The Future Of Single Family Home REITs – Dr. Peter Linneman

BRUCE KIRSCH: We’ve seen recently some REITs come onto the scene that are operating single family homes as their business model.

And we know that there are significant restrictions on operations. And the operation of real estate is, being your business model as a requirement to maintaining REIT status.

What do you think about these new REITs that own single family homes and essentially run them as physically separated apartments? And do you think this is going to continue?

DR. PETER LINNEMAN: Well, the operating restriction of not being able to actively manage your properties as a REIT, those have pretty much fallen by the wayside over the last five, seven years through a series of tax decisions.

So you can actively manage your property. So that part isn’t the challenge for single family. By the way, the reason home builders have not been REITs in the past is because there are prohibitions of being a trader. And you can think about what a home builder is is they build a home and trade it. They build a home and trade it. They build a home and trade it. And as a result, they’re viewed as in the trading business and they cannot qualify.

The business of buying single family homes and renting them is a rental business. It’s the same– in concept– the same kind of business as renting any other piece of real estate subject to short term leases. How do you operate it, how do you do this, and how you do that?

I happen to believe you’re going to see from this year three, four, or five notable public companies who will evolve as operators of single family rental. The jury’s out on that. I mean we’re in the early innings.

I think it’s like Public Storage, where most Public Storage in the United States is owned by private operators. But there are several large publicly-traded companies that choose to be REITs because they have the income and low debt.

Similarly, I remember in the late ’80s I made a comment that, someday there’ll be large apartment companies that own thousands of apartments all across the country and will be public. And people thought I was nuts. And you know, no one thought you could do it. You can do it.

And so I think you’re going to see a couple come out of this– single family. They’ll figure out how to do it. There’ll be some that stumble along the way and won’t figure out how to do it. Their costs will be too high. But I think you will see some public companies.

And in fact, I would not be at all surprised if one of the things you see is that as some of the public companies evolve to rent single family homes.

That at some point you wouldn’t see them consolidated inside of a large apartment company. And sort of absorb them as once they get to a sufficient scale have them absorbed into a residential rental company with two divisions– an apartment component and a single family home component, depending on the nature of the tenants.