The Way People Invest In Real Estate Has Changed - What This New Strategy Means For Investors

Residential rental properties have been the most common investment option for most people wanting to build wealth through real estate investing. A modest savings account could cover the down payment on a single-family home in many parts of the country, and an ambitious investor could scale that first purchase into a multi-million dollar portfolio.

Institutional investors mostly stayed out of the single-family housing market. Hedge funds and private equity firms historically maintained their focus on commercial real estate and large multifamily properties, leaving retail investors to dominate the rental property space.

The dynamic has been slowly shifting in the residential real estate market since the Great Recession in 2008, but this shift has been accelerating over the past couple of years. Seeing the major growth potential in new markets because of shifting migration trends and a growing need for affordable housing, many institutional investors are aiming their focus on single-family rentals.

According to Redfin, single-family homes represented 74.4% of real estate investor purchases in the third quarter of 2021, the highest level on record.

Who’s Buying The Most Single-Family Rentals?

One of the largest players in the single-family rental market is Pretium Partners, an investment management firm founded by Don Mullen Jr., the Goldman executive that bet against the housing market in 2008. The firm has a portfolio of nearly 80,000 homes across 30 markets.

Mullen described his firm’s real estate strategy as a way to capitalize on the millennial generation being priced out of the housing market in a video posted on the company’s website.

The current leader in the single-family rental space is the publicly traded REIT Invitation Homes INVH. The company currently has a portfolio of over 80,000 homes focused on the Western United States, the Southeast, Texas and Florida. In 2021, Invitation Homes grew its portfolio by over 4,000 homes after adding roughly 1,000 properties in 2020.

J.P. Morgan JPM Asset Management entered into a joint venture with the single-family rental home company American Homes 4 Rent AMH in 2020 that is now building thousands of homes with its build-to-rent model.

What This Means for Individual Investors

The institutional investors gaining a larger share of the rental property market are making it difficult for new individual investors to compete. The sheer scale of the growing institutional single-family rental portfolios allows these companies to reduce operating costs and provide more affordable rental rates than individual investors can while maintaining strong margins.

Companies like Invitation Homes and Pretium Partners also have access to much cheaper debt than the average investor, bringing down their total cost of ownership.

A few companies with a growing market share are actually offering new ways for individuals to invest in single-family rentals instead of forcing them out of the market. Provident Realty Advisors recently launched an offering on CrowdStreet for the development of seven build-to-rent communities in Texas, which offers investors a target internal rate of return (IRR) of 18% to 22% over the target hold period.

One of the newest players in the space is the Jeff Bezos-backed real estate investment platform Arrived Homes. The company has been acquiring rental properties across several markets and allowing investors to buy equity shares of the individual properties through Regulation A offerings with as little as $100.

What This Means for the Real Estate Market Moving Forward

Investors, both institutional and individual, have captured a much larger share of the total single-family housing market since the crash in 2008, which might offer the market an added layer of protection.

Properties that are part of an institutional portfolio will be less likely to go into foreclosure in the event of another economic recession. These same investors are also likely to take advantage of more opportunistic buying opportunities if another recession results in a higher foreclosure rate among owner-occupied homes, slowing the supply of new homes hitting the market. 

Overall, the changing dynamic could mean a new opportunity for individual investors that want access to passive real estate investments. Retail investors can gain access to real estate offerings from the top investment platforms through Benzinga’s Alternative Investments Hub.

Photo: Courtesy of paulbr75 on Pixabay