Just a few short years ago, Wall Street took its first look at buying homes to rent out for income. Large institutions like pension funds, real estate investment trusts and insurance companies have invested in commercial real estate properties for decades. But investing in thousands of single-family houses was unprecedented at the time.
Initially, the concept was that these large firms would buy up thousands of distressed houses that were in various stages of foreclosure. The plan was to buy them at a large discount, fix them up and rent them for income.
Because there is always some “crisis” in the news, the fear at that time was this: What if these large investment firms buy up thousands of homes and then decide to sell them? When they put a large inventory of homes up for sale, won’t it depress the housing market and wipe out the housing recovery?
Here are the biggest players in this market in the United States, based on the number of homes they owned at the beginning of 2014 (according to the Wall Street Journal).
A recent Bloomberg article estimates that private equity firms, hedge funds and other financial giants have bought nearly 200,000 rental homes in the past two years.
It appears that the institutional appetite for single-family homes is waning. Prices have risen dramatically in many markets, and bargains are much harder to find.
So what about the fear that these behemoths will stampede the market into a decline when they decide to unload these properties? That fear is pretty much unfounded. These companies have found another way to get their money back by selling bonds backed by the rents they earn from their houses. It’s like a small investor who pays cash for a property and then gets his investment out of the property with the proceeds from a mortgage.
These houses will likely be held by these large firms for many years going forward. The pace of purchasing is likely to slow dramatically, but the urge to sell is probably a long way off.
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