Is Wall Street Buying Up Main Street?

There has been a lot of talk in the last few years (and increasingly since the pandemic) that large institutions such as BlackRock and Zillow are buying up the housing stock in the United States. These purchases are driving prices up and making homeownership unaffordable for the regular Jack and Jill.

In real estate investing, being able to afford homes for rentals is paramount. It is also important to not only be able to purchase properties but also to ensure you are maintaining a solid investment portfolio. Equity, appreciation, cash flow, and tenant retention are all key factors to building and sustaining your financial future.

So, let’s explore whether institutional investors are negatively impacting housing availability and affordability with major purchases. If so, what can you do about it? Further, what advantages do institutional investors have versus you?

Deep Pockets, Company Size, and Track Records

Institutional investors have really deep pockets. Investors and financial institutions are willing to lend to them because of their size and track records. Their ability to repay is also much greater than yours. Additionally, large institutions can borrow money very cheaply, meaning the interest they pay on their loans is much lower than you would pay; it’s about half the interest rates available to the average individual borrower.

If their interest rates are lower, then these companies can offer higher purchase prices on investment properties because they will roll the higher purchase price into the mortgage. In short, a higher purchase price with a lower interest rate can have the same monthly payment as a lower purchase price with a higher interest rate. Because of this, larger investors can beat out mom-and-pop investors with their offers. A seller doesn’t care what your mortgage’s interest rate will be—they just want the most money they can get for their property now!

Their deep pockets also mean institutional investors can make offers in cash, whereas a traditional buyer will need to finance the property. Financing takes time to be underwritten and approved, so institutions have time on their side when it comes to making offers and closing quickly—and sellers tend to really like faster closings.

Large-Scale Economies and Portfolios

Institutional investors are running large operations and have developed systems to make their large portfolios run efficiently. They can save not only on human capital but also in other areas because they get bulk discounts for renovations and materials.

So, is it true that institutional investors are taking over real estate with all these advantages?

Let’s look at the total number of homes in the U.S. that investors own. According to Redfin.com, investors own just under 16% of the current housing stock in the U.S.

How much of that 16% is owned and controlled by institutional investors versus mom-and-pop investors? To find out, take a look at a company called Invitation Homes, which is owned by BlackRock. It is the largest rental property company in the U.S. Invitation Homes owns half a percent of all the single-family homes for rent in the U.S. So, if Invitation Homes’ market share is only half a percent of all single-family rental homes and they are the biggest institutional investor, then it appears smaller investors are making up a vast majority of the investing being done in the U.S.

Are Fundamentals Driving Up Housing Prices?

If institutional investors aren’t driving prices up with their purchasing power and economies of scale, what is pushing housing prices up on Main Street?

Think Econ 101. Currently, the U.S, is experiencing extremely low inventory. This is because of a building shortage and people who want to stay put due to COVID-19 and lifestyle reevaluations. We are also seeing millennials come into home-buying age and boomers are still alive and well, creating friction when it comes to housing turnover. In addition, we are still experiencing historic lows for mortgage interest rates and, as mentioned before, being able to borrow money cheaply can have a major impact on monthly payments. Low interest rates drive the demand for borrowing and buying up, which drives housing prices up.

When you look at the big picture, institutional investors are not taking over the housing market. Moreover—as we’ve seen with Zillow’s historic stumble in their house buying operations and ability to evaluate the price of homes—real estate is a highly localized industry that will take more than a few algorithms to be changed. Investments take time and patience to build. There will always be large institutions to compete with, but as a savvy investor, you can strategize against them. The real estate industry has withstood the test of time as a reliable investment path, and big corporations are not going to stand in your way of creating an investment portfolio with longevity.

Zach Lemaster is the founder and CEO of Rent To Retirement. Lemaster is a seasoned real estate investor who has accumulated a large portfolio of rental properties across multiple markets, including single family, multifamily, commercial, and new construction. He is passionate about educating others about the numerous benefits of real estate investing and how to use real estate as a means to create the lifestyle each person desires for their family.