Do investors negatively distort the market?

52 Replies

Hi BP,

Do investors, purchasing a property with the sole expectation of renting it out, make it harder for owner-occupants to find affordable housing?

This is the question that came up from a family member.  He lives in Washington, DC, and sees how hard it is to find an affordable place to buy.  He thinks this is primarily due to real estate investors driving up prices, hence his reluctance to ever purchase an investment property.

For me, I know there are many benefits from investing -- improving property and overall values after a fix-and-flip, or that some people simply aren't ready or willing to buy and would prefer to rent.  And I think any price increase would be minimal and offset by easier financing for owner-occupants. But in the spirit of being open-minded, are there some studies out there that show the impact (positive and negative) of real estate investors?

Owner occupant rate has been steady for the last 80 years with 2/3 of people being owner occupants and 1/3 of people being renters.  The highs and lows of that rate vary by only a few percentages off that.

People from some cities will tell you that it does, many of them are renters in areas with low vacancy rates and higher home prices.  I don't know of any evidence to support their statements.  In Vancouver BC they said it was foreign owners who were driving up the prices, but when they looked at the number of foreign owners, it wasn't that high.  Part of that was again related to houses sitting empty while people couldn't find places to rent.

It's more complicated.  The following drive housing prices:

  1. Disposable income - very high right now
  2. Population increase - many areas are experiencing large population growth
  3. Interest rates - still low
  4. Innovative mortgage products - not the same as 2008 but still lots of flexibility
  5. Access to credit - credit markets are wide open
  6. Mortgage backed securities - we are in the golden age of capital with huge demand
  7. Housing service providers - there are huge personal incentives to push transactions
  8. Financial literacy - this will always cause irrational decisions

On a different note, I recommend talking about things that matter with people who care.  Consider how hard it is to change yourself and you will understand what little chance you have in changing others.  I learned that one the hard way.

Every city/market is different.  Picking WDC for an example to prove this out is picking one of the highest cost of living areas.  All that example proves is how expensive housing is in WDC.

Most large markets are supply limited, that's what drives up the market. Not OO vs Investor. OO already can usually out pay investors in HCOL markets. No one in NYC and it's suburbs are buying $1-5m townhouses, apartments, and McMansions as an investment. They are buying to live and they make a good enough income to support that.

Washington, DC has artificially inflated prices, due to constrained supply, as you cannot build higher than the capital building

@Wes S.

In my area I’m finding owner occupants driving up the prices so we investors are getting outbid. You see, I need to make a profit on my purchase whereas owner occupants do not. They get emotionally involved and bid enough to make sure they get the house. I bid only as high as my numbers for cash flow show what I should bid.

Syed makes a great point. What I've also found is OO can overpay for small multi-family properties - they have access to better financing terms and can justify the price with soft benefits from living there.

Investors are what makes the economy num along…  why do you think the 1031 exchange process encourages property owners to reinvest?   If he’s looking for affordable housing perhaps he should not move to a major capital city!!

 Another thought… Most young professional DC home buyers are not interested in buying a 100-year-old rowhouse that needs total rehab ... in fact, most don’t even want a fixer-upper!  They want shiny new everything that is available thanks to the developers!   As mentioned above, it’s disposable income and demand that drives the markets up!

Originally posted by @Anthony Wick :

@Wes S.

In my area I’m finding owner occupants driving up the prices so we investors are getting outbid. You see, I need to make a profit on my purchase whereas owner occupants do not. They get emotionally involved and bid enough to make sure they get the house. I bid only as high as my numbers for cash flow show what I should bid.

this is what I call a tipping point.. investors will never beat an owner occ.. the only time i have seen that is in the last 5 or 6 years were you had corporate or bank owned assets and they favored cash over financing.   this was very previlent last 5 years or so here in Vegas.. Investors were beating first time home buyers but once U moved up to homes that make zero sense to rent NUMBERS wise that changes back to a normal market.

