What You Can Learn From Large Scale Foreclosure Investing

Every correcting market eventually reveals opportunities, it’s just a matter of who has the money to invest when those opportunities present themselves. We often talk about how price-to-rent ratios (see your town’s average P/R ratio here) and street-to-street, house-to-house price analysis are the best ways an individual consumer can time a purchase in your market. Now some institutional players are taking this approach and getting ready to make massive foreclosure investments.

The WSJ reported last week on a couple firms that are raising hundred-million-plus size funds to invest in foreclosures in markets like San Diego, Miami and Las Vegas.

Mr. East, a managing principal of Silver Portal Capital LLC, a small real-estate investment bank, is raising $150 million to purchase foreclosed houses in and around the firm’s hometown of San Diego. He is scouring lender portfolios and real-estate listing services — as well as spots to get a cup of coffee — for houses that he can rent out and then resell in five years. That is when he bets that the local housing market will have recovered. “It’s like the infantry,” says Mr. East, 48 years old, who plans to buy his first house later this month. “We’ve made a list, and we are going house to house.”

As with any other investment strategy, it’s all execution. Macro trend analysis is critical, but perhaps nothing is more important in real estate investing than security selection: choosing each home one by one based on quality of the property and neighborhood. And it appears firms like Silver Portal Capital are doing it right — certainly some spreadsheet crunching but rather going street to street. Those firms are likely to post strong returns for investors over the next five years, and are worth watching as a model for individual property investors to follow.