JPMorgan Chase (JPM) is giving its wealthiest clients the chance to invest in the single-family rental market after other investments linked to the U.S. housing recovery jumped in value.
The firm's unit that caters to individuals and families with more than $5 million, put client money in a partnership that bought more than 5,000 single family homes to rent in Florida, Arizona, Nevada and California, said David Lyon, a managing director and investment specialist at J.P. Morgan Private Bank. Investors can expect returns of as much as 8 percent annually from rental income as well as part of the profits when the homes are sold, he said.
The bank's wealthy clients are joining a growing number of private-equity firms and individuals buying rental homes in the regions hardest hit by the U.S. housing crash. Blackstone Group LP has spent $2.7 billion, and said last month it accelerated purchases as home prices rise faster than anticipated. Even after home values in November gained by the most in six years, investors are wagering on rental properties as an alternative to housing-related stocks and mortgage debt that's already soared.
"The traditional places people might look — homebuilder stocks and appliance makers — probably aren't the best places for new investments," said John Buckingham, chief investment officer at Al Frank Asset Management in Aliso Viejo, California, which oversees about $4.5 billion. "They've had fantastic runs."
PulteGroup Inc., the largest homebuilder by market value, was the biggest gainer on the Standard & Poor's 500 Index last year, rising 188 percent, helping an index of 11 builders more than double since the end of 2011, and raising concern among analysts including Michael Widner of Stifel Nicolaus & Co. that growth is already priced in.
Whirlpool Corp., a home-appliance maker, was the third-best performing stock in the S&P 500 Index last year, rising 114 percent, and subprime-mortgage bonds gained more than 40 percent.
The investments rallied as the housing recovery strengthened through 2012 with the Federal Reserve pushing mortgage rates to record lows, and as institutional investors increased their purchases of foreclosed homes. Home prices in 20 U.S. cities rose 5.5 percent in November from a year earlier, the most in more than six years, an S&P/Case-Shiller index of property values showed last month.
New York-based JPMorgan, whose private bank oversees $877 billion, started pooling investments from its clients in mid- 2012 into a partnership to purchase distressed properties, betting that prices will rise over the next several years and provide investors with income from renters along the way, said Lyon. The firm uses a third-party manager to find homes, buy and manage them, he said, declining to name the firm.
The goal is to sell the houses within three to four years in one of three ways: through an initial public offering of a real estate investment trust, a sale to an existing REIT or to an institutional buyer such as a pension fund, Lyon, who's based in San Francisco, said. Clients will receive a share of any price appreciation depending on the size of their investment.
The strategy is similar to institutional buyers including Blackstone, the world's largest buyout firm, Thomas Barrack's Colony Capital LLC, and Oaktree Capital Group LLC. They're aiming to profit from low prices on distressed properties, often those in foreclosure and sold at auction — and the demand for rentals from people who don't want to own a home or can't qualify for a mortgage.
"It's hard to find a private-equity firm on the planet that doesn't have a strategy in this space," Gary Beasley, chief executive officer at Waypoint Homes, said last week at the American Securitization Forum's annual conference in Las Vegas. The Oakland, California-based company has bought homes in California, Arizona, Illinois and Georgia.