Where I see this in the reverse in is low value real estate markets were low value to me is anything at 150k and under.. they can flip flop go either way.. and investor dollars have propped up the market by purchasing what would have been 20 to 30 years ago homes that were only sold for owner occ purposes.. you pull investors out of some markets and they would revert to the mean. and what i mean by that is prices would crash hard.. as homeowners wont buy C D areas generally becasue of crime schools etc.. those values are propped up by rents and investors paying for a given cash flow.. and out of area investors especially.. what you think works  Say 1% rule or greater an out of area person may think .05 is just great.

The reason why rent is so high in DC, San Fransisco, NYC, Seattle is partly due to rent control, zoning restrictions, limited building permits as well as NIMBYISM. Investing (markets/capitalism in general) is a natural process and the most efficient way to manage the supply and demand curve and the allocation of resources.

The problem is scarcity exacerbated by local governments dissuading investment in new supply or the investment in improving existing inventory. 

Why would I buy an apartment and improve it if I can't increase rents to drive NOI? There's no incentive to do so, therefore I move to a different market where I can achieve yield. The result is apartment inventory falling into disrepair and going completely offline - further reducing supply and increasing scarcity.


I may want to build new, but with concerns of "gentrification" and further NIMBYisms local zoning boards are hesitant to allow "greedy" developers to build new units when the only solution to the problem of scarcity is new units. It's a viscous cycle.


The result of limited construction and limited investment into existing inventory ends up driving up rents even further as demand grows. Then the cheers for more rent control, more zoning restrictions, even the seizing of property are heard from citizens understandably frustrated by the high cost of living. It's much easier to blame the rich developer or investor than your fellow citizens or city councilman.

Clearly there is some speculation that drives prices, but if they're completely out of bounds the speculators pay the price.

An extreme example :

https://www.bloomberg.com/amp/news/articles/2019-0...

Thomas Sowell's take on Rent Control

Originally posted by @Spencer Gray :

The reason why rent is so high in DC, San Fransisco, NYC, Seattle is partly due to rent control, zoning restrictions, limited building permits as well as NIMBYISM. Investing (markets/capitalism in general) is a natural process and the most efficient way to manage the supply and demand curve and the allocation of resources.

The problem is scarcity exacerbated by local governments dissuading investment in new supply or the investment in improving existing inventory. 

Why would I buy an apartment and improve it if I can't increase rents to drive NOI? There's no incentive to do so, therefore I move to a different market where I can achieve yield. The result is apartment inventory falling into disrepair and going completely offline - further reducing supply and increasing scarcity.


I may want to build new, but with concerns of "gentrification" and further NIMBYisms local zoning boards are hesitant to allow "greedy" developers to build new units when the only solution to the problem of scarcity is new units. It's a viscous cycle.


The result of limited construction and limited investment into existing inventory ends up driving up rents even further as demand grows. Then the cheers for more rent control, more zoning restrictions, even the seizing of property are heard from citizens understandably frustrated by the high cost of living. It's much easier to blame the rich developer or investor than your fellow citizens or city councilman.

Clearly there is some speculation that drives prices, but if they're completely out of bounds the speculators pay the price.

An extreme example :

https://www.bloomberg.com/amp/news/articles/2019-0...

Thomas Sowell's take on Rent Control

keep in mind as it relates to N. CA  and Seattle and portalnd you have physical constraints as well. mountains oceans rivers etc etc.. its not like flat fly over land were sprawl is easily achievable and the only thing stopping it would be govmit 

@Jay Hinrichs  

Definitely true. Even more reason for plentiful permits and policies that encourage investment, not discourage.

Originally posted by @Spencer Gray :

@Jay Hinrichs 

Definitely true. Even more reason for plentiful permits and policies that encourage investment, not discourage.

