Single-family rentals have long been a savvy investment choice for many. For years, small-scale investors have been buying these rentals and maintaining a diverse portfolio. However, in the past five years, institutional investors have caught on to this cash cow and are now scooping up single-family homes in Kansas City at an alarming rate.
You might be wondering what an institutional investor is. In short, it is a for-profit financial lending institution such as insurance companies, credit unions, commercial banks, or the big one, Wall Street investment firms. As the stock market has climbed higher and higher over the last decade, many Wall Street firms have started to get nervous and began moving money into real estate, and they’re moving a lot of money into this sector.
Before we get into why they’re making this move, let’s take a look at who the main players are. Invitation Homes is the largest one. It was officially founded in 2012 with the purpose of buying inexpensive homes to rent out. The founder, Dallas Tanner, used capital from the real estate investment firm Blackstone Group, a private equity firm, to start the business. Today with over 80,000 rental units under its umbrella, it is the largest landlord of single-family rentals in the United States. Fundrise, Tricon Residential, American Homes 4 Rent, and Brookfield Asset Management are also big names in the game. These companies are gaining momentum as they buy up thousands of homes every month across America.
The three largest institutional buyers are also flush with cash, having raised more than $30 billion to acquire and develop rental houses since the beginning of the pandemic. And they tend to focus on the same moderately priced homes that first time home buyers are trying to purchase. At the end of September last year, these three companies owned more than $10 billion worth of real estate.
Why are they doing this? A perfect storm of higher home prices, tight inventory, and rising mortgage interest rates continues to squeeze home buyers out of the housing market. With an ever growing population, these people that couldn’t afford to buy will need a home to rent, so these wall street firms are betting billions on the future.
It’s nearly impossible for first-time buyers to compete with a Wall Street hedge fund. The investor pays cash, is very flexible on closing dates, has no contingencies, and typically purchases the home in “as is” condition. Investors accounted for more than 18% of all U.S. home sales in the first quarter this year, according to research from Redfin Corp., the highest share since at least 2002.
My real estate team has recently been having many discussions about this, as I’m sure other Kansas City Realtors are as well. We are all getting very concerned about our home buyers getting pushed out of this market, which is already a challenging real estate market, to begin with. We want to do what’s best for our seller clients, but we also like to see real homebuyers being able to buy their dream home as well.
Owning a home not only “lets a family control its own means of production,” but also lets owners accrue wealth and then tap their equity. Home equity represents a huge portion of wealth in the U.S., especially for moderate-income families that have few other opportunities to use borrowed money to invest in assets that can rise in value over time.
We are having this discussion with all of our sellers in advance of hitting the market. To our surprise, many of our sellers are telling us they do not want to sell to an out-of-state investor and would prefer to sell to a local family that will lovingly take care of their home. We can certainly appreciate that as well and are happy to honor their wishes.