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Let’s jump in…
Last week we spoke about the myth of overnight success stories by going through two very popular companies:
1. Airbnb
2. Nvidia
If you missed out on that newsletter do not worry just make sure to visit the Mid Market Insider homepage and catch up!
This week I want to dive into a hot topic that has entered the floor of Congress: financial institutions buying public housing.
As Americans continue to struggle in a heavily competitive real estate market, a group of Democratic lawmakers are introducing a bill in Congress that aims to restrict financial institutions from buying up single-family homes.
The End Hedge Fund Control of American Homes Act would mandate that hedge funds, defined as corporations, partnerships or REITs that manage pooled funds for investors, sell off all single-family homes over a ten-year period, and eventually prevent them from holding those properties completely.
But before we dive into the why, let’s do a bit of background.
After the 2008-09 financial crisis, Blackstone spotted an opportunity: thousands of foreclosed single-family homes available at bargain prices.
The private equity firm poured hundreds of millions into these properties, pioneering a new investment strategy.
This move sparked a trend.
Today, these institutional investors have amassed over 600,000 houses across America.
While Wall Street's footprint in housing might seem modest today - owning just 1% of American family homes and 4% of rental properties - these numbers tell only part of the story.
Though corporate landlords with portfolios over 1,000 units haven't yet significantly impacted most local markets, change is on the horizon.
MetLife Investment Management forecasts by 2030, these institutional investors could control ten times their current share of single-family rentals, potentially reshaping America's housing landscape.
Which is big.
This definitely plays into one of my concerns that PE is becoming more about financial engineering than growing businesses.
But we need to consider both sides of the argument.
Pro’s
1. Access to Capital
Private equity firms typically have access to a lot of financial resources, allowing them to invest in renovations and improvements that individual landlords might not afford. This can lead to increasing property values and better living conditions for tenants. Other buyers will use their vast resources to rehab a property thus increasing its value.
2. Certainty to Close
Some private equity firms will not require inspections. Additionally, they often won’t require bank financing and other contingencies. In conjunction with access to capital, this could lead to increased certainty to close, which benefits sellers.
3. Professional Management
Properties owned by private equity firms are often managed by professional teams with expertise in real estate management. This can lead to better tenant relations, more effective property maintenance, and improved overall management practices compared to individual landlords who may lack experience.
However, now let’s dive into the negatives.
Con’s
1. Reduced Supply
Private equity buying single-family homes and converting to rentals has the effect of making more people renters, essentially making it harder and harder for people to own homes. Declining homeownership rates also reduce the opportunity for wealth building through home equity. This causes a ripple effect that could have devastating consequences for the younger generations.
2. Lack of Transparency and Accountability
Private equity firms often operate within their agency meaning they have a lot less oversight. Which can result in excessive cost-cutting, aggressive financial strategies, or neglect of property maintenance, ultimately harming tenants and communities.
3. Strip and Flip
PE firms are well known for stripping and flipping and they often implement restructuring strategies aimed at maximizing profitability. This can result in making the financial decision to limit reinvestment.
The landscape of American homeownership is transforming.
Wall Street has the American homeowner in their eyesight.
While Wall Street's current footprint in residential real estate remains relatively small, this expansion could fundamentally reshape housing market dynamics.
🧑🎓 The Lessons:
1. Efficiency Doesn't Mean Affordability:
Big investors save money through lower cost of capital and scale, but they typically raise rents rather than pass savings to tenants.
2. Financial Engineering Disrupts the Market:
Private equity buyers have different objectives and constraints than purchasers that intend to reside in the house. This often leads to increased market prices. While this will price out some home buyers, it generally will lead to higher home prices overall.
3. Local Impact Matters:
Though small nationally (1% of homes), investors cluster in specific areas where they significantly and disproportionately drive up both home prices and rents, while also increasing the percentage of houses that are rentals.
📅 Next Week:
In next week's newsletter, we'll examine the Internet Guru epidemic.
Keep building,
Nick
P.S.
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