Pandemic Highlights Differences Between Local Landlords and Big Companies

In the middle of a housing shortage, rental companies attract a certain amount of criticism. What buyer wants to wind up in a bidding war with a big company? And that’s exactly what happens in many of the top competitive markets. Some hopeful home buyers just can’t win. And they can end up in rental homes — paying rent to those same big companies.

Buying or building rental units is lucrative. Although corporate investors comprise a relatively small percentage of the U.S. rental market, their numbers are steadily growing.

Non-commercial properties — the “mom and pop” investors with four units or fewer in a building — supply a great deal of the country’s affordable housing. Many buy properties in college towns or dynamic tech hubs where a large portion of the population prefers to rent. And some of these small landlords also find themselves trying to compete with wealthy rental companies.

Let’s break this down.

Individual Buyers Face Competition From Rental Companies

Today’s buyers are coming into a seller’s market. The bidding wars in competitive cities are, by now, well known. Corporate investors are in the mix, buying up single-household properties. Some corporations are buying up whole subdivisions. Some are building houses, but they’re meant for renters, not for buyers.

In short, the corporate investors are buying up more homes than they are adding back into the market. This we learn from a survey done by the National Association of REALTORS® and reported in Arizona Business Magazine. NAR went to the most competitive real estate markets and looked through the 2020 and 2021 deed records. The findings tell a story of companies depleting inventory in 31 of the 50 most popular cities for buyers, including Phoenix, Charlotte, Chicago, Miami and Tampa. When a large company buys up housing, the units can be out of the buyer’s market for many years.

NAR did find investors selling more than they bought in some areas. Those are the priciest areas, where it’s hardest for the ordinary home shopper to buy. Like Dallas, Los Angeles, San Jose and San Francisco.

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Small Investors Are Stretched to Their Limits

After U.S. businesses shut down to follow the public health directives of March 2020, many employees were cut off from their normal sources of income. Some couldn’t make their rent payments. Some renters were able to obtain protection from evictions — protections issued by their states or by the Centers for Disease Control (CDC) — until the end of July 2021.

Then came August 2021. Investor-owners were looking forward to resuming some semblance of back-to-normal payment schedules. As though on cue, the Covid-19 delta variant appeared. To protect the public health as infections continue to spread, the CDC issued a new order halting evictions in August 2021. In many jurisdictions, evictions will be put on hold for the people least able to pay rent through the end of 2021.

Across the country, many renters qualify for assistance to pay their overdue rent and utility bills. This can help small landlords. Still, there are plenty of property owners who have waited more than a year for their rental income to resume. These small owner-investors are raiding their savings to pay mortgages, taxes and building maintenance costs.

For many mom-and-pop investor-owners, the situation is untenable. Now, some are forced to sell their buildings. And they might be selling to the big companies.

The institutionalization of real estate investment is a growing trend.

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Truth or Myth? Investors (and Renters) Bring Down Property Values

Generally, owner-occupied properties are associated with stronger property values than rentals. Consider this. When a condo property applies for FHA lending pre-approval, the condo association must agree to follow limits on how many absentee owners are allowed. The FHA want to see a certain percentage of owner-occupied units. Additional FHA rules keep any one investor from buying more than 10% of the condos. 

These rules reflect the value, or the perceived value, of owner occupancy to a condo property. The FHA is lending a certain amount of money based on that market value. The assumption? Prospective buyers avoid heavily rented areas. Buyers value a sense of stability, and may believe that a high rental population undermines a community’s stable character. It’s an assumption that undervalues the commitment of renters — many of whom are engaged contributors to a community, with pride in their homes.

That said, how engaged are their landlords? It all depends. It’s one thing to have mom-and-pop investor-owners who live nearby and work on local matters, and even show up at homeowners’ association meetings. It’s another thing to have a distant, bureaucratic rental housing company as the landlord.

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Separating Myth From Reality

In reality, investor-owners are not all having the same effects on today’s real estate market. Some have more in common with their renters than they have with large, public rental housing companies:

• Small investor-owners, alongside their renters, have faced serious setbacks related to Covid-19. As the virus variants continue to spit and sputter through 2021, these setbacks are compounding.

• In contrast, the pandemic has benefited the major rental real estate investors and developers. Corporate landlords have increased — and profited from — housing shortages in some of the hottest markets.

While investors might help to keep home sale prices (and shareholder value) high, their impact on communities is another story. One point seems clear. The pandemic has served institutional buyers well. It hasn’t been that good for the ordinary, hardworking investor. We expect a good deal of debate ahead about the rise of big companies in the U.S. housing market.

Supporting References

Arizona Business Magazine: Phoenix No. 1 Housing Market Negatively Impacted by Investors (Aug. 14, 2021).

Patrick Clark and Heather Perlberg for Bloomberg News: Zillow’s Bond Deal Signals First for Big-Tech Home Flippers (Aug. 4, 2021).

Derek Thompson for The Atlantic: BlackRock Is Not Ruining the U.S. Housing Market (Jun. 17, 2021).

Noel King, interview with Chris Nichols of CapRadio Sacramento, for Morning Edition by NPR News: Economic Pressures Are Rising on Mom and Pop Rental Owners (Jul. 7, 2021).

Ben Winck for Business Insider: The Wealthy and Wall Street Ruined the Housing Market for Everyone Else. Millennials Aren’t Helping, Either (Jul. 28, 2021).

James Brasuell for Planetizen: When Wall Street Controls the Housing Market (Apr. 7, 2021).

Alana Semuels for The Atlantic: When Wall Street Is Your Landlord (Feb. 13, 2019).

Ryan Dezember for The Wall Street Journal (audio): Millions Are House-Rich but Cash-Poor. Wall Street Landlords Are Ready (Sept. 18, 2020).

Ryan Dezember for The Wall Street Journal (via Fox Business): If You Sell a House These Days, the Buyer Might Be a Pension Fund (Apr. 5, 2021).

Photo credits: Craig Adderly and Blue Bird, via Pexels.