Wall Street’s Home-Rental Bets Shift to Lower-End U.S. Houses

Homes Inc., the U.S. landlord built by Blackstone Group LP, the 220 houses it owned in working-class areas around Atlanta were outliers, filled primarily with low-income tenants paying rents well below those at its other properties. For another company with big private equity ties, the homes were an opportunity. Promise Homes Co., a firm started last year with $130 million from investors including Ares Management co-founders Tony Ressler and Michael Arougheti, purchased the houses from Invitation Homes for $22 million in August. The startup set about a strategy built around helping tenants improve their finances, aimed at keeping them in their rentals and minimizing costly turnovers. As Wall Street’s rental-home industry matures from its early days of frenzied homebuying after the foreclosure crisis, upstarts such as Promise are turning to cheaper houses that have largely been cast aside by big, established landlords. With easy real estate bargains gone, investors are focusing on homes that carry higher yields and potentially more risks -- as well as an opportunity to promote a mission of helping poorer renters. “Larger companies are getting rid of underperforming assets,” said Jade Rahmani, a managing director at Keefe, Bruyette & Woods Inc. “That’s leaving an opening for companies to move more downstream, companies targeted to the affordable market, to lower-income residents -- because there still could be an opportunity to earn a return." When Wall Street companies started buying homes en masse in 2012, they mostly avoided focusing on properties aimed at poorer tenants, who tend to be less financially stable and more transient. Cheaper houses often require more expensive repairs, and even when they don’t, landlords can get hung up on basic math: A new roof or refrigerator costs the same amount whether you rent the house for $1,000 or $2,000, but it takes longer to recoup the cost of repairs if you’re collecting lower monthly payments.