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A surplus of REO inventory from financial institutions, demand for single-family rentals, tight lending standards â€" these are just a few reasons interest has developed for securities backed by cash flows from single-family rental properties.
[IMAGE]While interest has formed for good reasons, there are still risks involved. In a recent report, ""Moody's Investors Service"":http://www.moodys.com/ highlighted two key factors that can be used to determine credit risk for such transactions: Performance of an operator or manager and the variability of the cash flow from rentals and property dispositions.
An operator or a manager's performance holds great importance since they are responsible for overseeing the property on a number of different levels.
""Given an operator's critical role, a key risk for single-family rental transactions will be the failure of the operator to effectively perform its duties, including managing tenants, maintaining properties, and marketing and selling them,"" the report stated.
[COLUMN_BREAK]Moody's also suggested a single-family rental transaction will more likely benefit if the operator has a key economic interest.
Examples of operator risks include inability to set appropriate rent levels, a lack of familiarity with laws related to rentals, and a lack of experience collecting rents, among other risks.
Moody's stated a way to decrease operator risk is to have a manager with a successful track record of overseeing a geographically diverse portfolio of single-family rental properties or to have several operators with experience in specific regions.
Depending on rents from tenants and proceeds from the eventual sale of the homes, risks with cash flow can vary. For example, income from rent can start to deplete if an issue with excess supply forms in a specific market, which could lead to an inability to cover expenses.
Another source of cash flow risk is if the proceeds from the sale of a property is not enough to repay the noteholders' principal. This can occur if the prices of single-family homes depreciate, leading to less in sale proceeds. Also, if a large number of properties are located in places with high REO saturation, the pool would be exposed to a depressed market.
Another risk Moody's mentioned in the report was a lack of historical data on the single-family rental industry.
To mitigate some of these risks, Moody's suggested a diverse geographical portfolio, experienced operators, and the ability to sell properties at an appropriate price as strategies.
