No, Hedge Funds are NOT Buying Up All the Houses
You’ve probably heard a story about hedge funds and institutional investors that goes something like this: realizing that housing (particularly single family homes) is a finite resource that provides solid returns, deep-pocketed companies are vacuuming up all the housing inventory, and then evicting tenants and jacking up rents. In doing so, they’re making it impossible for regular folks to compete, leaving first-time homebuyers out in the cold and artificially inflating home prices.
In other words, they’re distorting the housing market, pillaging it for profits, and in the process they’re screwing both renters and homeowners.
The weird part about this story is how many people believe it when so little of it is true.
As always, I’m going to use facts & data to evaluate these claims, and see what holds up to scrutiny. I’ll also discuss why this story is now believed as widely as it is, in spite of the facts to the contrary, and whose interests that serves.
But first, let’s define some terms.
What is an institutional investor?
Throughout this article I’m going to use the term “insitutional investor” — so what does that mean, exactly? An institutional investor, strictly speaking, is an organization that invests funds on behalf of their clients or stakeholders. A hedge fund, mutual fund, pension fund, or endowment fits nicely into this definition.
But it also includes domestic & international corporations, governments & sovereign wealth funds, and venture capital-funded startups operating in the real estate space. I’m also going to include in this group “iBuyer” companies, who make instant, algorithmically-generated cash offers to homeowners looking to sell quickly, and then look to do a light rehab and re-sell those houses for a profit. (Opendoor and Offerpad are the two largest and best-known iBuyers.)
What all these institutional investors share in common is that they are BIG. They have huge financial resources compared to normal buyers (be they homeowners or investors). They pay in cash, they move fast, and they want to own LOTS of houses — sometimes hundreds of them, but oftentimes THOUSANDS of them.
Which sounds pretty ominous, doesn’t it? But let’s take a closer look at their activities to gain some perspective.
Note that for the purposes of this discussion, I’m going to focus on the single-family home segment of the housing market. This does not include large multifamily buildings — but when people think about institutional investors distorting the housing market, they’re not thinking about apartment buildings, where big investors have always been more active. They’re thinking about single-family homes, which also happen to account for 75% of all the housing units in the country, so that’s where I’ll focus my attention here.
Investors’ impact on the housing market
To be clear, there have ALWAYS been investors in the housing market. Small investors might operate a few properties in their home market as rentals; when buying a new home, a couple might choose to keep their old primary residence as a rental. There have even been larger private investors who build portfolios of dozens or (in rare cases) hundreds of properties.
While technology has made it easier for remote investors to operate rentals out of state — a trend I’ve written about previously — the share of investors in the market has increased only modestly in the last 25 years, and has been stable since the mid-2000s:
So investors have been responsible for about 25% of home purchases for the last several decades, with some fluctuations. It’s true, however, that investments from LARGE landlords accelerated about a decade ago, with iBuying peaking several years ago:
It’s important to keep overall scale in mind, though. Those look like very big, rapid increases, but even in the post-pandemic peak at the end of the graph above, institutional buying represented only about 3% of the overall purchase market. This is a long ways from being a major market mover (especially considering that iBuyers re-list their properties for sale, and therefore don’t decrease overall available housing stock the way a rental operator would.)
When you put this all together, it’s clear that even among the minority of home purchases that are made by investors, institutional buyers make up only a small portion of that activity:
As you can see, small “mom and pop” investors have always gobbled up the lion’s share of investor purchases. That was true decades ago, and it’s still true today — it was even true in 2021-2022, when institutional investment and iBuying was at its zenith.
The above chart also hints at another important fact: after peaking in 2021-2022, institutional buying activity has fallen off a cliff. They represented 2-3% of all home purchases at their high-water mark, but have fallen to less than 0.5% today. The decline of iBuying is a big part of that story — the model, though hailed at one time as the future of real estate, has faced significant challenges:
Still, after buying up all those homes, do these huge landlords now control a significant portion of single-family housing stock? No, they don’t. Estimates vary from as low as 0.5% to as high as 3%, but those are very small numbers — much too small to significantly move the national housing market.
In fact, these investors are now busy SELLING houses. Several of the biggest institutional investors in the country have become net sellers of homes in the last year. In a related anecdote from Memphis (where I have my rental portolio), a large institutional seller has been offloading properties through an agent I’m friendly with. The agent says there are over 500 properties they’re looking to sell, but it’s going to take 1-2 years to move through them all. Several of my coaching clients have actually bought these properties from this institutional investor.
So the bottom line here, despite all the misleading headlines and fear-mongering, is this: institutional investment in single family homes has grown, but it was never big enough to materially move the market, and it has been shrinking rapidly in the last several years.
Why did institutional investors pull back?
I write at length about the huge benefits of rental property investing. (I mean, it’s what this entire blog is about!) So what went wrong for these big investors? Why did they stop buying? And will they jump back into the market at some point?
Part of the story here is rising interest rates. Though these buyers don’t use conventional mortgages, they do use other kinds of leverage. So when interest rates go up, it becomes more difficult for them to invest profitably.
But that isn’t the whole story. It’s worth thinking about why big investors chose not to invest in single family homes at all prior to the early 2010’s. After all, these are huge funds that look to achieve wide diversification across various asset classes, such as stocks, bonds, private equity, commodities, and yes, real estate — but that historically meant larger real estate projects & developments, or investing through vehicles like REITs. And yet they avoided single family homes, a marketplace that is now worth over $50T. (Yes, that’s 50 trillion with a “t”.)
