JULY 25, 2017
Al Beahn was a 22-year-old college grad living in his parent's basement in the Detroit suburbs when he bought his first investment property in 2009. It cost him $27,000 and he flipped it three months later for a $16,000 profit. Today, his company, Pioneer Homes, has bought and sold 1,000 homes, primarily through a business model he calls the turnkey rental.
Beahn buys and renovates a single-family home, hires a property manager and finds a tenant—then sells the whole package to an investor. He works mostly in the historic neighborhoods west of Detroit’s downtown, where the promise of high yields has helped attract investors from more than 30 countries. “There’s not many markets in the world where you can buy a house for $50,000 and get a 1,500-square-foot brick Colonial that will rent at $850 a month,” he said.
The combination of low prices and optimism about the local economy has made the Motor City popular with property investors at a time when the for-sale market barely functions for buyers who want to live in their houses. Eighty-eight percent of the homes sold in Detroit last year were purchased by investors, according to Attom Data Solutions, up from 35 percent in 2010.
Detroit isn’t the only old industrial city attracting rental landlords at a record clip. Last year, investors accounted for 75 percent of sales in Flint, Michigan, 68 percent in Gary, Indiana, and 51 percent in Memphis, Tennessee. Other cities with comparable rates are vacation communities such as Myrtle Beach, South Carolina (69 percent) and Honolulu (54 percent).
With investors dominating these housing markets, it's no wonder that renters now make up the majority of households in most big U.S. cities.
Whether that's a good thing is less clear. Rental investors deserve credit for stabilizing many local housing markets after the foreclosure crisis, said Nela Richardson, chief economist at brokerage Redfin. And the Rust Belt cities where investors are playing an outsized role are still in varying states of chaos: In Detroit, it's possible to find a portfolio of 12 homes selling for less than $550,000.
But U.S. home ownership is hovering around a 50-year low, and investors are competing for homes at a time when there aren’t enough for-sale listings to satisfy demand. “We’ve come to a point where inventory shortages have become a part of the fabric of American housing market,” said Richardson. “It’s fair to ask: Have investors worn out their welcome?”
In the aftermath of the foreclosure crisis, such institutional investors as Blackstone Group LP and American Homes 4 Rent amassed big portfolios at distressed prices, gaining economies of scale on financing, renovating and managing the rental homes. The largest single-family investors slowed their pace of acquisitions years ago, but plenty of smaller firms are picking up the slack: Nationally, investors accounted for 33 percent of purchases in 2016, the highest share since at least 2000, the earliest year for which Attom provided data.
In most places, however, rents don’t track with appreciation; you can rent a $50,000 home for $850 a month, but you can’t rent a $500,000 home for $8,500. As a result single-family landlords won’t buy homes for more than $200,000 in most markets, according to Dennis Cisterna, chief revenue officer at Investability Real Estate, a Denver-based firm that offers a suite of services to property investors. When cities such as Atlanta and Phoenix—both of which were popular with early single-family investors—became more expensive, some landlords migrated to the Midwest.
“I’m having conversations with investors about Pittsburgh, St. Louis, Cincinnati,” Cisterna said. These markets "weren’t on anyone’s radar three years ago.”