In Defense of the Institutional Homebuyer

Few things provoke the public’s ire quite like institutional ownership of single-family homes. The idea that one should have to bid against Blackstone or Cerberus for a house strikes many as fundamentally un-American, a view that spans the political spectrum and is shared by many otherwise pro-market and pro-housing people. Even among real estate investors, only 14.9% have a positive view of institutional landlords.

Today’s letter will argue why the conventional wisdom here is, in fact, wrong. While easy bogeymen, institutional purchasers of single-family homes have become important drivers of broader access to quality K–12 education while having little-to-no impact on home prices or availability.

It’s a shame, therefore, that cities and states are putting increasing legal pressure on institutional buyers. States across the political spectrum—New York, California, Texas, and others—have introduced legislation this year to ban or severely limit corporate ownership of single-family homes.

In the context of institutional ownership’s impact, these efforts are best viewed as a continuation of legal efforts to perpetuate segregation rather than a genuine attempt to limit corporate power or encourage homeownership.

Let’s dig in.

The Rise of the Corporate Landlord

Institutional ownership of single-family homes was quite rare prior to 2012 or so. Before that point, single-family homes weren’t really legible to large investors as a category—the inventory was too diverse, the checks were too small, underwriting was too difficult, and management was local and unsophisticated.

A few things changed in the years following the global financial crisis that opened the spigot of institutional capital.

One, the GFC led to a large number of single-family homes hitting the market at severely depressed prices all at roughly the same time. This piqued investor interest and put a bounty on figuring out how to deploy capital into the category. It helped that the worst of the distress was concentrated in Sunbelt markets with relatively identical inventory—two typical three-bedroom houses in Phoenix are far more similar than two in Boston, for example.

Two, evolutions in software technology made the underwriting, acquisition, and management of single-family homes far easier. Thesis Driven guest writer Aaron Ru of RET Ventures explored this in depth last year, highlighting specific advances and companies that unlocked the SFR market. Invitation Homes, started in 2012, played a leading role in convincing institutional investors that capital could be predictably deployed at scale in single-family homes as a category.

Of course, the idea of a corporate landlord is nothing new. Large apartment buildings have been predominantly owned by large financial institutions for decades. Nobody blinks when the apartment building down the road is bought by Blackstone or Nuveen instead of a family office. In fact, most neighbors would acknowledge that an institution is less likely than a small investor to let maintenance slip.

But single-family homes provoke a very different reaction.

The Institutional Presence

When faced with criticism of the role of institutions in the single-family market—such as absurd but viral claims that BlackRock buys 44% of all homes—many housing experts retreat to facts about institutions’ relatively limited presence in the housing market.

And that’s certainly true. Institutions own approximately 0.5% of all single-family homes in the United States, far too little to make an impact on the overall market. Even when scoped only to single-family rental homes, institutions only own 2-4% of the SFR stock. Many people misunderstand—or intentionally misuse—the data in a handful of ways:

• Misquoting numbers scoped to single-family rentals as instead a percentage of all homes;
• Misquoting percentages of sales in a given quarter as instead a percentage of all homes;
• Cherry-picking individual metros.

For instance, data from this GAO map often gets misinterpreted as “investors own 25% of all homes in Atlanta.” But the denominator here is SFR—it’s the percentage of all single-family rental properties owned by institutions. The actual percentage of housing stock in Atlanta owned by institutions is far lower even though it is among the highest percentages in the country.

But I’d argue that it’s a mistake to retreat to talking points about institutions’ relatively small presence in the rental market. Many crimes are rare too, but that doesn’t mean we should make them legal. Banning institutional ownership of single-family homes would do significant harm to renters while doing little to help homebuyers, and we should oppose it on the merits rather than merely argue it is rare.

The Case for Renters

Rental homes—whether institutionally owned or not—are still homes. In fact, an institutional SFR property is more likely to be someone’s home than a privately-owned house, of which more than 5% are second homes or seasonally occupied. While there’s nothing wrong with second homes, it’s ironic that institutions are accused of intentionally holding homes vacant despite having higher occupancy rates than individually-held houses.

But the biggest argument for single-family rentals is education. In most major US cities, the best public schools are only available to homeowners, locked behind school zones that map neatly to single-family-only neighborhoods. To access good schools, families must be able to put down a 20% deposit and qualify for a mortgage for the remainder. At today’s interest rates, that’s a tremendous challenge for many families.

The end result is a system that limits socioeconomic mobility by locking poorer students out of good schools regardless of ambition or ability. I won’t bore the reader with the history of the interplay between housing, K-12 education, and segregation in midcentury America, but the legacy of that story—if not the laws—are still very much around today.

Single-family rental properties provide a relatively accessible path to those neighborhoods and quality schools. One month security deposit (often substitutable with security deposit alternatives) and a year-long lease is far more achievable for a working family than 20% down. Some investment firms like Scholastic Capital are specifically buying homes with this value proposition in mind, targeting relatively affordable homes to convert to rental properties in the best school districts.

A UC Berkeley study released last month confirms institutional buyers’ impact on neighborhoods: when SFR purchasers enter, neighborhood rents fall (due to more rental supply) and the neighborhood gets more racially and economically diverse, reversing some of the legacy of midcentury segregation. While some homeowners don’t like this, there’s no good policy reason to distort the market and lock families out of good educational opportunities just because homeowners don’t want to live next to renters.

Renters do not have any less of a right to good schools than homeowners. The property taxes levied on each home gets passed through to renters in their rent; the investor owning the home does not get any special treatment. And in states with laws like California’s Prop 13—which limit property tax increases outside of a sale—homes recently purchased by investors pay far more in property taxes than those with long-term owners.

