Investing in foreclosed homes goes public

Here is a new business model: buy a lot of foreclosed homes after a housing bubble bursts, plan to rent out many of the properties, and watch the money flow in.

Though Blackstone is unlikely to sell much or even any of its stake in an IPO, the stock market debut will test investors’ interest in the idea that the rental-home business can be institutionalized as apartments, shopping centers and office towers were before.

Blackstone and others investors believed that the housing collapse presented a rare opportunity to acquire homes for less than it cost to build them. Millions of foreclosures created a market large enough to justify investing in large systems to manage and maintain sprawling portfolios of rental homes…

To generate the revenue growth that shareholders will demand, they must pace rent hikes to avoid spooking tenants into becoming home buyers themselves. And now that foreclosure rates have returned to normal levels and prices have rebounded, they could find it difficult to add new houses at attractive prices.

They also must convince investors that huge home-rental companies are viable long-term businesses, not just massive portfolios of properties that need to be sold off.

I imagine there will be some particular parties (not just investors) interested in how this works out:

  1. Nearby residents. What happens if this leads to significantly more renters of homes in certain places? Americans tend to view renters more negatively than homeowners – though this might change in the future if the country shifts to fewer homeowners. How well will Blackstone do with having quality renters and following up with issues?
  2. Communities. Having renters is probably preferable to having vacant homes. But, they might have similar concerns as nearby residents as well as other interests in how Blackstone uses the properties.
  3. Advocates for affordable housing. There was some concern a few years ago that having large firms like this purchase cheap homes could limit lower priced housing. The lower end of the housing market could use more stock but investors may need to pursue higher rents in order to generate profits.
  4. Renters and homebuyers. What kind of rents will Blackstone charge? Will they eventually sell these properties and at what price? What kind of landlords will they be.

Additionally, I wonder what would happen if this does not prove to be a viable business plan. Are there others who would be interested in purchasing these properties? What if foreclosure proceedings begin with an institutional investor?

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