There are big investors in town right now playing the Sacramento market like Monopoly. Rental funds with multiple millions of dollars have been devouring the lower end of the market like real estate locusts. This has made rental funds instant mega-landlords and simultaneously caused many would-be owner occupants to have fewer opportunities to buy into lower-income neighborhoods.
Let’s talk about this phenomenon. There is a bit more opinion than usual from me in this post, but it’s timely and relevant for discussion. I really want to hear your take, so please comment below.
Cash Competition: It’s very difficult for lower-income buyers to compete with so much cash right now. This is America. I’m not saying we need to create hurdles for hedge fund rental investors or script laws against the free market. Owning property is one of our inalienable rights after all. I’m only saying it may not be best for longterm neighborhood stabilization when landlord investors with deep pockets are buying properties on such a massive scale. For example, there were six recent flips in the past 30 days in one particular subdivision, and a rental fund investor swooped in to pay cash for all of them as soon as they hit MLS. That’s the free market and I don’t judge any buyer, seller or agents involved, yet here we see how big money has trumped owner occupancy and simultaneously increased the rental rate in a neighborhood that was ripe for owner occupants. These investors typically pay top dollar or even overpay to obtain assets, which is helpful for property values in the short-term. But one must ask, what is the potential impact to lower-income neighborhoods if cash keeps winning like this over time? What will it look like in a number of years when these homes hit the market for resale? What if the market doesn’t perform well and all these homes are dumped?
Morality and stabilization: There is of course no moral obligation for sellers to sell to owner-occupants, and absolutely nothing wrong with investing in real estate either. Please don’t misunderstand me. Here is some food for thought though when it comes to long-term neighborhood stabilization in lower-income areas and the phenomenon we’re seeing in today’s market with rental funds:
- Owner-occupancy increases stability: Lower income neighborhoods often need all the help they can get. Selling to owner occupants helps to stabilize neighborhoods and can help increase property value over time because of a more stable element in the community.
- Landlords galore: It’s TBD how well rental funds will manage their massive portfolio. One investor contact told me a particular fund is writing 1,200 offers per month in the Sacramento area. Can you imagine the massive amount of rentals this fund will have to manage? Do they have the systems in place to do an effective job handling their portfolio? That’s the question. Moreover, what if they don’t mow lawns, take care of deferred maintenance or screen tenants? How will this impact neighborhoods? By the way, one of the aforementioned properties above that sold to a huge rental investor has been sitting vacant for nearly six weeks and has grass one foot tall already.
- Less farm agents: There are often few “farm” agents in lower-income areas, so there is less of a connection to the community, which may make it easier to sell to rental fund landlords.
- Appraisal issues: Let’s be honest. It’s not easy for sellers to deal with lower appraisals and the headache and hurdle of two appraisals on a flipped property (when required). Multiple appraisals can be a death-blow to an owner when one comes in at a higher level and the other comes in lower. The lender will often go with the lower appraisal.
- The allure of cash: What’s more attractive? A full price cash offer asking for no concessions or credits, or an offer over asking that will net slightly more, but there may be loan or appraisal issues? Since cash is king, it gives hedge funds more power in the market. It’s simply an easier and understandable road for sellers in many cases too.
- Community building: Each neighborhood needs to do its own work to improve its plight. Improving neighborhoods is not the responsibility of the real estate community. Bottom line. Change comes from within – especially change involving curbing blight. However, there are still outside market forces to consider as big money on Wall Street can impact the number of home owners on “Main Street”, which in turn makes it more challenging for lower-income neighborhoods to improve over time (especially if hedge funds are not upstanding landlords).
Questions: What are the long-term consequences, if any, of rental funds buying up the market? How do you see this playing out? Do you think hedge funds are capable of being good landlords on such a massive scale? How do you think owner occupancy can be increased in lower-income neighborhoods? I’d be curious to hear of any strategies, resources or programs available. If you are an agent, how are you helping buyers compete with so much cash right now?
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Tom Caruthers says
It’s a dilemma for sure.
Ryan Lundquist says
Gee, one would think after the recent crisis that people in real estate would stop and think before claiming that tenant-occupied neighborhoods are so inherently unstable. Tenants are unstable because the law makes them so, not by reason of some inherent moral failing. Tenants in rent-controlled communities with “just cause” eviction protections are often more stable than homeowners, and tenants who can demand that landlords make needed repairs without fear of retaliation are not likely to contribute to neighborhood deterioration.
Ryan Lundquist says
Thank you for the comment. I think I get where you’re coming from. In fact, some investor friends say all the time they’d prefer to sell to an excellent landlord instead of a lousy owner occupant. I don’t believe I said that tenant-occupied neighborhoods are inherently unstable. I’m sorry if that’s the impression you got. A search of some of my other posts on community building as well as efforts I am consistently a part of definitely shows my huge belief in neighborhoods others might label as “unstable”. My point in this article is that when neighborhood residents become home owners in neighborhoods on the lower end of the economic spectrum, it can be a huge win for the community. Of course, we need good owners in neighborhoods. Thanks for bringing that up. Whether owner occupants or tenants, everyone has a responsibility to the community.
My problem with the investor purchases is that they seem to be marketing to former homeowners who are credit-challenged and have fewer renting options for relatively high prices, and are setting people for another crisis. One of the investor groups, which got a bunch of its money from Citi, allows people to spend 41% of their gross income for rent. For low- and moderate-income households, that’s a one-unexpected-bill disaster waiting to happen.
Ryan Lundquist says
That’s too bad. 41% is a huge portion of income to spend on rent or a mortgage for that matter. I’m curious to see how things pan out here with hedge funds and rents they charge. I’ll pay close attention. Thanks for the info.