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Private Equity Is Moving in on Single-Family Rentals. Individual Investors Might Want to go Commercial Instead

In the past, individual investors owned more than 80 percent of single-family rentals. Since then, the number has fallen significantly.

Once upon a time, buying single-family homes and renting them out was the default way individuals diversified their investment portfolios beyond stocks and bonds. Becoming a landlord generated steady income (albeit a small one in terms of yield), and (successful) individual investors could buy rental properties and simply sit back and watch their wealth grow.

That model has been disrupted in recent years, as individual landlords have been increasingly marginalized by big institutional investors. The competitive pressure has led many individual real estate investors to exit the market. But legislative changes may offer a way back in.

The rise of the institutional investor

In 2001, almost 83 percent of single-family rental residences were owned by individual investors. In properties with between five and 24 units, that number was about 65 percent. Fast forward to 2015, when individual investor ownership of single-family residences had dropped to about 75 percent. For residences with between five and 24 units, the drop was even more precipitous: 38 percent.

It can be difficult for individual investors to scale: as portfolios expand, what starts as a small, passive form of income expands into running a full-time business. Adding more rental homes means more work.

But there’s something bigger at play. Since the Great Recession, homeownership rates have dropped dramatically, from 67.8 percent in 2008 to 63.6 percent in 2017. When banks started to foreclose on mortgages, institutional investors swooped in, leaving individual landlords with new, outsized competition.

The behemoth on the corner

Today’s individual investors are increasingly competing with public companies such as Invitation Homes. When Invitation Homes Inc. and Starwood Waypoint Homes merged last year, their combined worth was approximately $11 billion. The product of that merger, Invitation Homes, owns over 80,000 homes across the U.S.—that’s 0.5 percent of the country’s rentals—making it America’s largest landlord; and not a benevolent one.

There are accounts of tenants getting eviction notices from Invitation Homes within days of being late on their rent or having their rent increase substantially with no advance notice as a condition to renew their lease.

On the other hand, when a pipe breaks or the furnace goes out, big companies can leverage vertical integration to offer faster turnarounds on maintenance and repair issues. In an online world, renters’ property management expectations are rising. The local landlord may be nice to talk to, but he or she can’t compete with the efficiencies and level of service offered by a large company.

From landlord to shareholder

Competing with huge institutional investors might be intimidating, but there’s a flip side: While the residential real estate market is growing increasingly competitive, the commercial market is becoming more and more accessible.

For years, institutional investors had the high-value commercial market cornered. Even smaller commercial deals went to what the industry refers to as “country club money”—wealthy individual investors who joined with friends or acquaintances to form investment partnerships. For everyone else not in the “club,” it was challenging to simply learn about commercial real estate deals, much less invest in them.

In 2013, when Title II of the JOBS Act went into effect, commercial real estate sponsors were finally able to advertise their investments to a wider public. Information that was previously confined to backroom deals could be found on online investment crowdfunding platforms. In 2015, the last year for which there is reliable information, individual investors poured $484 million into real estate crowdfunding in the US, much of it into commercial real estate.

These platforms are easy to navigate and allow individual investors a much more passive way of diversifying their portfolios. Rather than scouring residential listings, visiting homes, going through the purchase process and then finding a renter, the platforms allow investors to manage the entire process from their computers with minimum investment amounts as low as $10,000.

In the same way that online stock trading has replaced the need for expensive private brokers, online real estate investing platforms are lowering barriers of entry to individual investors. So, instead of owning your rental home, that individual landlord may, in the future, own a fraction of your office building—or perhaps your local country club.

Ian Formigle serves as vice president of investments at CrowdStreet, an online real estate investment crowdfunding platform.

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