Real Estate

Landlord Nation: Boomers’ New Retirement Plan Is Millennials Paying Rent

The foreclosure crisis turned America into a market of renters—and rent collectors.
Photographer: David Paul Morris/Bloomberg

Pete Pollinger and his wife, Julie, are relocating from Boca Raton to Melbourne, a city of about 70,000 on Florida’s Space Coast, named for its proximity to NASA rocket sites at Cape Canaveral and the Kennedy Space Center.

They weren't just hunting for a place to live. As they get ready to move this year, they’re also looking for single-family homes they can buy, fix, and rent out.  

“We want to be more in control of our financial destiny,” said Pollinger, 51, a computer systems consultant. “As far as traditional investments go, we have less control of what really happens to those.” 

He and Julie hope to build a portfolio of about 10 homes, buying when they see good value or selling a fixed-up home when the market presents the opportunity to take a profit.

The Pollingers are joining the ranks of what Redfin Chief Executive Glenn Kelman calls Landlord Nation, a group of mom-and-pop investors who have seized on low mortgage rates and robust rent growth to plow savings into rental properties. Together, they’ve lifted the percentage of single-family houses used as rental properties to stratospheric heights, even as many would-be first-time home buyers struggle to reach ignition.

The number of starter homes on the market dropped by more than 44 percent from the first quarter of 2012 to the first quarter of this year, according to research published by Trulia. With entry-level homes in short supply, median prices in the category increased by nearly a third. 

The share of single-family homes used as rental properties, meanwhile, has surged to a 30-year high, according to a Zillow analysis of data from the U.S. census. Separate data provided by RealtyTrac show that only 65 percent of homes purchased in 2015 are owner-occupied.   

“If credit is tight, it doesn’t matter if it’s also cheap, because the people who can get it don’t need it,” Kelman said. “The haves in our society are renting homes out to have-nots, and they’ve been able to do that at increasingly high rents.”

The seeds of Kelman's Landlord Nation were planted in the boom times before the last recession, when easy credit helped millions of Americans buy their first homes, pushing home ownership rates to all-time highs. Then the housing bubble burst. Rampant unemployment and exploding interest rates pushed millions of homeowners into foreclosure, creating a ripe patch of cheap housing for would-be landlords—and a new pool of renters to absorb the supply. 

Wall Street firms, among the first to recognize the opportunity, poured billions of dollars into single-family homes. But by 2014, rising home prices led the largest single-family investors to scale back the pace of acquisitions and, in time, to start selling off homes to trim their portfolios.

Now smaller landlords are emerging in Wall Street's wake, taking advantage of low mortgage rates and steady rent growth, as well as property management infrastructure built to serve the larger investors. New tools include companies that collect rents and make repairs, and new lenders willing to risk capital, said Dennis Cisterna, chief revenue officer at Investability Real Estate, which offers another new resource for single-family landlords: an online marketplace for buying and selling rental homes.

“It is easier to be a landlord now than it has ever been in the history of the U.S.,” Cisterna said. 

Even with favorable interest rates and new technology, the ranks of U.S. landlords wouldn't have grown so fast without another key condition. The same low interest rates that made mortgages affordable for those who can get them squashed traditional investor income, said Troy Lewis, a certified public accountant who has worked through many real estate deals at his tax practice in Draper, Utah.

"If people felt they could get a reasonable return on money in the traditional way, then these nontraditional ways would have no appeal," he said. "But savers are getting killed and looking for ways to increase cash flow. There aren't many ways to do that right now."

That doesn't make rental properties a sure thing—far from it, said Lewis. Unlike an investment-grade bond held to maturity, a rental home provides no guarantee that an investor will even earn back his or her principal. Renting out homes is also complicated from tax planning and property management perspectives, said Jon Strandlie, a financial adviser with Edward Jones in San Antonio, Texas.

Still, Strandlie and his wife, Nancy, recently turned a home in Helotes, Texas, into a vacation rental, which he forecasts will earn about $15,000 a year in profit. That's after property taxes, insurance, cleaning fees, and the 10 percent fee, per booking, they pay to Evolve Vacation Rental Network. Once they get done paying off the mortgage, the annual profit could more than double, he figures—though he adds that property management can be a headache for landlords that don't boast handyman skills. 

It's too simple to say that the influx of new landlords has been a bad thing for home buyers, said Svenja Gudell, chief economist at Zillow. When banks were hesitant to lend, cash buyers helped resuscitate comatose markets. Even now that investors are competing with would-be buyers, it's not clear to Gudell that they’re taking precious housing stock off the market. 

“We can all agree that there aren’t enough homes to buy, but if you look at rental rates, you can also say there aren’t enough homes to rent,” she said.

During the dark days of the Great Recession, it was fashionable to wonder whether the housing crisis would sour an entire generation on the idea of home ownership. That hasn't quite come to pass, at least not according to a bevy of surveys reporting that the vast majority of millennials still aspire to home ownership.

At the same time, the share of U.S. households that rent is at its highest level since 1965, leading Redfin's Kelman to wonder whether the growing class of new landlords has wrought permanent change on the country's housing market.

“The interesting thing to me is that when investors were buying up property in 2011 and 2012, there was all this anxiety about what will happen when they sell,” Kelman said. “Now everyone is surprised to find out that they’re not flippers, but given where rents and mortgage rates are, it makes sense. We may have to acknowledge that there’s only one shoe, and it dropped in 2011.” 

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