Hedge Funds Buying Rental Properties
In the past 18 months, hedge funds and large corporations have jumped into the red-hot market for single-family homes, intending to manage the properties as rentals. A hedge against inflation and a lack of rental housing is driving this move.
hedge funds buying rental properties
The best solution to this dilemma is increasing the housing inventory, but that can be problematic, given the high costs imposed by municipalities for land development and building permits. And, even if the housing stock increased, in a rising interest-rate environment, cash is still king, giving the buying advantage to the hedge funds.
"There's a lot of people who have cash. There's a lot of money that has been printed," said Jeff Lichtenstein, the founder of Echo Fine Properties in Palm Beach Gardens. "People are flush with cash, but then you're running into hedge funds and other institutions that are in the market as well."
This aberration is hedge funds. They are and have been prevalent buyers here, as well as around Northeast Florida. Local real estate agents are encountering hedge-fund buyers more regularly, along with newer competitors like Zillow and Open Door.
Instead of reinvesting their money into richly valued U.S. stocks or low-yielding bonds, hedge funds have turned to buying houses in booming locations. It provides a hedge to their normal business of being long/short of securities. Even industry titan Blackrock is getting into the action.
At the end of the last housing crash, major funds like the Blackstone Group decided they should be buying tens of thousands of residential houses. They saw the low prices and the rents that could provide great yields compared to those lose prices. They bought properties from the MLS, from the foreclosure sales, and directly from banks as well.
At the end of the housing crisis, the government was putting tremendous pressure on banks not to foreclose on homes. One way the banks could avoid that government pressure was to sell the properties to someone else. Many banks and even HUD (department of housing and urban development (the government)) sold pools of foreclosed properties to hedge funds and institutional buyers. The funds could get massive price discounts by purchasing tens of thousands or even hundreds of thousands of homes at once in one transaction.
Some of the owners of these properties would fix them up and sell them, but many held them as investments. The hedge funds and institutional investors still own a lot of houses and they are still buying!
The hedge funds are run by really smart people, in fact, many of them are run by billionaires. They did not become billionaires and trustworthy of other billionaires to invest their money by being dumb with money. If the hedge funds were to sell all of their houses at once it is possible they could hurt the market, at least the local markets where they own most of their homes.
Even the banks realized at the end of the last housing crash that it was not smart to sell all of their houses at once! That chopped their own legs out from beneath them since they knew they had more foreclosures and houses coming their way the worse the market got. The hedge funds would not have that problem since they are not lending money to homeowners. But they are still smart enough to know that if they sell all of their houses at once it could hurt the markets they are selling in and lower their profits when they sell.
The first thing to realize is that the hedge funds do not own houses in every market in the United States. They own houses in most major cities but there are hundreds of towns with no properties owned by hedge funds. If the hedge funds wanted to sell off everything, it would not tank the entire US market, but it could hurt certain markets where they own the most houses.
There are also many different hedge funds. Invitation Homes owns 80,000 homes in the United States and is currently the largest homeowner in the country. The Blackstone Group used Invitation Homes to buy up single-family properties in the US, but recently sold off most of their shares in the company after taking it public. There are about 83 million single-family homes in the United States. There is more than one hedge fund but there are not that many houses owned by hedge funds compared to the total number of houses in the United States. Invitation homes own .1% of all homes in the US so even if they sold them all at once, it most likely would not impact the market enough for anyone to notice except in a few markets where they own most of their houses.
Invitation Homes are still buying and recently said they have 1 billion dollars to spend on houses in the US. That sounds like a lot right? That would buy about 3,500 houses. Houses are very expensive and the hedge funds own a very small percentage of them. It is estimated that big investment companies own about 2% of all rental homes. Not 2% of all homes, just 2% of all rentals!
Hedge funds are not only buying houses, but they are creating subdivisions and building new houses to rent out! Many of these developments are not in the big cities where they primarily bought after the foreclosure crisis but in the suburbs. They think the suburbs are a safer bet after Covid and the problems big cities had and still have.
Do hedge funds own a lot of houses? Yes. Are they planning to sell them all at once? No, especially since they are buying them and even building them. Even if the hedge funds decided to sell them all, could they crash the market? No. They might hurt some local markets where they own the most houses, but they simply do not own enough houses to cause a crash and why in the world would they cause a crash when it would hurt them so much?
No, it is not the same people. It was mostly huge banks that did that and the government easing restrictions on loans. There are almost no hedge fund purchases in the grand scheme of things. The people who are buying the houses and pushing prices up are the people.
Once homes get bundled into a fungible asset, people are not going to be able to buy individual properties from that bundle. Those homes become part of the rental market and will be unavailable to prospective homebuyers. This will exasperate the shortage of new and existing homes for sale. Unfortunately, the nation cannot build quickly and inexpensively enough to make up for the gap between housing supply and housing demand.
Sadly, these colliding problems are going to hang around for years. And the activities of hedge funds will just be gasoline thrown on a well-established fire. Faced with the stubborn reality of those problems, the best course of action for small developers and others interested in building and rebuilding neighborhoods is to focus on modest rental properties, what some call missing middle housing: rental apartment buildings, small mixed-use or live/work buildings. As for where to do that kind of building, we should focus on distressed existing neighborhoods and stay well clear of the overheated and expensive portions of the local market. With so much speculative value baked into for-sale housing, there are a lot of places where it is expensive to build, and local rents cannot support higher construction costs. We need to work in the places where modest rental projects can pencil out. These neighborhoods are also the places to find local construction trades and folks interested in learning a trade. In other words: Find a place you care about that needs you.
"Following the 2008 housing crisis, large private equity hedge funds bought large portfolios of foreclosed homes," notes a fact sheet from his office. "Regrettably, the federal government enabled this growth through bulk sales of federally-backed mortgages and foreclosed properties."
"While some of our housing challenges, including a supply shortage, will take years to remedy," the document states, "others can be addressed immediately, including a strong ban on hedge funds owning and controlling large parts of the American housing market."
This push into single-family homes initially began as an arbitrage opportunity after the global financial crisis in 2008 but has morphed into something more permanent. The real estate bust lowered the perceived risk of single-family housing relative to returns. Today, real estate investment trusts, private equity firms, insurance companies, and pension funds view rentals, which were spared the impact of pandemic-related lockdowns on offices and shops, as a relatively high-yielding hedge against inflation.
Property technology is transforming more than just single-family rentals, but the impact in that sector is particularly profound. Whereas the due diligence for multifamily properties is, by definition, already scaled, single-family properties are more idiosyncratic, making the process for potential buyers more costly per unit. What is changing is that investors are deploying big data technology that lets them filter diligence information much more quickly, making otherwise fractured markets more efficient and accessible. 041b061a72