Keep in mind development policies are implemented through local and state govmit.. and by elected officials. so in reality is the citizens that live there that elect in officials with certain stances on development  NO growthers and pro growthers.  This is why in some of the dead and dying areas to encourage investment govmit has to give big tax breaks to encourage companies that then bring in employees to fill your houses.  end of the day its all about who you vote into office

@Wes S. Owner occupants will almost always pay more than an investor, so it's more likely that the opposite is true.

Originally posted by @Mike Dymski :

It's more complicated.  The following drive housing prices:

  1. Disposable income - very high right now
  2. Population increase - many areas are experiencing large population growth
  3. Interest rates - still low
  4. Innovative mortgage products - not the same as 2008 but still lots of flexibility
  5. Access to credit - credit markets are wide open
  6. Mortgage backed securities - we are in the golden age of capital with huge demand
  7. Housing service providers - there are huge personal incentives to push transactions
  8. Financial literacy - this will always cause irrational decisions

On a different note, I recommend talking about things that matter with people who care.  Consider how hard it is to change yourself and you will understand what little chance you have in changing others.  I learned that one the hard way.

 Accountants always make the simple sound complicated ;)  Demand drives prices. Economics 101.

All of these factors influence demand.

Originally posted by @Syed H. :

Most large markets are supply limited, that's what drives up the market. Not OO vs Investor. OO already can usually out pay investors in HCOL markets. No one in NYC and it's suburbs are buying $1-5m townhouses, apartments, and McMansions as an investment. They are buying to live and they make a good enough income to support that.

I agree with Syed.

Investors don't drive prices UP. In fact, we want to drive prices DOWNWARDS. Owner occupants are the one who pay market and sometimes MORE than market value and they drive the prices up.

Now, having said that, there are "investors" who do drive prices up. They are not really investors but speculators.

Originally posted by @Michael Ealy :
Originally posted by @Syed H.:

Most large markets are supply limited, that's what drives up the market. Not OO vs Investor. OO already can usually out pay investors in HCOL markets. No one in NYC and it's suburbs are buying $1-5m townhouses, apartments, and McMansions as an investment. They are buying to live and they make a good enough income to support that.

I agree with Syed.

Investors don't drive prices UP. In fact, we want to drive prices DOWNWARDS. Owner occupants are the one who pay market and sometimes MORE than market value and they drive the prices up.

Now, having said that, there are "investors" who do drive prices up. They are not really investors but speculators.

Micheal its totally apples to Oranges when i got into this game a century ago or it feels like that.. investors did not buy SFR's per se like they do in droves today.. and from my cheap seats.. all the new construction we build not a single property goes to an investor.. price is the price and you get to the price by cost plus profit and profits are generally 10 to 20% of gross sales prices as your cmpeititon backs into it the same way.

its only the last 20 or so years were soup de jour is getting rich only rentals and the easiest way to do that is buy low value SFR.. beginners can t start generally with 2 mil apartment complex.. but they can a 75k SFR.. and in the lower price points especially in mid west rust belt the under 100k is dominated by investor i bet 10 to 1 at least. with rates were they are a 200k mortgage owner occ is only 1,200 a month or so.. you get that OLD.. what does it cost question.. if they can afford it they will buy the 200k house instead of a sub 100k house even though economics could be better for them .. but owner occs look for quality of live schools crime etc.. investors not so much.

I mean we see it daily here on BP were investors are fine buying 50k rentals.  we know what those neighborhoods are.

Investors, that buy and then rent out, likely have limited affect on the housing price.  We will drive price higher a little, but once it gets to certain point, we slow down the investment.  

Another type of investors, buy and let the property sit empty, will literally take the inventory out of the market.  Those will drive up the cost for everyone else.  These tend to be in major cities, such as DC, NY, etc.  Some countries is trying to limit this type of investments.

For example: 

- A recent report states that over 100k homes sit empty in the San Francisco metro area.  

