Housing isn’t used just for shelter; it’s also a wealth-builder. It’s an asset with a practical function, making it a smart investment.
A home’s appreciation in value means that wealth can be passed down via inheritance, ensuring a build-up of wealth across generations. On the selling side, agents know that even in challenging economic times as we have seen, demand for housing can still remain high.
Since the 2008 financial crisis, investment firms have wisened up to the opportunities in housing. Companies like Invitation Homes (founded by Blackstone but now an independent organization), American Homes 4 Rent, and Tricon American Homes have gotten into the business of purchasing single-family residential homes.
The post-2008 foreclosure wave created millions of empty properties for these firms to snatch up.
The purchase model is similar to iBuying; a company makes a quick, upfront offer on a listing with the intent to make a profit. However, rather than refurbishing and re-selling these single-family homes, these institutional investors turn them into rental units, becoming “corporate landlords” and ensuring a continuous income from their renters.
This trend is growing. Based on research conducted by NAR in 2021, institutional investors own more than 15% of several states’ single-family home inventory.
That number is unlikely to fall due to sustained market interest by investors. According to NAR’s report, Southern states have the highest number of single-family homes owned by institutional investors, with the top states being Texas (28% of homes), Georgia (19%), Oklahoma (18%), Alabama (also 18%), and Mississippi (17%).
Bright MLS chief economist Dr. Lisa Sturtevant and Dr. Desiree Fields, associate professor of Geography and Global Metropolitan Studies at the University of California, Berkeley, have both researched and analyzed this emerging trend and its ramifications on the housing market and the fundamental structuring of the American lifestyle.
What is this coming shift, and could it be a positive or negative for real estate agents?
The political economy of corporate landlords
In an interview with RISMedia, Dr. H. Shelton Weeks of Florida Gulf University attributed institutional investors’ entrance into the single-family home market to advances in data technology.
“The thing that had kept them out prior to the last decade or so is, when you look at single-family homes, the cost associated with going into and out of the real estate markets were so high. The search cost, the maintenance costs, one of the big things in real estate is lack of informational efficiency, so the technological advances that we’ve seen in real estate, particularly on the data side, have facilitated this move by institutional investors into this space.”
As RISMedia previously covered, Desiree Fields, associate professor at the University of California, Berkeley, researched corporate landlords in a paper titled, “Big Capital, Precision Technologies, and Structural Power in the US Housing Market.” This paper, blending history and analysis, was published as part of a Harvard Joint Center for Housing Studies (JCHS) investigation into the influence of wealth and digitalization on the housing market.
Fields concurs with Weeks that technological innovation, particularly “click-and-buy” investing, led to investors’ interest in the single-family home market. However, Fields believes that surplus inventory via the post-Great Recession foreclosure wave was another cause.
She describes these two factors as a confluence that set the stage for this new market player.
“Digitization of housing needs to be considered among property relations roles in the reproduction of ongoing inequality,” Fields writes. “Corporate landlords can make an all-cash offer within hours of a property being listed. For example, Tricon American Homes developed Triad, an underwriting software that automates acquisition. The application screens a million homes a year and underwrites a property in under five minutes. Similarly, Invitation Homes has used its AcquisitionIQ software to underwrite over a million homes and build up a portfolio of 80,000+ properties in the last decade.”
A 2021 Study, “How and Why U.S. Single-Family Housing Became an Investor Asset Class” by Professor Brett Christophers of Uppsala University in Sweden, adds a third leg in this triptych, an ideological one—arguing that not all Americans can become homebuyers in a post-Great Recession world.
“Before the crisis, only about 31% of U.S. households rented; by 2016, nearly 37% did—a huge shift over the course of just one decade,” he wrote in the report. “In acquiring foreclosed homes and then converting them to rental units, Blackstone directly contributed to this shift, even if only on a relatively small scale. More fundamentally, though, it benefited from it: it invested in the rental-housing asset class just as demand for the service associated with that asset class—that is, rental accommodation—was enjoying its most significant growth for generations.”
Weeks believes the reason institutional investors’ continued, and growing, presence in single-family home markets is a sign they view the properties as “stable” investments, carrying low risk in comparison to return. Previously, only multi-family properties (Weeks lists 350 units as the typical minimum) were considered as such.
The mix of data technology, capital, and inventory at these firms’ fingertips may be what piqued their interest in single-family homes. However, that interest speaks to an unending feature of the market; there will never not be demand for housing. This need is what has made mortgages a traditionally stable investment for banks, after all.
