Economies of Scale in Single-Family Rentals

Bloomberg reports that JP Morgan has started an investment pool in order to capitalize on low mortgage rates and a large existing capital stock:

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.

As Matthew Yglesias notes:

One great way to better use the resources we have available to us would be for someone to devise the technologies necessary to efficiently operate a large-scale, single-family home rental operation. But that’s not the kind of technology you can test out in the lab. To know if you’ve developed the necessary management techniques, you really do need to go out and buy a bunch of houses and try it out. And there’s a big risk—many decades of experience and accumulated conventional wisdom say it doesn’t work, that renters lack adequate incentives to maintain a single-family unit properly, and monitoring their behavior is too hard.

Now it has to have occurred to someone at JP Morgan to use their scale to negotiate favorable contact terms with maid services in order to maintain the properties. Depending on how the contract is written (and I’m completely ignorant of contract law, so feel free to correct me in the comments), the management group for the fund should be able to obtain regular reports from the maids as to the condition of their physical properties. According to this site, cleaning services are $96* a week in Maryland (a high-cost state). I would assume that better terms than that could be negotiated.

That works out to about $5,000 a year. Obviously that entire amount would not be able to be passed on, so lets assume that the rental demand is elastic, and JP Morgan will have to subsidize renters to the tune of 90%, which would be $4,492 a year. Is that really a stiff price to pay to maintain the equity of your investment? To be able to overcome the monitoring problem? Hell, it would probably smooth out the payment streams for maintaining the property (professional cleanings generally happen when the property changes hands anyway, this would make their marginal cost much lower).

The investors should eat some of the capital costs as a hedge to protect their stream of future payments.

For the record: yes, I am capital constrained.

*I chose 1200-1600 ft2 because that is the average of the rental housing stock in my area.


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