A growing trend in real estate investing is spreading across the nation — particularly in Sunbelt states hit hard by the financial crisis of 2008 — with institutional investors purchasing increasingly large numbers of residential homes and turning them into rentals.

The number of purchases by these investors has grown so rapidly that real estate brokers, associations, economists and elected officials are beginning to call for greater oversight and regulation. They argue, among other things, that pulling single-family homes out of the market not only hurts the residents of Black and Hispanic communities where these purchases are largely taking place, but also cuts would-be homebuyers, along with local real estate brokers, out of the process.

While institutional investment in residential real estate is happening across the nation, cities like Atlanta and Phoenix have experienced among the biggest surges in the last couple of years. In the third quarter of 2021, 42.8% of the homes in metro Atlanta and 38.8% in the Phoenix-Glendale-Scottsdale area were purchased by institutional investors, according to a June 28 memorandum submitted to the U.S. Committee on Financial Services’ Subcommittee on Oversight and Investigations.

In 2021 alone, investors purchased 33% of all the single-family homes in Georgia, making it the biggest target for Wall Street investors, according to a July 22 report by Stateline, a news website published by The Pew Charitable Trusts. Stateline’s analysis of data from real-estate data analytics firm CoreLogic reveals that Georgia was followed by Arizona, where investors bought 31% of all single-family homes; Nevada, at 30%; and Texas and California, both at 29%.

The investment strategy has become so lucrative that investors are now turning to building entire communities for the sole purpose of renting.

How it all started

Institutional investment in residential real estate on a broad scale started in the fallout of the 2008 financial crisis, when households across the country saw the value of their homes plummet, putting them underwater in their mortgages or in foreclosure.

Wall Street investors stepped in to buy up these subprime mortgages, with financing from Fannie Mae, to stabilize the U.S. economy. It turned out to be a good deal for investors, so once the housing crisis was dealt with, this growing asset class continued, according to Shad Bogany, a broker at Better Homes and Gardens Real Estate Gary Greene, who works in the Houston metro area. “Freddie and Fannie gave them the money to do this and made the money available at low interest rates, and they kept going,” he said.

As those federal lending programs came to an end, investors turned to “hedge funds, pension funds, ultra-high net worth individuals and other institutional investors,” to raise billions and expand their footprint in the market, according to the Oversight and Investigations memo. The onset of the COVID-19 epidemic helped bring about the rapid increase in institutional money flowing into residential real estate. Like homeowners across the nation who were refinancing their mortgages or buying a new home because of historically low interest rates, investors also saw a once-in-a-lifetime opportunity.

Elora Raymond, an assistant professor of city and regional planning at Georgia Tech, wrote in a letter to the U.S. House Ways and Means Committee that because their original investments in single-family homes began in economically depressed parts of the country, that is largely where they stayed and continued to grow. “Because these racial minorities were targeted by mortgage originators for high-risk subprime mortgages, foreclosures clustered in predominantly Black and Hispanic neighborhoods,” she wrote.

Her research shows that in 2021, institutional investors purchased 25% of homes in Atlanta, Miami and Tampa. “On average, these firms purchase in neighborhoods where 84% of residents are non-White. Similarly, in a 40-metro study, Redfin and the Washington Post found that single-family rental (SFR) investors comprised 30% of all home purchases in majority Black zip codes in 2021,” Raymond wrote in testimony submitted to the subcommittee for its hearing “Nowhere to Live: Profits, Disinvestment, and the American Housing Crisis.”

The crunch on homebuyers and brokers

The impact that institutional investor purchases are having on local markets is hard to ignore, particularly in areas like metro Atlanta. But Sharon Henry, franchise owner of EXIT Realty Quality Solutions and managing broker/owner of record, said in a telephone interview that many are still unaware of the shift in ownership that is taking place. “I don’t think the media is shining enough of a light on this,” she said.

Henry, who served as 2016, 2017 and 2018 president of the Empire Board of REALTISTS®, the Atlanta chapter of the National Association of Real Estate Brokers, said clients looking to purchase their first home have been hit especially hard by the trend. “Inventory is very short, and we have an even larger shortage of inventory for first-time buyers,” she said.

Raymond noted in her report that in many cases, institutional investors are able to outbid other buyers with cash offers and low-risk closings. “With dedicated work-crews and the ability to spread risk across a portfolio of homes, institutional investors can buy as-is, or waive inspection,” Raymond noted. “[Institutional single-family rental investors] have access to cheap debt at rates lower than the mortgage rates that households face — particularly households at the lower tier who may have lower credit scores and face higher interest rates.”

Michelle Calloway, Henry’s partner and managing owner/broker of record at Exit Realty Quality Solutions, said in an interview that the competition from institutional investors has become so fierce in Atlanta that it has led to the growth of mortgage lenders who will lend buyers the money to cover the cash spread — but it doesn’t come cheap. “These programs allow them to buy with cash, and if they win the bid, [these lenders] will loan them the money to the tune of 3% on that cash,” Henry added.

That means in order to win a bidding war on a $400,000 home, which is the median price in metro Atlanta, a buyer will pay an extra $12,000 just to match the cash offer made by investors, she said. “It’s a Band-Aid for the problem of people not having enough money to compete,” Calloway said. “In this moment, it’s the only help they have.”

Although aspiring homebuyers in Sunbelt states have been hit hardest by the expansion of these investment firms, the impact has also been felt by local brokerages working in those areas, according to Kim Barnes-Henson, president of the Texas Association of Real Estate Brokers and broker/owner of KBH Signature Realty Group in the greater Houston area.

Barnes-Henson said that when institutional investors flood the market with cash offers, they usually do the work with their in-house staff. “A lot of times they come into the market, but they aren’t creating jobs for the local market,” she said. She believes that the solution has to come from local banks and government loan programs to assist buyers with the rising cost of down payments. She noted that the city of Houston is getting involved with new grant programs to help with down payments. Local banks could also recapture some of the business lost to these institutional investors by adjusting their rates to give homebuyers a fighting chance.

“That’s where it needs to happen,” she said. “We’ve got to be our own solution.”