Markets & Economy

Hedge funds and rental houses: The beginning of the end of a bad idea

Wall Street's interest is shrinking
  • Five years ago, Wall Street hedge fund and real estate investors planned to hijack the single family rental business by purchasing foreclosures at a deep discount, bundling them into securities and selling them to institutional investors.
  • By the end of Q1 2016, the institutional investor market share fell to 2.6 percent.
  • As Wall Street’s share in rentals shrinks, it’s the beginning of the end of a bad idea.

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Five years ago, more than a dozen Wall Street hedge funds and real estate investment trusts armed with fistfuls of cash made plans to hijack the single family rental boom by spending billions to buy up thousands of foreclosures at fire sale prices. Attracted by returns exceeding 8 percent a year generated by the small investors who dominate the business, they planned to purchase foreclosures at deep discount, bundle then into securities and sell the bonds to institutional investors. The Wall Street landlords would get their money back up front, transfer the risk to investors and use the proceeds to finance even more purchases to create more securities. Best of all, they would continue to control their securitized rental assets by managing the properties for 10 percent of gross rents a year. However, the entry of big money drove up foreclosures prices and immediately began to reduce the discount factored into many institutional investors’ game plans. Hedge funds like Blacksto...