- Part 1: The American Dream
- Part 2: The Rise of Institutions
- Part 3: False Narratives
- Part 4: Building Wealth
- Part 5: The Economy
When it comes to the single-family rental (SFR) market, there’s a lot of misinformation out there. You might have seen headlines claiming that 44% of homes were bought by institutions last year. The reality? It was just 0.4%. But let’s imagine a world where SFR home buying by institutions increases over a hundredfold. What would that look like?
In engineering, we often talk about min/maxing. What would a country look like with the highest and lowest amount of homeownership? Let’s explore.
Institutional Takeover Extreme
Imagine a scenario where institutional ownership of SFRs skyrockets from the current 3% to a whopping 80%. Let’s say homeownership rates also drop significantly as institutions dominate the market.
Upside
The rise of institutional landlords would be a game-changer for the middle class, ensuring better-managed properties and more professional standards.
Non-institutional real estate investors often lack the expertise to maximize the value of their real estate assets. They view homes more as personal possessions than assets to be optimized. Our societal structure pushes individuals to pour their money into a single asset. Recognizing this flaw, we have the opportunity to correct it.
Economies of scale and deep knowledge of tax and property management are crucial for making real estate profitable. Most people would benefit more by focusing their efforts on other skills rather than trying to master this complex domain.
Institutions oversee more performance metrics. They request sentiment analysis on tenants, care about headline risk, and track their Net Promoter Scores (NPS). Institutions judge themselves based on these metrics and strive for excellence.
In contrast, many small and medium-sized businesses treat property management as a side hobby, often ignoring rules and regulations. Numerous friends have had mold issues in single-family rentals that were managed poorly. None of these properties were managed by institutions.
Downside
With a significant increase in institutional ownership, neighborhoods could experience decreased stability. Renters might move more frequently than homeowners, leading to a lack of long-term relationships and weaker community bonds. This could result in less community involvement and a decline in neighborhood cohesion.
In response, institutions could offer incentives for longer-term leases and invest in community engagement initiatives, such as neighborhood events or local improvement projects, to build a sense of community among renters.
Homeownership Extreme
Now, let’s assume that everyone in society purchases their own home.
Upside
After around five years of ownership, homeowners accumulate equity instead of continuing to pay rent.
In addition to mortgage interest, homeowners can often deduct property taxes and other home-related expenses. When selling a primary residence, homeowners can exclude up to $250,000 ($500,000 for married couples) of capital gains from their taxable income, provided certain conditions are met.
Homeowners can renovate and decorate their homes to suit their tastes and lifestyles. The ability to shape one’s living environment can contribute to a sense of pride, and owning a home can provide a sense of belonging and stability.
Downside
But let’s not forget the origins of the word “mortgage.” It comes from the Old French words “mort” (dead) and “gage” (pledge), meaning a “dead pledge.” This term signifies that the agreement becomes null if the obligation is fulfilled or the property is taken through foreclosure.
Homeowners are responsible for mortgage payments, property taxes, insurance, and maintenance costs. Economic downturns, job loss, or unexpected expenses can strain finances and potentially lead to foreclosure.
Homeownership can reduce personal and professional flexibility. Unlike renting, where one can easily move at the end of a lease, selling a home can be lengthy and complex. This lack of mobility can hinder career opportunities and personal growth.
Homeownership comes with the ongoing responsibility of maintaining and upgrading the property. This can be time-consuming and costly, requiring regular attention to repairs, landscaping, and general upkeep.
Homeownership can lead to overleveraging, where individuals take on too much debt relative to their income. This can create financial strain and limit the ability to save for other goals, such as retirement or education.
Homeownership rates tend to decrease as nations become wealthier. High levels of homeownership can restrict mobility, locking people in place and potentially hindering economic growth. Homeowners often drive Not In My Back Yard (NIMBY) movements, which limit housing production and density, stifling urban innovation and economic progress. This influence extends beyond local zoning politics to national levels.
Adjusting to a New Normal
In a world where housing is not the primary long-term investment, alternative financial products could rise in prominence. Vehicles like 401(k)s and IRAs already serve this purpose well, and ETFs popularized by firms like Vanguard could see increased usage. These products, especially those with restrictions on selling for 10+ years, might become more attractive alternatives to homeownership.
At Ender, we are at the forefront of this revolution. We empower institutions to own and operate real estate at scale. We build for managers and owners. While tenants are not our direct clients, the tools we develop still significantly impact their lives.
By exploring both extremes, we can better understand the potential future of the SFR market and prepare for the changes ahead. Whether institutional ownership rises dramatically or ~65% homeownership remains the norm, it’s crucial to adapt and find innovative solutions for the challenges we face. At Ender, we’re committed to leading this charge and transforming the real estate landscape for the better.