There has been a lot of publicity over the last few months about driving the Wall Street housing market. I’ve seen dozens of headlines about how no one can buy a home because big institutional investors are buying all the homes. Since I was skeptical, I wanted to see if it was true.
Let’s dig up data and information to uncover what Wall Street’s role is in today’s red-hot real estate market – as well as the risks of Wall Street for both long-term home buyers and short-term investors. To do this I looked at some data from Redfin, which shows that the share of homes bought by investors is currently 15.9%. By the way, it’s still a bit down where we were before the epidemic, when investors were buying about 16.1% of all homes in the United States.
See this graph below with Redfin’s data. As you can see, parts of homes bought by investors are recovering from a sharp fall last spring but are now just where we were a few years ago.
Now, it is quite difficult to measure the share of investors, but I have seen a few reports from Redfin, John Burns Real Estate Consulting and all reputable companies in the choreographic-real estate industry. And while they all had different methods, they all showed the same pattern: Investors buying homes have not reached new heights since the epidemic. And some reports, like John Burns, show that investors were approaching Homebuying 2013.
This is a clear indication that investor activity is not driving home prices higher. Nothing really has changed about what percentage of homes are being bought by investors. By all accounts, the activity of Wall Street investors is equal to the activity of the smallest or smallest investors compared to the last decade.
If we want to focus on big investors, the latest data is hard to come by. However, a 2018 choreographic survey estimates that only 1% to 2% of all single-family purchases were made by large investors, whereas about 18% were made by small investors.
Another data point suggests that Wall Street activity like today is not fueling this chaotic housing market. Instead, the housing market is being fueled by the basics:
- Extremely low inventory
- Growing demand from the millennium to enter the era of home buying
- Low interest rates
The current real estate market is a function of these three factors rather than the activity of institutional investors. However, that may change. These institutional investors are not yet dominating the real estate market, but they have some serious advantages over regular housekeepers or short-term investors like me. And it made me worry about what might happen in the coming years.
Who are the investors in Wall Street?
As we dive into this, let’s first define who these Wall Street or institutional investors actually are. The largest of all companies is Invitation Homes, which comes as no surprise. Black is a branch of BlackRock, the world’s largest asset management company. Invitation Homes owns approximately 80,000 single-family homes across 16 markets in the United States, which is undoubtedly huge.
In fact, it’s so huge that they’re about 58% larger than their nearest rival American Homes 4 Rent. But, to put it in perspective, there are about 16 million single-family rental homes in the United States, and Invitational Homes owns about 0.5% of them.
The United States has an estimated 80 million single-family homes and owns only one-tenth of 1% of Invitation Homes. To repeat, such companies are large, but they are not currently controlling the housing market.
However, companies like Invitation Homes have a wider advantage than private investors and regular home buyers. This advantage means that they can surpass almost everyone – and, therefore, will probably increase their acquisitions.
Let’s break down their advantages over small investors.
Right now, interest rates are incredibly low for regular shoppers, and that’s great. If you or I go out and look for a mortgage, we can probably fix 30% or 3.5% somewhere for 30 years. This is close to the lowest so far. Invitation Homes, on the other hand, can borrow something like 1.5%.
It may not be like many, but it does mean that they can bid বাড়িতে 10,000, $ 20,000 or even $ 30,000 or more on a home and still pay the same amount of their loan as you and I would for a small loan. In short, institutional investors can offer more in a home and pay the same – a huge advantage.
The second is the cash offer. Has anyone heard of losing a cash offer recently? I must have. Well, not all of these are from institutional investors, but you can be sure that institutional investors can and will offer cash and may leave assets in cash or refinanced. This gives them a huge advantage in winning good deals. They can be closed in a few days when regular homeowners have to wait weeks or months.
Data and research
The third advantage is data and research. We are working hard to bring in our members at BiggerPockets, who are almost all relatively small investors compared to this company, with as much information and research as possible. But these companies have teams of data scientists creating algorithms that can predict which properties and markets will give the best returns. Many people do not have access to it.