Locations and people affected
The next step to understanding the conditions that created the trend of corporate landlords in the single-family homes sector is to ask, who’s reaping the benefits?
The obvious answer is larger firms for the simple reason that they have more capital. This enables large upfront cash offers and the funds to manage those aforementioned costs such as inspections and maintenance on a larger scale.
To understand the effects institutional investors can have on real estate businesses, look no further than Atlanta, a growing market in many respects. The trend of institutional investors was the subject of a recent ongoing series by the Atlanta Journal-Constitution (AJC) titled, “American Dream for Rent.” The research found that Invitation Homes and Progress Residential each owned more than 10,000 properties in the Atlanta metro area.
Noting the targeting of Black neighborhoods and properties considered starter homes, the investigation attributed investor influence to first-time buyers being pushed out of the market and a recorded 4.2% drop in local Black homeownership.
Should the presence of investor-owned single-family rentals persist, the report suggests it will impede the ability to build generational wealth via homeownership and that the presence of institutional investors has caused cost inflation.
The AJC reports that one home experienced a price increase from $49,000 in 2012 to $189,500 in 2022. CNBC likewise found that for a two-bedroom home, rents increased by 35% in Atlanta, compared to 24% nationally.
Maura Neill, a REALTOR® with RE/MAX Around Atlanta Realty in Alpharetta, Georgia, spoke with RISMedia about her experience selling in a market increasingly crowded by institutional investors. Neill is generally critical of institutional investors’ practices, citing an uneven playing field with real estate professionals that holds the potential to harm consumers.
“(Institutional investors) have driven a lot of our buyers, especially those who need financing, out of the market just by virtue of being outbid,” said Neill. “I think there’s a couple of different ways I see it as problematic for consumers. I get, regularly, 4-5 times a week at least in my mailbox offers to buy my house ‘as-is, all-cash, no inspections, no hassle with showings.’ And I keep a stack of those mailings because I want to show them to my clients and say, ‘There’s absolutely no reason in this market where even with interest rates having gone up, with buyers who still want to buy, there’s absolutely no reason to sell your home to someone without exposure even if you’re in a fixer-upper.’
“I sold a fixer-upper,” Neill continues. “We had 41 offers on that house. Ten or 11 of them were from clearly identifiable institutional buyers, none of them were in the top three choices that my seller chose from. And (my client) said to me, ‘I almost sold to a letter that came in my mailbox and (the final sale price) isn’t even close to what they offered me,’ and she ended up getting so much more.”
In her JCHS paper, Fields writes that point-to-click investing firms, such as Roofstock and Fundrise, were meant to help retail investors; that’s why they emphasized ease of use.
However, in practice, the accumulation of data helps large firms with the resources to make the quickest and widest-reaching use of it. Individual homeowners are outclassed even more so in click-to-invest models.
Where are large institutional investors buying property? Per NAR’s report, there are 10 factors that make areas more attractive to these investors. These include high concentration of black and/or millennial residents, high concentration of renters, and high home prices, rents, sales numbers and vacancy rates.
Like NAR’s 2021 research, Fields pinpointed Southern locations and the Sun Belt as a site of early purchases by institutional investors, citing the high volume of foreclosed properties post-2008. RISMedia previously reported that the Sun Belt is a popular destination for multi-family unit investors. It would appear that single-family investors are no different.
“The Sun Belt region benefited from changing industrial patterns and the growth of the military and defense industries in the last decades of the 20th century, as well as fast-growing housing supply,” Fields wrote. “When the foreclosure crisis hit, housing prices declined most steeply and repossessed properties accumulated in the greatest volume in suburbanized Sun Belt markets.”
Fields indicated that investor-owned single-family homes might not all be used as perpetual rental properties but rather as part of rent-to-own schemes. In such agreements, tenants rent a property with the option to buy years later, with a portion of their rent typically collected as a down payment.
Fields cites research suggesting that most tenants in rent-to-own agreements ultimately do not go on to purchase the home in the agreement. However, Weeks tells RISMedia that rental homes aren’t always a negative for consumers.
“Let’s say you’ve taken a job with a firm and you know you’re probably only going to be there for 30 months, but you’ve got a family with multiple children,” he says. “You can’t really go to the apartment market, you need space, but it doesn’t make sense financially to buy a home. So single-family rentals help to service that.
