Apparently, Rental Homes Are Not Like Bonds

It is always hard to tell if the media is really offering a balanced sample of customer experiences when they pile on some company, but the Huffpo makes a pretty good case that large Wall Street home rental companies are doing a terrible job at customer service.

If so, I am unsurprised for three reasons:

  • I run what is essentially a property management company.  One thing I have learned is that everyone outside of the business systematically underestimates basic maintenance and operating costs, and few if any ever factor in the costs of longer-term capital maintenance.  Further, and perhaps more critically, outsiders frequently underestimate the detailed, even minute focus on process and organization that is necessary to make sure everything is getting maintained satisfactorily  particularly when the portfolio gets larger than the executive group can personally oversee.
  • I have rented out a second home for a few years.  It is difficult and expensive to stay on top of basic maintenance, and this is with one property that one is intimately familiar with.  I challenge you to find many people who will say they made money renting their second homes, particularly given the high cost of property management.  They may have made money on the appreciation of the real estate value, or reduced the net costs of owning a vacation home, but I seldom run into anyone making money on a annual basis (as long as the real cost of capital is being considered in the equation).
  • Wall Street has a long history of treating operational assets as financial assets.  There is a huge mindset difference between the two.  The book Barbarians at the Gate included some early history of LBO firms like KKR, and it is interesting the culture clashes they faced as they tried to explain the need to be operationally involved in their investments to the financial guys who wanted to treat them as Deals.


  1. Elam Bend:

    I work in real estate and over the last 5 years I've been approached many times by people wither raising a large amount of money to buy single family homes/two-flats, etc. or people who have been solicited by such people. I've always warned people off. It's incredibly management intensive and some kid raising a few million will not get the job done. One old timer I know who bought in the slums over the years told me that he thought 100 to 150 units was the max he could manage himself and all he did, all day, was visit the units to check on them. Whiz kid investment guy is not. I told people that if they invested, they should hope to make money on appreciation (or actually just getting an incredible discount from a distressed bank).

    I have seen one group, here in Chicago, do well: Pangea. They were previously tech entrepreneurs and they have a very well run, very tight, very structured management system. There management costs are more than most would under-right, but they've ultimately saved in other head-aches. Even then, I wouldn't want to do it. Real estate management is a pain.

  2. MingoV:

    I netted around four thousand dollars from renting a home that I had been trying to sell. However, I would have paid two thousand dollars to have someone else fix the problems caused by the renters.

    My father-in-law had rented a house in a rural area for decades and made a decent profit every year. The renter was responsible for ground keeping, but my father-in-law covered repairs. The local home repair contractors were not expensive, which was a big factor in profitability.