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Foreclosures Fuel the Engines of These REITs

By Amanda Alix – Jan 22, 2013 at 11:44AM

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Single-family rental properties are a hot -- and lucrative -- new business model.

As Benjamin Franklin supposedly once said, "Out of adversity comes opportunity." Though he probably wasn't talking about real estate, that old adage applies perfectly to two new real estate investment trusts: Silver Bay Realty (NYSE: SBY) and Altisource Residential (NYSE: RESI), which are hoping to turn the foreclosure crisis into a gold mine.

Backlog of foreclosures presented new sources of profit
As the housing crisis worsened, foreclosed properties littered the landscape. Last year, however, large investor groups began purchasing distressed single-family homes in bulk, then sprucing them up in order to ready them for the rental market. One of the biggest players in this new market is Blackstone Group (BX), which shelled out over $2.5 billion last year  to buy 16,000 dwellings to add to its rental portfolio. Looking for its own piece of the pie, diversified REIT Colony Financial (NYSE: CLNY) predicts that it will have $1.5 billion invested in the single-family rental market by year's end, and it has just recently been given the green light from Fannie Mae  to purchase nearly 1,000 foreclosed California properties.

It's not hard to understand the attraction of a newly minted business sector that analysts have predicted will top $1.5 trillion  in value as its own asset class. Growth is expected to be particularly vigorous over the next two years , and both Silver Bay and Altisource have been launched to take advantage of this new opportunity.

Silver Bay, of course, is the offspring of Two Harbors Investment (TWO -1.06%), a hybrid mortgage REIT with a current yield approaching 18%. Two Harbors took Silver Bay public a little more than one month ago, donating its own single-family home portfolio in order to create the first REIT built on this particular model. It was a $245 million IPO for Silver Bay, which currently sports a market cap of just shy of $800 million.

Days later, Altisource Portfolio Solutions (ASPS -3.40%), a company specializing in real estate-owned properties, announced its own spin-off -- and Altisource Residential was born. Altisource Portfolio is itself a child of  Ocwen Financial Corp. (OCN -0.94%), a mover and shaker in the mortgage servicing arena. Both Altisource Residential and Silver Bay have seen their stock values rise by almost 13% since their IPOs.

One Fool's take
There isn't a lot of information out there concerning Altisource Residential just yet, but Silver Bay has been pretty active in acquiring properties over the past few months -- spending around $40 million to $50 million  on a monthly basis. Analysts predict that the REIT's portfolio will expand to more than 8,000 single-family houses by the end of this year, up from its current 3,100 or so.

This sector is fairly new, but keeping an eye on it seems like it might pay off. Not only is there profit to be made from renting these properties, but, as property values rise, so will rents -- as well as the value of the portfolio. Since these houses were bought dirt-cheap, well, there's nowhere to go but up.

If you're looking to take advantage of the rental market but don't want the muss and fuss of owning properties yourself, the single-family REIT sector just might be the chance you've been waiting for.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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