The fourth advantage is patience. These companies don’t need anywhere to survive – they just want to get the best returns. They can wait as long as they want to find a good deal. Regular home buyers often do not have that luxury.
The fifth advantage is the skill of scale. I told you earlier that Invitation Homes has about 80,000 accommodations. They have a team of absolutely maintenance people, leasing agents, property managers and many more. They can use their purchasing power for cheap materials, and they can rehabilitate property for cheap. In general, the older you get the more efficient you become and this is certainly true of these companies.
Sixth, and, perhaps, the greatest of all these advantages, is market share in the individual market. I said earlier that these companies are not controlling the housing market on a national scale, but they can do it on a local scale.
There was a report that Invitation Homes actually bought 90% inventory in a single zip code in the early 2010s. Again, this will not remove the entire housing market, but it basically gives Invitation Homes exclusive power over housing in this local market. They can surpass ordinary homeowners who simply want to find an initial residence. And then when those homeowners tend to rent, they will face the expectation of renting from a huge corporation that owns a large portion of the rental properties in your area, giving them the power to set prices on the rent.
It really has the potential to spiral out of control. We already have a capacity problem in American real estate where every day Americans and individual investors cannot afford to enter the market. If large institutional investors start targeting a specific market, that market can really get out of control. They can start pricing in both the housing and rental market in any area where they get adequate market share.
And let’s be clear: this is their business model. They are focusing on specific types of markets such as Charlotte, Atlanta, Phoenix and Las Vegas. And we should expect that these markets will see massive increases in both housing prices and rents in the coming years if this trend continues.
And their strategies seem to be working. All these advantages lead to stronger performance. The portfolio of Invitation Homes collects about বিল 16 billion in rent and about 9 1.9 billion in rent, which is about a 1% rent-to-value ratio. This means that their portfolio, overall, is meeting the 1% rule, which is increasingly difficult for small landowners and individual investors.
Also, the types of homes these companies buy may be similar to what individual investors prefer to notice: mid-price range fixers-uppers that offer good rents. Since these companies (often using cash) can bid and reform at a lower cost, this gives them a structural advantage over individual investors.
In this blog post, I have mainly focused on invitation homes, and although they are the largest and farthest, they are just one example. There are dozens of other companies like this.
So what to do about it? Do you just throw in the towel and buy stock in this giant company? By no means! There are still good deals, and if you are diligent and do your research, you will be able to find them. As I said before, interest rates are low, and long-term supply constraints and demographic trends indicate that the housing market will show solid gains over the next decade, even if prices show a temporary slide. Most importantly, don’t forget that you also have benefits.
Get ready for market change
Change your investment strategies – not just to survive the recession, but to prosper! Go ahead with any recession and don’t be intimidated by the market change again with it Recession-proof real estate investing.
Small investor benefits
You know your market better than any algorithm (It comes from a man who went to graduate school to study algorithms). You care more about any private contract than any corporation. These companies are looking at macro-economic trends so that they can find a market where hundreds, not thousands, of homes can be bought. On the other hand, you can make one or two great deals around you.
You are more creative. If you are looking at a few deals at once, you can find the best way to add a bedroom, improve the quality and create a good return. You can give more time to each contract to ensure a great return than any company in this deal. They are going to make their operations as generic as possible and do everything exactly the same way – you can do the opposite. You may not be good at buying 200 units, but you may be better at just buying one.
Finally, you can be a good homeowner. Renting a unit of this company by all accounts can be a daunting experience. On the other hand, you can provide an amazing experience for your tenants. By finding great tenants and building strong relationships based on mutual respect, you can reduce your vacancy rate, reduce your property losses, and ensure that you have excellent tenants in the years to come.
In no way should we all be terrified. Individual landlords and short-term landlords still have benefits. For everyday investors like you and me, investing in real estate is the best way to achieve financial stability and independence, but there is something to observe about the activities of these large firms. I plan to follow what is happening in this place for you and me!