Wall Street Journal
By ROBBIE WHELAN
VALLEJO, Calif.—Agustin Gutierrez, a construction worker from this town in the hills northeast of San Francisco Bay, lost his job in 2009, then, 10 months later, he lost ownership of his home.
Now, the husband and father of four rents the same five-bedroom ranch from McKinley Capital Partners, an investment company that's at the forefront of a new breed of big-money landlords.
Hedge funds, private-equity firms, pension funds and university endowments are dipping into the foreclosure market McKinley, which has acquired more than 300 foreclosed single-family homes in the Bay Area over the past two years, recently teamed up with Och-Ziff Capital Management Group LLC, a New York hedge fund, with plans to buy at least 500 more foreclosed homes in the next year. Those homes, too, will be rented to people like the Gutierrez family.
Buying foreclosed homes as investment properties has long been dominated by mom-and-pop investors. But now hedge funds, private-equity firms, pension funds and university endowments are dipping into that market. The attraction is double-digit returns at a time when most bonds and other income investments yield very little. The most popular strategy is for a big investor to team up with a local company that scouts out houses and finds the renters. The hope is to flip the homes in the future when prices recover.
"It's kind of the Wall Street meets Main Street phenomenon," says John Burns, an Irvine, Calif.-based real-estate consultant who has discussed investing in single-family rentals with hedge funds. "The Main Street guys need the capital, and Wall Street needs the expertise."
At the end of May, 3.5 million loans were at least 90 days delinquent or in foreclosure, according to investment bank Barclays Capital. At the same time, the country's home ownership rate has fallen, to 65.9% in the second quarter of 2011 from its peak of 69.2% in 2004, according to figures released by the U.S. Census Bureau last month. That drop has produced millions of new renters and helped push the vacancy rate for rental housing down by about two percentage points, to 9.2%.