Oaktree Capital Management LP has teamed with property manager Carrington Holding Co. to buy up to $450 million in distressed single-family homes in what's seen as an evolving interest among private equity groups in the troubled housing sector.

The Los Angeles private equity firm, a specialist in distressed investing, and Santa Ana, Calif.-based Carrington believe that by acquiring lender-owned, distressed single-family units and renting them out will help strengthen the housing market.

"Anything that the industry can do to remove distressed properties from the sales inventory will reduce some of the price pressure that the housing market is suffering from right now and help prices appreciate again," said Rick Sharga, executive vice president at Carrington. "There is a market for single-family home rentals as home ownership rates continue to decline and more families are interested in renting at least for the next several years."

Carrington manages more than 3,000 single-family rental homes under Fannie Mae's Tenant-in-Place and Deed-for-Lease programs. As part of these programs, Carrington does not acquire ownership but handles rental operations for Fannie Mae. The partnership with Oaktree will enable the firm to buy distressed properties to rent out. Sharga said his firm has been working with Oaktree for several years, managing other real estate assets. Oaktree is providing "the bulk of the financing" to acquire assets, Sharga added.

Oaktree and Carrington's partnership is the latest joint venture that aims to capitalize on anticipated measures by the government to stimulate faster recovery in the U.S. housing market.

In a white paper published Jan. 4 presenting a policy framework to address the slump in the housing market, Federal Reserve Chairman Ben Bernanke proposed selling foreclosed homes held by government-sponsored enterprises such as Fannie Mae and Freddie Mac in bulk to investors that would then rent them out. While most other firms still prefer to buy distressed multifamily projects or mortgages, some PE investors view investing in single-family properties as an opportunity to generate sizable profits.

On Jan. 12, Menlo Park, Calif.-based GI Partners, a midmarket firm that invests in asset-based businesses, said it made an equity investment in Oakland, Calif.-based Waypoint Real Estate Group, an investment holding company that acquires distressed, single-family properties. The investment will enable the acquisition of more than $250 million in single-family rental homes.

Acquiring single-family homes has not been the traditional purview of real estate-focused private equity largely because such assets are difficult to manage. But what makes it palatable for PE investors, executives said, is the increased volume of foreclosed homes available at reasonable cost and the ability to produce steady cash flow from the rental properties.

"This was more of a cottage industry where families and foreign investors were buying maybe $1 million to $5 million worth of homes and then flipping them," said Rick Magnuson, executive managing director of GI Partners.

"What has happened is that the volume of product has picked up," Magnuson said. There were about 2 million foreclosures last year, and another 1 million expected this year and next, he said, citing Federal Reserve estimates.

GI Partners' premise is that the market demands "more housing for rental and less for sale," Magnuson said.

Another real estate private equity firm, Praxis Capital LLC, has a similar notion. The Santa Rosa, Calif., firm is in talks with a couple of larger firms to form partnerships to invest between $50 million and $100 million in bulk single-family unit acquisitions, co-founder Eric Peterson told The Daily Deal.

"With a buy-and-hold strategy where you buy homes and rent them out, you can obtain significant income and a positive cash flow," Peterson said. Average returns on investment for this type of strategy are between 18% and 22%, he added.

David Nachman, principal of New York real estate investment company Spirit Investment Partners, also said that acquiring government-sponsored, agency-backed homes in bulk is a good strategy, considering the pipeline of expected foreclosures in the foreseeable future.

One potential downside: Acquiring and maintaining single-family units in bulk is a management-intensive process as the properties can be miles away from each other.

In a Jan. 9 report, credit agency Fitch Ratings said, "While we believe this idea has merit, as it could potentially reduce the number of distressed properties for sale, it would face some operational challenges. ... A direct rental program could be an undertaking of some magnitude and cost due to the staffing and property management demands associated with large-scale property rental programs."

"The supply of homes is clearly going to be there, but you have to be able to manage it very efficiently or it becomes cost-prohibitive," GI Partners' Magnuson said.

Waypoint has developed a technology that allows it to buy about 30 properties a week for about 40% less than what it would cost to build them, he added.

Carrington has a similar system in place. Sharga said the company has developed a national field services network along with a proprietary software system that allows for centralized property monitoring and management.

Nachman explained, the strategy "is hard to scale up. For instance, you can get one maintenance person to take care of 100 multifamily units. But single-family houses can be miles away from each other."

Spirit Investment prefers to concentrate on multifamily properties, announcing Jan. 13 a joint venture with Irvine, Calif., private equity firm Bascom Group LLC, he said.

Like other investors in troubled loans, Spirit Investment continues to see opportunity in commercial mortgage-backed securities. "The most egregiously written CMBS loans were written in 2007," which typically have five-, seven- or 10-year terms," Nachman said. "You will see that a lot of these loans will not be able to be refinanced. We could buy either the property or the notes directly."

As of November, delinquency rates for CMBS backing multifamily properties was 16.73%, according to data from CMBS analytics firm Trepp.

Meanwhile, delinquency rates for lodging properties was 14.12%, and industrial properties' delinquency rate was 11.59%.