Single-family rental investors dive head-first into Rochester market

Rochester has always been an attractive market for residential real estate investors.

Single-family rental homes usually provide a slow-but-steady profit, which makes investment appealing to mom-and-pop landlords looking for a little retirement income or independent entrepreneurs intent on building a portfolio.

“The economy here is perceived as stable, the employee base is stable and investors believe they will get appreciation over time,” said Dennis Mietz, CEO at Park Centre Properties, a real estate management and consulting firm in Brighton. “Unlike the stock market, you don’t get a big jump, but you don’t get big losses, either.”

Institutional investors now agree. Two outside firms have gobbled up more than 300 area houses since last summer. One firm, SFR3, is based in California with investment roots planted primarily in the South, Midwest and Mid-Atlantic. The other is headquartered in Toronto and has its sights trained on Western New York as the bullseye of its investment target.

SFR3, a tech-enabled real estate investment fund headquartered in Walnut Creek, Calif., spent $9.6 million to buy 156 houses — mainly in Rochester with a few in the suburbs — between June and April. SFR3 owns more than 7,000 houses in 22 metropolitan areas.

Silver Lining Homes, LLC, spent $12.75 million to buy 174 houses in Rochester through Nexus Capital Real Estate SPE LLC of Perinton in a deal finalized in March.

Silver Lining Homes has a corporate address in Grand Island and is a subsidiary of Toronto-based Peninsula Capital Corp. The firm, founded by Michael Appleton of Owen Sound, Ontario, has raised more than $20 million over the past 16 months for investment in single-family properties.

Those two investment funds now own the largest portfolios of single-family rental (SFR) homes in Rochester, according to Dana Miller, commissioner of the city’s Department of Business and Neighborhood Development.

“As median prices continue to rise across the whole country, we continue to be one of the most affordable places to own a home,” said Lanie Bittner, president of the Greater Rochester Association of Realtors. “That’s always been part of our story and it’s probably why these investors are interested.”

While out-of-town buyers have comprised a significant part of the residential rental landscape in Monroe County over the past decade, SFR portfolios of this magnitude are rare.

Until now, that is. What has been a national trend is apparently just reaching Rochester. Bulk investment in single-family rental houses is now one of the hottest segments of the commercial real estate sector. SFR property has become its own asset class for institutional investors, making up 13 percent of all housing units in the country.

In June of 2021, Blackstone Real Estate Income Trust, a subsidiary of publicly traded Blackstone, paid $6 billion for Home Partners of America, Inc., a lease-to-own single-family rental giant based in Chicago.

Invitation Homes, also publicly traded on the New York Stock Exchange, owns 83,000 homes in 16 markets across 11 states, mostly on the West Coast and in the Southwest and Southeast. Blackstone was an early investor, cashing out when the firm went public in 2019.

VineBrook Homes, a Dayton, Ohio, company, operates in 23 communities from Nebraska to Arkansas, from Pennsylvania to Florida. They, too, have made their presence felt in one fell swoop, such as in 2020 with a purchase of 147 single-family houses in Milwaukee.

Now the potential of Rochester’s SFR market has appeal to the institutional investors.

“I believe that the low price of properties compared to other places and the increasing rents in our area bring these investors into the area,” said Richard Zona, president of Zona Properties, Inc., a Rochester rental property management firm. “You can purchase single family in the city for $70,000 that commands a rent upwards of $1500-plus month, depending on the area, and without having to pay for utilities and lawn maintenance.”

Return on investment is high. The median rent in the U.S. showed a year-over-year gain of 13.1 percent in March, according to CoreLogic, a global property information, analytics and data-enabled solutions provider.

“Single-family rents rose at more than three times the rate from a year earlier and more than four times the pre-pandemic rate,” Molly Boesel, principal economist at CoreLogic, said in a new release. “Strong employment and low supply have pushed single-family rental vacancy rates to low levels and have contributed to the high growth in rents.”

