Three years ago Aaron Edelheit was working out of his living room, buying foreclosed properties, and putting them up for rent. Today he is CEO of The American Home Real Estate Investment Trust, one of the first REITs investing only in single family rental homes.
"We think the foreclosure crisis has allowed a couple of firms such as ours to get size and scale to start institutionalizing a very large market," said Edelheit.
The single family rental market was large even before the housing crash, with sixteen million homes designated as rentals in 2010, according to the U.S. Census. Add to that at least five million foreclosures, many of which will become investor-owned rentals, and the enormous scale is apparent. (Read More: Goldman, Morgan Stanley to Settle on Foreclosures: Sources)
"By some accounts, $6-9 billion has been raised or committed, suggesting potential acquisitions of 40,000-90,000 properties," according to Jade Rahmani, an analyst at KBW, who pointed out that this amounts to around 15 percent of unsold bank-owned, so-called REO (real estate owned), homes. "We expect the REO-to-rental market to experience robust growth over the next 12-24 months, potentially emerging as an institutional asset class."
To see that growth, look no further than Edelheit's brand new Atlanta office space, where he now employs 150 workers full-time and hundreds more part-time. His REIT owns close to 2000 properties in Georgia, North Carolina and Florida, and they are buying more every day.
"We outgrew the last space as soon as we had moved in," said Edelheit as he weaves through a maze of desks, followed by his panting dog Frankie, to get to his office. There he shows off his stand-up computer work station that he fabricated out of a small shelf from Ikea. Many of his mostly-young employees stand as well, as they search for homes to buy, rent, market, and manage. The energy is palpable.
"In terms of risk and reward, I feel that this is a generational opportunity," Edelheit noted.
Two similar REITs, Silver Bay Realty Trust and Altisource Residential just went public in December 2012.
Analysts at KBW estimate cash returns on investments in REOs are in the 5-7 percent range, while total returns could reach 15-20 percent. (Read More: Bank of America in $10 Billion Foreclosure Settlement With Fannie Mae)
The properties, purchased often at a 40 percent discount to new construction costs, provide a long-term rental stream as well as the opportunity for appreciation — which may come slowly at first but will improve along with the greater housing market. The key is in the model, and how effective the REITs will be in managing these properties, which are spread out over wide geographic areas.
The American Home is using technology to try to get as close to the multi-family apartment model as possible. While there cannot be one landlord in one location, employees are armed with AppleiPads, so they can communicate information from a wide field. From the teams inspecting potential homes to buy, to the project managers checking in on homes they are rehabilitating, to the agents showing homes to potential renters, to the handy-men answering renter complaints, all the information is transmitted back to the main office from as far away as North Carolina and Florida. Soon they will have a web portal up and running where renters can log on to make monthly payments and request service.
As investors try to consolidate this new asset class and take advantage of so many bargain-priced foreclosures, the overall housing market is slowly getting back on its feet again. That begs the question: Will all this new renter demand fall off? (Read More: New Foreclosure Wave Is Coming)
"I'm getting calls from 7:30 in the morning to 11:30 at night," said Neysa Brown, a rental agent who joined The American Home just three months ago. "There is definitely demand for rentals."
Some of today's demand may fall off eventually, but overall the rental market is still huge. Even before the housing crash, around 35 percent of Americans were renters. Home ownership rose dramatically, nearly hitting 70 percent at the height of the recent housing boom, but it will likely settle again back to historical norms of around 63-65 percent. Household formation lately has been almost entirely in rentals.
"Although the housing market is improving, we believe restrictive mortgage credit, negative equity, continued deleveraging of borrowers and lenders, and the overhang of delinquencies will continue to suppress home ownership rates and increase the percentage of renters," noted KBW's Rahmani.
Essentially these new institutional investors are looking to take market share from the old model, which was often mom and pop owners looking for extra cash flow from one or two properties. As the new REITs get larger and more go public, this new asset class could offer all kinds of investors a chance to get in on an old and well-tested source of revenue.
—By CNBC's Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC
Questions? Comments? RealtyCheck@cnbc.com
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