Bloomberg News

Ex-Morgan Stanley Analyst Forms Firm to Buy Rental Homes

August 01, 2012

Oliver Chang, the former head of housing strategy at Morgan Stanley, said his new company aims to spend as much as $1 billion in the next two years buying rental homes, targeting low-cost houses that need major renovations.

“We’re looking for homes that are undervalued and need repairs,” Chang, who left Morgan Stanley in May, said in a telephone interview. “There’s not as much competition to buy those houses, so the price is lower.”

Chang, who as a Morgan Stanley strategist wrote about a U.S. “rentership society” created by the rise in foreclosures, is following firms such as Blackstone Group LP (BX:US), Colony Capital LLC, KKR & Co. (KKR:US) and Starwood Capital Group LLC in buying discounted single-family homes to convert to rentals. Private- equity companies have announced or been said to plan spending more than $8 billion on rental houses, which have historically been owned by small local investors.

A private equity firm committed an initial $300 million to Chang’s company, Sylvan Road Capital LLC, according to a statement today. That’s enough to buy about 3,000 houses, said Chang, who declined to name his investor. The goal is to purchase 10,000 homes in two years, he said.

About 5.95 million homes are in the so-called U.S. “shadow inventory,” which means they face foreclosure or have been seized by banks and aren’t on the market yet, according to a July 26 report by Morgan Stanley.

Southwest, Midwest

Chang’s partners are Robert Lee, Sarah Lee and Gavin Kleinknecht, who are principals of Delmar Realty Advisors, a homebuilder that already owns a portfolio of single-family rentals in Atlanta, according to the statement.

Sylvan Road plans to start buying houses in the Southeast and Midwest, targeting markets where it can assemble about 300 to 400 homes to achieve efficiencies of scale, Chang said.

The company, with offices in Atlanta and San Francisco, will acquire, repair and manage its housing stock through a subsidiary called HavenBrook Homes, Chang said. HavenBrook has 25 full-time employees and expects to hire more as it expands to new markets.

As an example, Sylvan could buy a home for about $50,000 that needs another $50,000 in repairs, such as replacing windows and air conditioning, plumbing and electrical systems, Chang said. The houses will rent for about $1,250 to $1,500 a month, he said.

By managing the renovations and properties itself, Sylvan can reduce expenses to less than 40 percent of rental income, which is close to the cost of managing multifamily rental properties, Chang said. Based on that cost, investors would get about 9 percent annual yield on their money.

“The operating component of this is so critical, not only because it increases your return,” Chang said. “It also allows you to provide a better-quality house and better service. If you’re in this business to institutionalize it, you have to deliver a higher-quality product.”

To contact the reporter on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net


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