- My wife has some super rich clients who purchased 1000+ SFH with cash in Dallas and Houston area around 3 years ago, and all of them sit empty since purchase. They don't want to deal with renters or management companies, they treat these investment same as gold. Most as asset protection/diversification for long term.

The same concept is similar in stocks.  Many companies do stock buy backs, which will take out liquidity in its stocks.  This tends to drive up its own stock price as everyone is bidding on less number of available stocks.

No. If anything, owner occupants distort the market for investors. Owner occupants tend to make purchase decisions emotionally and per what they can afford as a monthly payment. They do not study the market and purchase as a sound business decision. Conversely, investors purchase as just that, an investment, and enter the decision without emotion, from a position of knowledge and experience. There are some systemic flaws that allow this too (owner occupants to buy stupid), but that is too long of a story that nobody on this forum cares about because it does not concern them. I only bring the last bit up because your thread title concerns forces that distort the market.

Originally posted by @Merritt S. :

No. If anything, owner occupants distort the market for investors. Owner occupants tend to make purchase decisions emotionally and per what they can afford as a monthly payment. They do not study the market and purchase as a sound business decision. Conversely, investors purchase as just that, an investment, and enter the decision without emotion, from a position of knowledge and experience. There are some systemic flaws that allow this too (owner occupants to buy stupid), but that is too long of a story that nobody on this forum cares about because it does not concern them. I only bring the last bit up because your thread title concerns forces that distort the market.

 its not a market distortion.. the two assets are completely different and bought for different reasons. renters could give a rip who lives on the block IE other renters or owners.

where owner occ's are very cognizant to this.. this is why developements have restrictions on how many if any properties can be rented at all..  you simply cant compare the two markets or market influences.. if your a landlord you only look at numbers.

If your looking as an owner occ your only concerned about quality of area .. crime schools and does it fit my budgets and do i like the layout and do i want  a new home or a vintage home..

Originally posted by @Wes S. :

 But in the spirit of being open-minded, are there some studies out there that show the impact (positive and negative) of real estate investors?

Excluding flippers:

I've yet to see anything systematic and non-anecdotal supporting the hypothesis that REI drive real estate values up.

This notion is just from the "landlords are bad" camp where landlords are the cause of ALL problems and the solution to NONE of them. There's no grounds in reality, they are just taking it on faith because it makes them feel good. People that lean a certain way politically are more likely to assume "landlords = bad" and they will believe this no matter what you present. 

A slight variant on this, similarly with no research backing it that is systematic and non-anecdotal, and this might be a local one, is the notion that "evil foreign Chinese investors buying mass amounts of real estate and leaving it vacant is driving up values in the San Francisco / San Jose / Oakland" area. It's just xenophobia supported by anecdote, no one has good data on how prevalent this is. People that lean a certain way politically are more likely to assume "foreign/Chinese = bad" and they will believe this no matter what the evidence suggests. 

In both cases, the "bad guys" are actually a fairly small segment of the market, and they aren't the ones generally most willing to pay the highest price... market value is determined by who IS willing to pay the highest price. And that will be your emotionally invested retail owner occupants 19 times out of 20, and that 20th time it'll be something that is too scary for the owner occupants and REI are the ONLY ones who will buy it.

Pic related, I lent on this house post-flip:

My first words in this post were "excluding flippers," because you 100% can hypothesize that the flipper "drove up" the values of that house and that neighborhood.... however the neighbors (20 houses to the right and left on both sides of the street - 80 homeowners) should be sending "thank you" cards to the flipper, they all probably picked up at least 10% in terms of home value thanks to that flipper removing this chop shop blight from the neighborhood. That flipper did God's work and they earned every penny they made on that transaction! She isn't "driving up values," she's saving the freaking day!

@Chris Mason was that on 84th!? 

As a realtor and occasional wholesaler, I think wholesalers who sell off the MLS (properties that have been hanging out for NO TIME) definitely make affordable properties (that could be purchased with conventional loans) otherwise unaffordable to buyers who want to put in some sweat equity.

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