How Corporate Buyers Affect the Housing Market in the West

[Bradley Buxton]

According to a recent report, corporate buyers own about 3-5% of single-family homes in the US, but that number could increase as they see more opportunities for profit.

Some lawmakers are trying to stop this trend by proposing a new law that would ban corporations from buying single-family homes. They argue that this practice is driving up prices, reducing inventory, and displacing local residents.

In my market in Reno NV, the institutional investors were active in the past, but have stopped their purchases recently. This may be due to the high demand and low supply of homes in the area, which have pushed up the median home price.  I'm seeing opportunity buys with our clients finding and buying investment properties with cap rates above 6%. In Lake Tahoe Vicasa has been active but I'm not sure this would fall under the proposed law.  This current version of the law will never pass and could be an election bait but it's and issue that will likely come up again. 

Are Wall Street investors taking opportunities from other home buyers?  Is this actually happening in the West?  How is affecting your market? 

[Scott Trench]

I'm a forever skeptic on big institutions truly owning large swaths of US housing stock. 

All the press headlines talk about how instutions are buying the housing stock. 

The headline @Bradley Buxton you are referring to is about corporate buyers owning 3-5% of all single family rental housing stock. Not total stock. There are 18M single family rentals. Corporate buyers own no more than 900,000 of those units, and likely closer to 600,000. About $270B in AUM. 

The headline is that "Mom and Pop" investors own 90% of these rentals. Or $4.6T in assets. The question is "can corporate buyers possibly compete with Mom and Pop Buyers and ever be even 10% of the equation in single family housing?"

And my belief is that the answer to that question is an emphatic "no". For several reasons:

First, people buy single family homes for a variety of reasons. Generational wealth, family memories, etc. Institutions are competing with buyers who are trying to afford a home, not other investors looking for returns on a financial asset. Investors like us get good deals because we constantly search the market for unique opportunities to put properties to their highest and best use, are often highly creative, or have unique advantages (willing to live in the property, property is right next door and can be easily self-managed, etc.)

Second, "mom and pop" investors have a killer financing advantage over institutions. We typically use 30-year fixed rate mortgages. This offers high leverage (75% or even up to 85% leverage on single family properties) at great rates. Institutions cannot get the same blend of rate, LTV, and term. This is a huge advantage.

Third, "mom and pop" investors often have the ability to self-manage in lean times to cut costs. Institutions are likely unable to cut costs. 

Fourth, and related to the financing advantage, investor timelines can be very, very long, counted in decades. And, often IRR isn't the sole goal. Many investors buy property, let decades pass, and then pay them off. They don't get a great return on the unlevered property, but they get stable inflation adjusted cash flow and live their best lives off an asset they've owned for years.

Institutions have to met return/performance expectations of shareholders, can't use competitive financing with the small landlord, can't cut costs in lean times the way owner-operators can, and have to operate at scale - and thus are unable to be opportunistic. 

I project messy returns for all but a select few particularly well-run funds in isolated geographies. And, a continuation of the relatively small market share they've had in the past.