So, as housing prices and mortgage rates continue to skyrocket, the single-family rental market is expected to become even more attractive to institutional investors. Inventory remains low across the country and home prices have risen rapidly. Bidding wars on what few homes come up for sale has kept some potential homebuyers in rental property.

Those factors are even more acute in Monroe County. There were just 399 homes for sale in March, a plunge of 57.2 percent from March of 2019. It’s common for there to be 10 or more offers on a house, and for the winning bid to be tens of thousands of dollars over list price.

And now as mortgage rates climb from record lows between 2 and 2.5 percent past 5 percent — with 6 to 7 percent expected by year’s end — even more single-family renters will find the upfront costs of home ownership out of their reach.

That’s especially true if competing against a corporate buyer. The investment firms usually pay cash — that’s how SFR3 bought the 156 houses over the past nine months — meaning it’s a more attractive offer to the seller because deals close quickly.

SFR3 paid between $30,000 and $70,000 for most of the houses it bought in Rochester. Management could not be reached for comment, but the SFR3 website says the firm specializes in “workforce housing.”

SFR3 typically buys houses in need of repair, renovates them using local companies, then finds tenants.

“If I can buy for $30,000 and then make upgrades, I can still make a reasonable return on my investment,” Miller said of what has been the reasoning of institutional investors.

The business model has worked for SFR3. In March, Moody’s Investors Service upgraded a series of 10 tranches of single-family rental investment by SFR3 that had an original mortgage liability of $1.05 billion.

Moody’s said the ratings boost — most to AA1 or higher — was due to four factors:

• a steady increase in equity;
• home price appreciation of 16.6 percent to 46.7 percent since purchase;
• the paydown of debt; and
• the shortage of rental housing leading to rent increases of 7.2 to 15 percent.

Other firms also are thriving. Invitation Homes raised rent an average of 9.7 percent on lease renewals in the first quarter of 2022 compared to the Q1 of 2021, with a 98.1 retention rate. For new leases, the rental rate rose 14.8 percent year-over-year, according to Invitation Homes’ Q1 financial report.

And, unlike other asset classes in the world of commercial real estate and Real Estate Investment Trusts (REIT), rising interest rates are beneficial, not detrimental. Most SFR REIT buy with cash, they’re not paying interest, and higher mortgage rates make homebuying more difficult for individuals, which enhances rental demand.

But are absentee owners a good thing for the city of Rochester? Mayor Malik Evans recently formed a Housing Quality Task Force with goals to develop policies and enhance housing in the city. Out-of-town ownership was cited as a concern where properties are not properly maintained and where tenant needs are not addressed.

The city obviously can’t control who buys a house. But any out-of-town owner must provide a management contact located within 45 miles of the city. Someone must be able to respond to emergencies in a reasonable time.

“Even when we have ‘local’ ownership, it’s very typical that folks who own in the city don’t live in the city,” Miller said.

That’s why he’s not looking at bulk ownership by institutional investors as a negative. While individual home ownership is preferred, largely because “owner occupants have a different level of pride,” Miller said, “we have had positive experiences and outcomes with out-of-town owners. We look to all housing providers to operate safe and quality housing, and work to improve the city of Rochester overall.”

Before coming to Rochester, Silver Lining Homes barged into the Buffalo market, spending just over $10 million to buy 83 houses between September and March. It’s all part of plan to grow an existing portfolio to more than 900 houses.

“Entering (Rochester) is a natural extension of our existing operation in Buffalo, given its proximity,” Appleton said in a news release. “The addition of these 174 houses puts us well on our way to achieving our target of acquiring 500 houses in 2022. With our recently closed capital raise, we have the necessary equity capital on hand to achieve this objective.”

Appleton’s firm says it “is focused on growth and specializes in identifying and acquiring stabilized and near-stabilized houses with a strong tenant base.”

“I’m glad outside investors view Rochester that way,” Mietz said.

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