What’s the best way for investors to get exposure to residential real estate?
A typical approach is to buy shares of homebuilders like KB Home (NYSE:KBH), PulteGroup (NYSE:PHM) and Hovnanian Enterprises (NYSE:HOV). But these companies represent just one part of the market. Investors often forget about the 14 million rental homes in the U.S., which have an aggregate value of about $2.8 trillion.
Until recently, it has been tough for investors to get access to residential real estate. Essentially, you had to buy homes, fix them up and rent them. But now there’s a better way.
Rental operators are starting to hit the public market. And Colony American Homes — one of the leaders in the space — recently filed for an offering.
The company, a real estate investment trust, owns more than 8,200 U.S. single-family rental homes located primarily in Arizona, California, Delaware, Florida, Georgia, Nevada and Texas.
Colony is the mastermind of billionaire Thomas Barrack. Back in 1991, he started a private equity firm called Colony Capital, which has gone on to purchase about $50 billion in real estate assets. The company has found success by focusing its efforts around finding distressed valuations.
While real estate prices have staged a nice comeback over the past year, they’re still sitting below the peak prices from 2006. As a result, CAH believes it has snagged attractive valuations on its portfolio. Keep in mind, though, that a big part of the purchases came through short sales, foreclosures and deals with government-sponsored entities.
Of course, the key for the company is the growth potential for the rental home market. And for the most part, there shouldn’t be much to worry about. After all, millions of Americans still have a difficult time qualifying for home loans.
There’s also a growing part of the population that prefers to rent. According to research from John Burns Real Estate Consulting, the total renter households segment is expected to increase by 22% from 2010 to 2015.
CAH got its start in March 2012, so the financials are a bit limited. But revenues came to $16.3 million for March 2012 to end-of-year, and the company saw a net loss of $4.5 million in that time.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.