Don't call it a glut

Back in November, I wrote a column entitled "Some rental investments don't pay off," in which I wrote that some cities such as Phoenix and Denver were showing signs of a single-family-home rental glut.

I immediately received a scathing e-letter from Andrew Waite, the publisher of Personal Real Estate Investor magazine, which targets people who invest in single-family homes. It's his job to tout single-family home investments and he took serious umbrage at my column.

Basically, his message to me was: "There is a price war among property management companies to get investor business and thus rental inventory because there is such a dire shortage of ideal SFDs (single-family dwellings) for tenants."

He was talking about the Phoenix area, and I thought his comments interesting because about that time I had interviewed one state's most prominent economists, who also talked about a glut of single-family home rentals in the Phoenix metro area.

So, the obvious question was: Who's right?

Initially, I called Waite, which is not always a pleasant task, as he generally has a lot of opinions, all of which are based on the fact that he is right and everyone else isn't.

At first, he excoriated me for writing a misleading article and that my big problem was that I wasn't an investor and therefore not in touch with the right people. OK, then who are the right people I should be talking to? Waite gave me a list of four companies. I gave all of them a call, but only two deigned to get back to me.

The first fellow I called, Geoffrey Jacobs, was a principal in a Scottsdale, Ariz., company called The Empire Group LLC. He and his partner were veteran real estate developers and early in 2009 put together a couple of funds to purchase single-family homes.

"There was no development going on -- it was just something to keep us busy for a while," Jacobs explains. "Specifically, we are buying in the Phoenix area and we are going to hold product for three to five years."

The Empire Group's target was the lower-end product, which the principals assumed would rent steadily with positive cash flow. By the end of 2009, Empire had already purchased 70 homes.

Did Empire's experience support Waite's viewpoint that there was no glut of single-family home rentals? The answer: Indubitably!

"In terms of the idea that there is an oversupply of rental, in our experience that's just not true," Jacobs tells me. "We're running about 85 percent to 90 percent occupancy. The product is leasing as fast as we can make it available."

Empire acquires for cash, and, according to Jacobs, the investments are cash-flowing at over 8 percent net of all expenses, management fees, leasing fees, projected repairs and other costs.

Probably the key to Empire's success is that it buys relatively new product, nothing more than 10 years old, and no homes in "inner-city" areas. ...CONTINUED

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