Wolf here: occasionally I highlight comments that add a different angle or flavor or an illustration or more depth to an article published on Wolf Street. This is a comment (actually two comments that I combined into one) by “economicminor” on my article, The Big Unwind: After Messing up the Housing Market, the “Smart Money” Bails Out. The article discussed how institutional investors such as large private equity firms, after buying up tens of thousands of vacant single-family homes across the country to rent them out, were now abandoning the housing market. And sales to institutional investors in Q3 plunged to lowest level since 2010.

By economicminor:

I have managed properties for others for decades and also have read about PE buying/renting/selling model for a few years now.

Renting homes isn’t a great wealth builder unless you manage them yourself. Buy low and hold a very long time. Paying someone else to manage your single-family residence is in itself risky as the management fees seldom are adequate to really do a good job. Many Property Managers are more interested in keeping the home rented than making sure the owner’s asset is fully protected.

It also is very hard to find really good long term renters as turnover is a killer with big costs every time. Even those good renters end up in bad situations with losses of jobs and medical issues plus kids and irresponsible friends. I have seen all kinds. The one whose kids used the stairs for a slide and punched holes in the wall at the bottom, or the guy who rebuilt his Harley on the living room carpet. Both appeared to be good renters on paper. References can be faked too.

The renter class is not generally the same as the owner class. People who own never let the drippy sink drain drip until the cabinetry and sometimes the floor, sub floor, and even the wall behind the sink is destroyed. There is never enough security deposit to take care of the problems.

The biggest cost in owning rentals is when you try and get a renter to move. In my state, and I believe in most states, renters have more rights than owners.

I had one this year where the renter’s dad bought her a home. She got some help moving from a couple of druggies. They had keys to the property and when she moved out, they moved in. The local police said that these were tenants because my tenant in effect sub-rented, even though this was explicitly prohibited in our rental agreement. The police said this was a civil matter. So I filed to evict with the local court.

Bottom line, it took 4 months and $3,000 worth of damage plus legal fees and court costs to get them out. Then they kept breaking in so we had to hire a care taker to live there, and that became a problem…. Some of this was because of the local condition of the lack of police funding, but some of it had to do with the laws protecting people from owners.

All this appears to be a train wreck coming, with both rents and ownership costs way above the working person’s ability.

How is this going to work out for PE firms that have bought single-family homes across the country to rent them out? All I have to say to the PE firms that have this great model for making a killing is: Good Luck!

I have no idea how this all will work out when the 2nd real estate bubble pops, but I think most of us are going to wish we’d had some real financial reform before all this is over. And then we will get it as the mess I think will be horrendous. By economicminor. The original two comments are at The Big Unwind: After Messing up the Housing Market, the “Smart Money” Bails Out.

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