In this series of posts, we explore what it means for single-family institutions to purchase real estate, the complaints against it, and the arguments on why it’s good for America and the world.
Many have decried the rise of institutional single-family investors.
A corporation is your landlord?! Individuals are supposed to own houses. Owning property is the best way for the middle class to build wealth!
This is ingrained in our perception. It’s sad to see even those open to new technology assume any change here is bad. Housing is one way for the middle class to build wealth, but it’s one of the more arduous and less effective ways.
Real estate is only a good investment if you know where/when to buy and how to use leverage and tax benefits. Utilizing 1031 exchanges, deducting repairs and maintenance, depreciation, accounting for capital improvements, and stellar management help make real estate an investment that may beat the market. For a non-institutional investor in rental properties, is it worth learning all these things for limited to no scale? DIY hobbies can be fun, but DIY real estate is not for everyone.
It assumes the average person has nothing better to do than grow wealth in overleveraged, hyper-localized asset. It’s lunacy. It’s always been lunacy, and it’s great that institutions are finally stepping in to change things. With non-institutional ownership of single-family no longer the norm, human capital, time, and stress of ownership will disappear. Capital will be put into the market, and time spent elsewhere.
Why Institutions Do It Better
Scale.
The cost of purchasing one HVAC vs. purchasing 1,000 HVACs. Paying a plumber to fix one toilet vs. paying to fix hundreds of toilets. One-off vendors vs. repeat vendors. More data and transparency on what processes, materials, and appliances work best. Smart, full-time people have this as their core competency. They think about it every day vs. thinking about it as an annoying side project. The world is changing.
There are things people did in the past that are no longer worth the effort, like writing shorthand. My grandmother used to teach shorthand classes to teenagers in the 70s and 80s. Now, we have keyboards, spell check, and audio recordings with transcription. Shorthand is as missed as telephone operators. Owning and managing your property includes handling the repairs, maintenance, haggling prices, accounting, deductions, taxes, and insurance.
Oh, how it’ll be missed! How sad! Every American should get to go through the title process. Every American should know what it’s like to have a vendor flake on them.
It will be us telling the next generations how, instead of them tapping a button on their phone and someone fixing their residence– we had to go online, call vendors for quotes, schedule appointments, and hope the unknown vendors live up to anonymous strangers’ ratings of these vendors. This is not going to be missed.
The Big Lie
There are 94.6M single-family houses in the US, of which 20.1M are single-family rentals. Institutions currently own 3% of single-family rentals. This is only rentals. Over 75% of single-family rental properties are owned by investors who own two or fewer properties. But let’s take it to an extreme hypothetical where institutions own most single-family real estate.
Owning a home is the best way to build generational wealth!
The idea of homeownership as an aspect of the American Dream became emphasized in the early 20th century as America’s consumer culture expanded. Individual home ownership has costs.
How much productivity is lost yearly because people deal with issues at their house? How much stress? How many arguments with housemates and significant others? How much time is spent sourcing and vetting vendors for one-off projects? How much context switching is required for house-related tasks? This is a massive cost our society pays. This time and energy could be put to use somewhere else.
Purchasing a home is a massive, illiquid, and hyper-localized investment. Compare this to investing in an ETF. When liquidity is needed, it’s easy to access and reduce risk by immediately selling smaller units of capital (stocks) versus one massive, slow, costly transaction (a property).
While both asset classes are vulnerable to catastrophic system failures (i.e., the economy failing), real estate is more vulnerable to hyper-localized impacts like new state/municipal laws, property taxes, and neighborhood changes. A portfolio of companies is better organized to defend against these factors.
Society shouldn’t normalize investing multiple times one’s net worth in a single asset. Owning a property isn’t a requirement. It’s a choice. It’s not good or bad. It simply is.
Incentives
Individual ownership incentivizes NIMBYism. New developments increase the quality of life for everyone. People are less likely to block new developments if they don’t own homes. Fewer groups would lobby against new developments. The increased supply of housing would decrease the cost of housing.
Institutions support collective action. More renters reduce NIMBYism.
Institutions are a way to reduce NIMBYism. They allow for collective action and incentivize developers to build more housing. This would lead to an increased supply of housing and, thus, a decreased cost of housing.
People will have greater freedom to live where they want and will no longer have to live in the same house for years to pay off a mortgage. Human capital will flow more freely, lowering barriers to entry for every part of the workforce.
Real estate owners are forced to constantly context-switch, which leaves them less time for deliberate practice and deep thinking. Excess free time allows individuals to be more productive in their core competencies.
Our society has been structured to force people to put all their money into one asset, which our policies artificially inflate the value of. It’s time we rethink this.