WALNUT CREEK, CA—There has been a lot of hype and capitalcommitted to the bulk ownership of single-family homes, primarilydue to the large volume of foreclosed properties available from thefinancial crisis and easy availability of capital. The easyavailability of capital has been the handiwork of the FederalReserve and their zero interest rate policy. However, the bulkownership of homes is a low margin and low return real estateinvestment business with the following characteristics:

• Owning a large portfolio of homes scattered around the countryis unwieldy and management intensive.
• Most foreclosed homes need significant rehab and repair workthat typically equals 10%-15% of the purchase price.
• Management fees can run from 7% to 10%+ of the effective grossincome versus 3.5%-5% for apartments.
• Monthly maintenance expenditures can be time consuming andcostly.
• Total returns are well below core, opportunistic and valueadded commercial real estate investment strategies.
• Disposition of the homes can be cumbersome, time consuming andwill usually need to be done in a pool structure and at asignificant discount.
• Operating expenses average 60%-65% of effective gross incomeversus 40%-45% for apartments.
• Higher vacancy of 10%-15% versus 5%-7% for apartments.
• Highly volatile pricing of the homes that are subject toextreme interest rate risk.
• Diseconomies of scale as operating costs increase faster thanrevenues as more homes are purchased.

We have advised many of our clients not to invest in thebusiness privately or in the public REITs because of the aboveissues and low overall returns. Whenever I discuss this industrywith clients or give a commercial real estatepresentation, I ask the audience two questions. One is; “If thebulk ownership of single-family homes is such a good business, whyhaven't there been any successful companies in the business before2009”? Question two is; “What would you rather own, 300 homesspread across four states or a 300-unit apartment building”? Theanswer to the first question is all the firms that have tried bulkownership have gone bankrupt (i.e., the largest was a companycalled Epic, headquartered in the Midwest, which owned about 11,000homes and went out of business in the 1980's). The answer to thesecond question is that everyone in the audience picks owning the300 unit apartment building.

In addition to the public REITs, there are two large privateowners of homes, Blackstone's, Invitation Homes with more than30,000 homes and Colony American Homes with more than 16,000 homes.Outside of the poor economics, the biggest risk looming for thisbusiness is an increase in interest rates, which will reduce homedemand and housing values and increase the owner's cost ofcapital.

Joseph Ori is executive managing director of ParamountCapital Corp. The views expressed in this column are the author'sown.