“I try to caution people against buying immediately because the way you’re going to live and the amenities you want to consume, it’s really hard to get that mix right as soon as you walk into a new area,” Weeks continues. “ So renting for a year or two if you need a single-family home is sometimes a pretty good idea and these institutional investors help to supply product for that element.”
Long-term effects
Research by private equity groups (and cited by Fields and CNBC’s Carlos Waters) suggests that institutional investors could own as much as 40% of the single-family home rental market by 2030. Weeks takes a more measured view.
“Getting to 40%, things would have to stay the way they are for a very long time,” he says. “We’re in a precarious situation right now with interest rates, so I think as those increase, you’re likely to see capital flowing in different directions than what we’re seeing now.”
However, he also states, “In the end, I think the institutional investor is in the single-family home rental market to stay.”
Renting is already considered a more viable option than buying in most large U.S. metro areas. Could institutional investors supercharge that? And if you’re a real estate professional in an area of strong investor activity, what should you take note of?
According to NAR’s 2021 research, 59% of REALTORS® reported institutional buyers used a seller’s agent during the sale, while 56% of sellers cited the cash offer as the reason they accepted. However, there was no recorded difference in offer price between institutional investors and individual buyers. However, experts note that because institutional investors view single-family homes only as income-generating assets, versus with individual buyers’ emotions, there could be less incentive to sell.
On the other hand, for an individual with multiple properties, the temptation for liquidation might be stronger because they have less time and resources to manage them than larger firms do, experts note. Institutions like Invitation Homes, for example, have the funds to maintain multiple properties.
This begs the question, if investor-owned, single-family homes aren’t being sold, will this cut into the inventory for REALTORS® to sell? Weeks thinks it will do the opposite, citing the age-old economic principle of supply and demand.
“I think concerns (about this eating into the market or single-family homes becoming majority rentals) are completely unfounded,” he says.“I think, if anything, bringing the institutional investor to the market should increase the size of the market.”
“We have a significant shortfall in the quantity of housing that’s being supplied to the market right now,” he continues.“There’s tremendous demand, but our ability to produce homes doesn’t stack up to that demand. The way I view it is with the institutional investor coming to this market, funneling more capital into the market, it’s only going to increase the quantity that’s supplied. There’s going to be more housing supply and so with the agents there should eventually be more transactions, there should be a larger market.”
However, RE/MAX’s Neill described this as “too optimistic” a projection.
“Was there a time and a place to incentivize hedge funds and other institutional buyers to purchase? I think absolutely,” she says.”During the last recession, the foreclosure crisis, there was a glut of homes that needed an incredible amount of rehab. But the market is healthy now.”
“If we incentivize them too much, give them too many tax incentives and breaks, and have we created a monster while trying to fix a previous problem? I think there’s a lot of reason to think yes,” Neill adds. “I don’t think we as a country want to be a society of renters. There’s nothing wrong with renting a property, but when there’s not enough homes for the people who want to buy them, and we don’t have affordable, attainable options, then we need to look back and think, ‘How do we fix this problem?’”
Certain legislators are also starting to take action to curtail institutional investors.
Representative Ro Khanna (D-CA) introduced the “Stop Wall Street Landlords Act of 2022,” on October 28, 2022 while Senator Jeff Merkley (D-OR) introduced the corresponding “End Hedge Fund Control of American Homes Act,” nearly a month later.
Khana’s bill would deny tax benefits to investors who own more than $100 million in single-family homes, ban large investors from obtaining certain federal mortgage assistance, and impose an excise tax on home sales to investors equivalent to the price of the home, while creating a tax credit for the home seller.
Merkley’s bill would impose an excise tax on investors who own more than 100 single-family homes. The taxed income would then be channeled into a housing trust fund to provide down payment assistance for homebuyers.
Both bills expired at the end of the 117th Congress and have yet to be reintroduced.
At the state level, similar bills (HF 695 and SF 365) have been introduced to the legislature in Minnesota.
Asked if she would favor legislation restricting institutional investors as a way to curb the impact on her local market and business, Neill said, “That’s a tough question because I’m generally not in favor of more government oversight. How do we encourage legislation that stops the beast but doesn’t end up having unintended consequences of harming the everyday consumer. Does the everyday consumer own 100 properties? No, but you know I own six and I’m an investor and I already feel like I’m overtaxed. So how do I make sure that if I’m lobbying for legislation that protects consumers, I’m not harming the future me or my colleagues?”
