Wall Street’s favorite suburban housing bet is getting crowded
Real estate tax bills will continue to rise over time
Wall Street’s zest for a corner of suburban real estate long left to small landlords is reaching new heights, attracting institutional investors, homebuilders and apartment managers during a pandemic that has ignited demand for larger homes.
The pension manager for the Canadian Mounties is the latest investor in single-family rentals, joining JPMorgan Chase & Co.’s asset-management arm and Nuveen Real Estate in a bet that there are lots of Americans who want spare bedrooms and backyards, but don’t have cash for down payments.
“It’s really an inflection point in SFR,” said Michael Carey, a senior director for Altus Group, an advisory firm. “It used to be an alternative asset class. Now people look at it as a solution.”
Apartment owners
Apartment industry players are also warming to rental homes, especially those built in contiguous communities, where they can be managed like multifamily buildings and financed with loans from Fannie Mae and Freddie Mac.
Greystar Real Estate Partners, the largest property manager in the U.S., is currently managing roughly 1,500 homes on behalf of clients. That number could grow to 25,000 homes in five years as Greystar’s multifamily clients embrace rental houses, said Mike Clow, executive director for the firm’s third-party portfolio.
“Three years ago I would have said this was a fad,” Clow said. “But it’s become more prevalent because it’s filling a need for consumers.”
Small landlords still own the vast majority of single-family rentals, but companies such as Invitation Homes Inc. and
American Homes 4 Rent have demonstrated that large portfolios of rental houses can be operated as efficiently as apartments, in part because of renter demand for professionally managed homes.
Pandemic push
Then COVID-19 accelerated the trend, pushing Americans to seek larger living spaces and forcing investors to find places to allocate capital at a time when hotels, offices and malls face uncertain prospects.
The influx of new capital helped attract Hunt Cos., which owns more than 136,000 apartments. The El Paso, Texas-based company has developed and managed single-family rentals on military installations for decades, but its interest in expanding beyond bases was stymied by investors’ unwillingness to embrace the asset.
Tight inventory
Finding homes isn’t always easy. Low interest rates, demographic trends and demand for suburban properties have fueled the housing market, pushing the inventory of houses to buy to historic lows.
Instead of hunting for homes on the open market, many investors have backed developers like Hunt. That’s helped rental builders gain share in markets including Phoenix and Salt Lake
City, where they now account for 15% of raw land purchases, according to a recent survey by John Burns Real Estate Consulting.
Convergence
There are limits to the convergence of homebuilders, apartment landlords and institutional capital. Builders have plenty of interest from individual buyers these days. Most real estate investment trusts that specialize in apartments still believe that they’re in a different business than single-family landlords, said Jeffrey Langbaum, an analyst at Bloomberg Intelligence.
Others, however, see the logic in companies offering tenants everything from downtown apartments to suburban homes.
“I’ve thought for a long time that eventually we should see companies focusing on rental housing broadly, owning both houses and apartments that could be offered to tenants,” said Gary Beasley, chief executive officer at Roofstock, a platform for acquiring single-family rentals. “This would allow landlords to service customers throughout their life cycle — starting with an urban apartment in their 20s, moving them to a suburban rental home in their 30s and perhaps even selling them a home in the 40s.
Q: I have a question about what happens to your real estate taxes when you pay off your mortgage. When you have a mortgage, the payment to the lender includes real estate taxes and insurance. Once you pay off your loan, how do taxes get paid? Is it better to pay off your loan or keep a loan so that the taxes keep getting paid? Do property taxes rise when you pay off your loan?
A: You’ve asked some important questions, although we think you might be a bit confused about how your real estate tax and mortgage escrow accounts work.
Let’s start with a basic fact: Whether you carry a mortgage on your property has no impact on what you pay in real estate taxes. Your real estate taxes should be based on the actual value of the home or what your local taxing authority believes your home is worth.
Let’s say you purchased your home for $300,000. The taxing authority might base your real estate taxes on your purchase price or may have some other formula for determining the value of your home. Once it has determined that value, the taxing authority sets the amount of taxes you must pay based on a complicated formula. For our example, if the local taxing body says that your taxes are $3,000 per year, that’s the amount you are legally obligated to pay, regardless of whether you are currently paying off a mortgage or not.
For most homeowners with a mortgage, the lender requires the homeowner to pay monthly into escrow a sum equal to (or a little
higher) than the expected amount of real estate taxes and the current homeowner insurance premium. If your real estate property tax bill is $3,000 per year, the lender will set the monthly amount you pay into the escrow account at $250. If your homeowners insurance policy is $1,200 per year, the lender will want you to pay an additional $100 per month to cover future insurance premiums. In addition, the lender may require you to put in an additional
amount, typically limited to two months’ worth of insurance premiums and your total real estate tax bill, in case the bills come in higher than expected.
Whatever the sums are, they’re added to your monthly mortgage payment. When the lender’s servicer receives the payments, the amount due to the tax and insurance escrow are separated out and when those bills come due, the lender will pay them. The primary reason your lender holds these
funds is to make sure these two bills are paid on time so the insurance policy doesn’t lapse and your home isn’t sold for back taxes.
Having said that, when you pay off your mortgage, your lender no longer has the obligation to pay your real estate taxes and homeowners insurance premium. From the day you pay off your loan, you must take on the obligation to pay these bills yourself — on time and in full.
If it’s too much to write those checks once or twice
a year, when they come due, you can set up your own escrow account and deposit one-twelfth of the amount due each month into the account. Since your mortgage will be paid off, it will hopefully be easier to come up with the funds, and then remember to pay the bill. (Check with your tax assessor’s office to make sure your home address is on the tax bill, so you are sure to receive it.)
The way real estate usually works, as you pay down your mortgage, your real estate tax bill will continue to rise. Recently, we found a tax bill from around 25 years ago that was about one-fifth of our current tax bill. Hopefully, your income over the decades will continue to increase so that paying a heftier tax bill won’t be too much of a burden.