Real estate has seen a lot of volatility over the past few years. Home prices have skyrocketed, mortgage rates have remained high and the supply of homes for sale is still well below what a balanced market requires.
Many factors have influenced this unusual housing market, of course. But one that affects the housing shortage in particular is institutional real estate investment. Redfin reports that real estate investors purchased about 44,000 homes in the U.S. during the first quarter of 2024 — that’s close to 19 percent of all U.S. homes sold during that time frame. The share of lower-priced homes bought by investors was even higher at 26.1 percent.
These large investment companies are exacerbating the home inventory shortage by buying up the most affordable properties and renting them out, making it even harder for individuals and families, especially first-time homebuyers, to get themselves onto the housing ladder.
What are institutional real estate investors?
Institutional investors are typically large companies (ie, institutions) looking to make an investment that ultimately turns a profit. They can invest millions, or sometimes even billions, at a time.
These companies typically buy up sizable amounts of properties. An institutional investor might purchase 100 or more homes in a single city, creating a portfolio of properties that they can then rent out to tenants for a profit.
And they often focus on lower-priced starter homes to maximize their own profits, which then removes those homes from the market for individual residential buyers — making an already-low housing supply dip even lower.
Most real estate investors are small players. Institutional investors, on the other hand, buy homes on a much larger scale.
— Jeff Ostrowski, Principal Writer, Bankrate
“Most real estate investors are small players — people who have some extra cash and buy a rental property or two to generate extra income and build wealth. Institutional investors, on the other hand, buy homes on a much larger scale,” says Jeff Ostrowski, a principal writer for Bankrate. “A related trend is build-for-rent homebuilding: Builders are delivering new single-family homes to investors rather than to individual homebuyers.”
These investors are “certainly competing for homes — especially three-bedroom houses that are the bread and butter of the U.S. housing market — and thereby pushing up prices to a degree,” Ostrowski says. “That said, the housing market would be a challenging one for buyers even if institutional investors stopped buying immediately.”
How investors affect housing inventory
Because of their sheer size and deep pockets, institutional real estate investors can have a massive impact on home inventory on both a local and national scale. This is particularly true in growth areas, where companies can swoop in and get what practically amounts to a “bulk deal” on inexpensive houses. While that may be good for business, it’s bad for hopeful homeowners: The number of homes these companies are able to purchase can greatly reduce the available supply in a given area, especially for affordable starter homes, making it even harder for regular buyers to buy a house and compete.
To make matters worse, many investment companies make cash offers to buy homes and are willing to accept them in as-is condition. This makes them more appealing to sellers than individual buyers, because there’s no financing risk and no need to worry about appraisals or repairs.
Because of their financial resources, institutional investors “are often able to lose money on properties for a few years, eventually increasing rent enough to make it worthwhile,” says Dennis Shirshikov, an adjunct professor of economics at City University of New York and head of growth at vacation-home site Summer.
Even people who aren’t looking to buy a home can feel the housing market squeeze caused by these investors. For example, with fewer people able to afford a home purchase, more people wind up renting, which in turn can drive up rent prices.
Affordability is already incredibly challenging right now, and the institutional investor trend makes it that much worse. Consider that, according to Bankrate’s 2024 Home Affordability Report, 42 percent of aspiring homeowners say they can’t afford a down payment and closing costs.
Notes: Percentages are of U.S. adults who don’t own a home but have a desire to; Respondents could select more than one response. Source: Bankrate survey, March 6-8, 2024
No wonder an April study by Bankrate found that it’s cheaper to rent than purchase a home in all 50 of the top U.S. metro areas.
Which housing markets are most affected?
While institutional investors are putting a strain on housing supplies across the country, the most affected areas are located in Florida and California. The top 10 major metros with the highest share of purchased homes bought by investors are:
| Metro area | Share of purchased homes bought by investors |
|---|---|
| SOURCE: Redfin | |
| Miami | 30.6% |
| Cleveland | 24.6% |
| Jacksonville, Fla. | 24.5% |
| San Diego | 23.6% |
| San Francisco | 23.4% |
| Anaheim, Calif. | 22.7% |
| Las Vegas | 22.7% |
| Orlando, Fla. | 22.5% |
| Phoenix | 21.3% |
| Atlanta | 1.1% |
Some fear that investors are creating a long-term shortage of inventory in these markets. “When a hedge fund comes in and buys up a bunch of single-family properties, those houses are gone,” says Doug Greene, owner of Philadelphia-based Signature Properties. “And if they ever decide to sell, it will be to another large institution, which means they may never come back onto the market for the regular homebuyer.”
What homebuyers can do
There is still hope for house hunters, though. Even if you live in a market where real estate investors have taken up a lot of the inventory, here are a few things you can do to improve your chances of buying a home.
- Sweeten your offer: Cash deals are part of what makes corporate homebuyers so appealing to sellers. While all-cash offers are out of reach for most people, companies like Ribbon and Flyhomes will finance what amounts to an all-cash offer for you, which can help your offer stand out in a crowd. You can also reduce the financing risk sellers face by offering a larger down payment — there are many down payment assistance programs out there to help up the amount you can put down. “Additionally, make sure to get a preapproval for financing so that you can move quickly,” says Ostrowski.
- Go light on contingencies: Make it easier for a seller to say yes by lessening the amount of conditions you place on the purchase. Waiving certain contingencies, such as the home inspection, can be risky, but it can be done without getting burned if it helps you compete. Being flexible in other ways, such as letting the seller dictate the closing timeline, can also help.
- Expand your horizons: If you’re looking in a truly tough town, you may want to consider options in a less expensive housing market. Finding success with a purchase outside your initial search zone will give you the chance to start building equity — and you may eventually be able to trade up to a home in your desired area.
- Reconsider your needs: Choosing a condo or townhome instead of a single-family detached home can get you on the homeownership track more quickly and help you begin building equity for a much lower entry price. Many young buyers have gotten even more creative with homeownership: 10 percent of millennials (ages 28-43) have purchased a home with a friend, and 7 percent have bought with a relative other than their spouse or domestic partner, according to a recent Bankrate study. Also, “think about buying a duplex or a triplex and renting out part of the property to help cover your mortgage,” Ostrowski says.
Bottom line
Institutional real estate investing is a significant factor exacerbating the housing shortage. These investors often target lower-priced starter homes, further reducing the already-limited supply available to individual buyers, particularly first-time purchasers. Working closely with an experienced local real estate agent can help house-hunters find options that work for their budget and needs, improving your chances of finding the right home for the right price.