Right around the same time I got into the landlord business in metro Atlanta, so did Invitation Homes (NYSE: INVH). And Atlanta is where Invitation Homes shines, owning over 12,500 homes here. While I never personally lost a deal to this mega-company, many mom-and-pop landlords like me have, as have scores of potential first-time homebuyers.
Some people might lump mom-and-pop landlords in the same category as those big investment firms, but that wouldn't be entirely accurate. The similarity is the type of homes that are targets for both groups. But there are more differences than similarities. Let's explore what types of homes small mom-and-pop landlords (like me) and big investment firms buy and what makes the two sets of investors different.
The perfect investment property
The types of homes investment firms snatch up are usually around 2,000 square feet and have three bedrooms and two bathrooms. The homes often need repairs and renovations, and that keeps the price lower, but the homes could be move-in-ready if the price is right.
These homes are in solid middle-class neighborhoods with good schools and employment opportunities, but the locales aren't "discovered" yet, meaning they aren't overpriced, like New York City, at least not yet. And they aren't cities that have seen better days and are now experiencing population declines, like St. Louis.
For 2021, Norada Real Estate Investments has slated the following as the top 10 investment cities:
- Boise, Idaho
- Dallas and Houston
- Las Vegas
- Orlando, Florida
- Spokane, Washington
- Tampa, Florida
- Austin, Texas
- Chicago (Note that Chicago also makes a list of the worst investment cities because of high property taxes, increasing crime, and no significant increase in property prices. It makes the top list because of the high percentage of renters and high private-sector employment.)
- Columbus, Ohio
How to buy a home using cash
The large investment companies have been buying single-family homes and typically use cash to do so. Invitation Homes has an unfair advantage, though, according to Slate: The company gets billion-dollar loans at 1.4% interest, far less than what everyone else pays. That means Invitation Homes can pay cash from the loans it gets, and because the interest rate is so low, Invitation Homes can offer between $5,000 and $20,000 more for a home since their actual costs are less.
Mom-and-pop landlords often pay cash as well to compete with homebuyers. Here's how:
- They have saved it up.
- They use the home equity from their primary residence or from another rental property (if allowed by the lender).
- They use a hard money lender.
- They use a third-party service like Accept.inc or Ribbon.
What makes mom-and-pops different from investment firms
It's true that both investment firms and mom-and-pop landlords buy single-family homes that might otherwise have gone to primary homeowners. In defense of both types of landlords, there will always be people who want or need to rent, at least for some portion of their lives, and not all renters want to live in an apartment building. But there are a couple of key differences between the two types of landlords.
One difference is the magnitude of the homes bought. Mom-and-pop landlords typically own between one and five rental properties, not over 12,000 homes in one town.
Another difference concerns the experience of the renter. While both types of landlords can take advantage of tenants, the investment firms are earning a reputation for bad service, for reasons such as high rents and repair avoidance. In fact, every time I list a property, at least one potential tenant asks if I'm the owner, as they don't want to deal with an institutional investment firm anymore.
The Millionacres bottom line
An article in The Atlantic makes the point that shareholders of corporate landlords like Invitation Homes have been kept pretty happy, but at the expense of the tenants who are largely unhappy with their living conditions. Is this model geared more for the short term? It might be. But regardless, if you want to invest in homes yourself, look at the markets in which the institutional firms are looking.