It’s important to remember that families renting single-family homes in great school districts are paying a premium to do so; homes in good districts are going to command higher rents than those in bad ones. The families making this choice likely place a high value on education—think upwardly-mobile first-generation immigrant families. Giving those families the best chance to provide a great education for their kids is a deeply American value. And a robust supply of rental homes in great school districts helps fulfill that value.

On Homeownership

Lest the reader be confused: I love homeownership.

Individual homeownership is good, and having more homeowners is a positive thing for the nation. While renting is not a bad thing, turning the US into a nation of renters with no feasible path to homeownership would be terrible. Pundits who believe we should own nothing and be happy are deeply misguided.

Fortunately, we’re at no risk of that happening. The US homeownership rate has wobbled within a narrow band between 64% and 68% since the late 1960s. It peaked in the mid-2000s when homebuilding was surging and sub-prime mortgages were easy to come by; it fell through most of the 2010s as credit markets tightened in the face of regulatory scrutiny eager to prevent a reprise of the GFC. It currently sits at 65.6%, slightly below historical averages mostly due to elevated mortgage rates and a shortage of starter homes.

And while investor purchases of single-family homes have drawn a lot of attention in recent years, the actual percentage of homes purchased by investors has held steady since 2010. While there have been some surges (post-GFC, post-pandemic) and sags (late 2010s) in investor market share, investors have remained within a fairly narrow range of 18% to 26% of the market.

The composition, however, of investors has changed; institutional buyers’ growth has largely come at the expense of small multi-property investors, not end-user homeowners. While those smaller players still purchase the bulk of single-family rental homes, larger investors began taking more market share starting in 2021.

In general, institutional buyers struggle to compete against end-user homeowners. The institution must follow strict underwriting standards, paying no more than a preset multiple of local rents. An end user buyer is far more likely to get into a bidding war with another end user—following their gut rather than a narrow underwriting window—than they are with a financial investor.

Institutions can, on the other hand, outcompete other financial investors—also using narrow underwriting standards—by bringing cheaper capital, better access to debt, and economies of scale to the table. And that’s what we see in the data; institutions are taking market share from smaller investors, not end-user homeowners.

And as we’ll discuss below, this is a very good thing.

What is an institution, anyway?

Before we continue—or feel too badly about the small investor missing out on deals—it’s worth asking a fundamental question: what is an institutional investor, anyway?

This is where the contrast between small private investors comes into relief. Institutions are generally us: they’re investing on behalf of pension funds, life insurance companies, endowments, and governments. Blackstone, for instance, invests on behalf of retirement systems representing more than 100 million retirees and pensioners around the world. While asset managers do take fees, the vast majority of returns they generate accrue to the investors they represent, not to the firm itself. In a sense, institutional investors are providing real estate exposure to a wide swath of people who may not otherwise have it—teachers, firefighters, municipal employees, and others who participate in retirement or pension plans.

Contrast that with smaller investors, typically individuals or family offices: they invest on behalf of themselves, and any cash flow or appreciation they generate goes back into their own pockets. Tax treatments like 1031 and 721 exchanges, bonus depreciation, and basis step-up for inherited assets make building generational wealth easier by owning real estate long-term.

To be clear, I have a lot of respect for small real estate investors as long as they treat their residents well. I myself am a small-time real estate investor, as are many Thesis Driven subscribers. But I see no reason why encouraging wealthy individuals to build portfolios of real estate should be a policy objective or why we should use state power to protect those investors from other, larger investors. And that’s exactly what prohibitions on institutional single-family purchasing would do: protect small multi-property investors, not first-time homebuyers.

Homeownership is a policy goal, petit bourgeois rentiership should not be.

On Small Landlords

It’s weird and ahistorical that small real estate investors have become a populist cause over the interests of renters.

There is one subjective point underlying this: small landlords suck. They’re far more likely to violate tenant protection laws, skip out on preventive maintenance, or attempt to abscond with a security deposit than an institutional owner. Institutional owners are big, slow-moving targets for state attorneys general and regulators. They have teams of lawyers and compliance officers, and site-level employees are salaried and have little incentive to engage in petty grifts.

Small landlords, on the other hand, are often entirely unaware of the laws and regulations that institutional owners spend fortunes writing rules and SOPs around. While there are certainly good small landlords, the distribution curve of quality and ethics is wider—and the long left tail is particularly bad.

In other words, there’s no policy objective for helping them out. And there’s certainly not a progressive or populist reason for doing so.

Unfortunately, poorly-designed state-level legislation is unlikely to narrowly impact institutional SFR buyers and would likely threaten build-to-rent, purpose-built single-family rental neighborhoods. Even if a law doesn’t ban BTR developments outright, prohibiting institutional sales of single-family homes would take away BTR developers’ exit—after all, BTR builders typically sell to the institutional buyers with the capital to purchase a 100+ unit development.

There is no public policy reason to tackle institutional homeownership. It provides an affordable means for working-class families to access great schools while having no impact on homeownership rates. And legislation written by populists with little understanding of real estate will likely throw various babies out with the bathwater, casting a pall over BTR development and limiting exit paths for developers.

The way to increase homeownership is clear from the data: (a) build more homes and (b) make credit more available to marginal homebuyers. There are, of course, policy reasons to be cautious around credit availability; the explosion of sub-prime lending destabilized the mortgage market and ultimately led to the GFC.

But unlocking development and building better structures for capital availability is a far better use of political capital than attacking renters who are simply seeking access to good schools.

—Brad Hargreaves