Institutional investors thought single-family homes would be quite difficult for several reasons:
Inefficient and hard to scale. Despite single family homes being an enormous market overall, you pretty much have to buy them one at a time. This would be extremely inefficient, both in time and money, compared to other asset classes that an institutional investor might own.
Hyperlocal. Even if they were to devote resources to buying all these houses, WHICH ones to buy? This question would require vast analytical resources, since so many considerations about a given property are hyperlocal — one block might be significantly more or less desirable than the adjacent one, so each property would have to be individually evaluated.
Hard to operate. Once the properties are acquired, they need to be managed as rentals. I’ve devoted multiple articles to the importance of property management to the success of rental property investors. This may be the stickiest problem of all for institutional investors, because they have to choose between two bad options — use existing property managers, or manage the properties in-house. Why are both options bad? Existing property managers, even large ones, likely can’t scale up fast enough to match the pace of acquisitions; and attempting to stand up in-house property management is difficult, expensive, and market-specific — and these are investment companies, not operators, so they’re probably going to suck at it.
Knowing these challenges, why did the institutions decide to jump in? How would these problems be solved? One word: TECHNOLOGY.
Yes, the magic of modern technology would allow institutional investors to overcome these challenges. Algorithms would pick the properties; software would help to manage them; automation would speed up processes and make them reliable and predictable. It would be brave new world.
Except it wasn’t.
Zillow, certainly a well-resourced firm equipped with armies of data analysts and software engineers, admitted as much when they decided to shutter their iBuying business, Zillow Offers, in 2021 after just three years of operating. Their CEO, Rich Barton, initially cited supply and labor constraints as a challenge to getting the newly acquired homes renovated in a timely fashion. Later, though, he made an even more startling admission: "Fundamentally, we have been unable to predict future pricing of homes to a level of accuracy that makes this a safe business to be in," Barton said. In other words, the algorithm just wasn’t up to the task. Zillow ended up selling most of the homes they purchased for less than they bought them for. Oops.
The mystery institutional investor in Memphis — the one recently offloading 500+ properties — faced similar challenges. I personally evaluated over a dozen of these properties, and here’s the story: they had been purchased in a flurry, and then the investor couldn’t find the teams to get the renovations done. As a result, many of the homes had sat vacant for over a year. The firm apparently decided the operations were just too difficult, and pulled the plug on the whole operation.
So will institutional investors jump back into the market when interest rates fall? I have my doubts that they will, because these other challenges are very real — perhaps insurmountable, particularly at scale across multiple local markets.
Why is this false narrative so pervasive?
If institutional investors aren’t gobbling up homes and distorting the housing market, why do so many people believe they are? I think there are two angles to consider here: political, and statistical.
First, the political. Large institutional investors — hedge funds, big banks, massive endowments, etc. — are easy to hate. There is plenty not to like about these organizations, the way they operate, and the impact that they have on the world. But in this case, they are being scapegoated. There is unquestionably a severe housing affordability problem in this country, so it’s convenient to point the finger at these firms and lay the blame at their feet. It’s easier to scapegoat the easy villain than to deal with the real-life structural problems in the housing market — most obviously, our inability to build enough houses since 2008, and the related issue of pervasive NIMBYism in many high-cost neighborhoods. (I wrote at length about these problems in this article.)
Politicians on both sides of the aisle have used this tactic, one of the rare times when “both sides do it” is an accurate assessment. Expensive housing is a bipartisan problem, it seems. Various versions of legislation have been proposed to limit the activity of institutional investors in the single-family marketplace. I don’t personally oppose such legislation, but the truth is that it won’t make any material difference to housing affordability.
There’s another reason the public generally misunderstands this story: statistics can be misleading (particularly when those same politicians WANT them to be misleading). For example, it’s true enough to say that institution investors own over $500 billion in single family homes, which makes them seem like an ENORMOUS player in the marketplace unless you’re ALSO told that the total marketplace is over $50 trillion. Likewise, you can write an accurate headline that states that institutional investment more than doubled in 2021 and 2022 compared to previous years, which again makes it feel like these giant buyers are hungrily hoovering up all the houses — unless proper context is provided so you know that this was still only ~2% of all home purchases, and they have fallen dramatically since then.
Conclusion
Institutional investors have gotten a lot of attention in the last five years, and have caused worry among both homeowners and smaller investors. Their activity has certainly increased, and they’re easy villains, but here are the core facts to remember:
They have never been responsible for more than 3% of home purchases in any given period, and at present that figure is 0.5%.
They currently control perhaps 1-2% of single family homes, and have been net sellers in the last few years.
The iBuying model has largely collapsed.
“Mom and pop” investors are a MUCH bigger part of the housing market — in fact, more than 20x bigger in most periods.
The operational challenges that prevent institutional investors from investing successfully in single family homes have largely not been solved, which may make the asset class less attractive for them going forward.
About the Author
Hi, I’m Eric! I used cash-flowing rental properties to leave my corporate career at age 39. I started Rental Income Advisors in 2020 to help other people achieve their own goals through real estate investing.
My blog focuses on learning & education for new investors, and I make numerous tools & resources available for free, including my industry-leading Rental Property Analyzer.
I also now serve as a coach to dozens of private clients starting their own journeys investing in rental properties, and have helped my clients buy millions of dollars (and counting) in real estate. To chat with me about coaching, schedule a free initial consultation.
