Real estate has always been a safe, long-term investment. When managed locally (and not by a slumlord who is mining equity), rental owners provide an important service to a local community by providing affordable and decent places to live. Historically, middle-to-upper-middle-class families owned a couple of units to build long-term wealth and provide a cushion in downturns. This territory has also had its share of investors who subscribe to the “FIRE: Financial Independence, Retire Early” mentality.
But, coming out of the housing recession of 2008-2013, we saw a new sort of investor – highly capitalized, corporate buyers who, during the foreclosure crisis, had the capacity to enter a market and pay cash for distressed properties. On HGTV and other channels, we saw the flippers glamorizing this segment of the industry, but they were small time compared to the corporations that were getting in on the game. With credit so tight for home purchases during 2012-2015 they had the advantage of leveraged capital in real estate investment trusts (REITs) and other mechanisms. They concentrated in this period in markets like Dallas and Denver with booming markets for renters. Unlike multi-family properties, they catered to stable renters who wanted nicely upgraded homes in ‘good’ neighborhoods. These renters paid in the top ranges of the rental market. The renters could probably have bought lesser homes but were choosing to live in nicer digs.
Now, in the last few years, and partly because of the confluence of the pandemic, the large number of millennial home seekers, the smaller share of boomers downscaling, tighter mortgage industry regulations, etc. we see a surge in single-family rentals in secondary markets. There were no more ‘deals’ to be had in Houston, Dallas, Philly, Boston, etc. so cities like Greensboro, Winston, Ashville, and Durham have become a good investment for these large firms as an asset class. Also, with the eviction moratorium and the slow pace of Emergency Rental Programs in getting funds out, we saw many mom-and-pop investors decide to sell their properties as they hadn’t been paid rent in over a year.
This of course has had an impact on local property values. In NC we have seen 20-25% increases in housing sales prices year-over-year in the last two years. So little housing stock and so many looking to buy while rates were lower, caused bidding wars where an institutional investor had the advantage of being able to outbid with cash and close quickly. Just like small investors doing a BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method, the large investors come in quickly with their own construction and trades crews (and often their own supply chain behind it). In weeks they have a house gutted and rebuilt then rented out and eventually locked into a portfolio mortgage. Short-term losses from paying higher than the going rate have been quickly erased by equity as prices climb in neighborhoods where multiple properties have been sold and rehabbed. Stable tenants with good credit and strong W2 jobs make for a safe long-term investment even if cash flow on a $1500-$2000 rent is only a few hundred dollars initially.
There is some pushback… HOAs, tenants’ unions, and some municipalities are trying to limit institutional investors, but there are many hurdles. We really need more regulation on this industry as it begins to dominate local markets.
Some readings:
•https://www.planetizen.com/news/2022/04/116708-hoas-fight-back-against-institutional-investors
•https://www.washingtonpost.com/business/2022/03/31/charlotte-rental-homes-landlords/
•Christophers, B. (2021). How and Why U.S. Single-Family Housing Became an Investor Asset Class. Journal of Urban History. https://doi.org/10.1177/00961442211029601
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