High prices and interest rates are sidelining individual homebuyers, allowing a surprising offensive from small-scale real estate investors to emerge in the single-family housing market.
Small investors are securing better deals as inventory builds and sellers grow desperate to close transactions, the Wall Street Journal reported. The trend is a reversal from previous years when private equity giants like Blackstone and Starwood Capital Group dominated investor activity; smaller players are capitalizing on market conditions that favor cash buyers who can close quickly.
“It’s not just the Blackstones of the world anymore,” Rajan Bhatt, president of Strand Capital, told the Journal.
Investors account for 30 percent of single-family home purchases this year, the highest share on record according to Cotality, which has tracked the data for 14 years. But the composition has shifted dramatically: small investors with fewer than 100 properties comprise 25 percent of purchases, while large institutional buyers represent just 5 percent.
Small investors have several advantages over institutional buyers. They face fewer regulatory constraints, can take more risk without answering to pension funds and benefit from the reduced competition from traditional buyers. Many also offer all-cash purchases and can close quickly while avoiding elevated mortgage rates.
Strand Capital exemplifies the strategy: targeting homes around $250,000 with $75,000 down payments and $15,000 renovation budgets. The firm charges $2,000 to $2,200 monthly rent, expecting 5 percent annual appreciation before selling after three years.
Investors are seizing on the fact that homebuilders — including Lennar and D.R. Horton — are offering increased discounts and incentives to clear inventory. This month, 38 percent of builders reported price reductions, the highest level in three years, according to the National Association of Home Builders.
Among the small investors getting into the sector are small funds representing wealthy individuals who are backing away from office and industrial holdings, as well as multifamily investors looking to diversify.
Meanwhile, institutional investors are pulling back. Invitation Homes, Progress Residential and Amherst are all selling more properties than they’re acquiring this quarter, according to Parcl Labs.
“We’re acquiring at a fraction of what we were several years ago,” said Chris Avallone, chief financial officer of Amherst, which owns 46,000 homes.
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