Effects of Institutional Investor Activity in the Dallas Fort Worth Market

10 Replies

Hello All - I'm a small time buy-n-hold investor from Dallas/Fort Worth. Got 4 rentals currently, all renting within the $1675-$2050 range, solid cash flow. My goal was to grow into 10 properties but the institutional investor activity and focus here is making me nervous. I was doing some research into institutional activity in my County (Tarrant) and I can tell that they are fairly active. Colony American for example has acquired about 80 properties in my County in the last 9 months. American Homes 4 Rent is still buying as well. When my last property came up for re-leasing it took a while longer than I was used to (about 45 days, although that was in Dec but still raised a few red flags in my mind). There seems to be plenty of rental inventory but I've never figured out who to determine demand. So here are my questions -

- Beyond keeping an eye on some generally available historical metrics such as avg rental prices, days-on-market and months inventory, how does one gauge the short term future health of a rental market? Is keeping any eye on these same metrics the only way to indirectly monitor the supply-demand equation?

- If you are local to DFW, what do you think the impact will be of this institutional investor activity to our rental market? Is it time for the small time investor (less than 20 properties) to leave the market, stay put or even expand?

Ali Boone wrote a great article recently on market over saturation due to institutional investor activity (in Atlanta)

Happy Investing folks!

This is outside my expertise but I'll chime in for two reasons.  First, this may get the ball rolling and second, some times you just need to hear some one else say what you already know..... or you'll know they are wrong when you hear them say it.  

So, unless you think the institutional investors are naive, dumb, or ill-informed, I would look at their entry into the market as a positive.  Do they have a history at buying at the top?  Or buying as a rental market is drying up?  What do you suppose their strategy is, appreciation, rent rates increasing, both?  

Commercial appraisers who do apartment buildings keep great data on their markets.  They'll have employment growth, population trends, etc.  Your banker will have their name and tel.  If you tell them you got their number from your banker they may even offer the information for free.  In some markets I've seen them package the data into a report they disseminate free to market their business.   

Brett - Thanks for chiming in, your comments have certainly helped.

You are right, institutional activity can be a great sign of market health and certainly it's no secret all the big cities in Texas are attractive right now. I'm thinking they are going to hold on to these assets for a while longer (3-4 years) for appreciation and start unwinding these. So appreciation is probably the name of the game, I don't anticipate much rent increases given this amount of supply at least in my market. At the same time, these guys have setup significant infrastructure for maintaining these properties (not just maintenance-wise but what looks to be significant technology investments), will they just dismantle those? With securitization, this could be a more permanent venture (much like it is for us small investors). 

@Tony Sera  Hey there, Anthony!

First, just a semantics issue...be careful with the term "institutional investor."  That is generally reserved for Hedge Funds, REIT's, and other financial players.  What you're seeing is large investors...investment companies.  There is a difference.  It may be subtle, but it's an important one.  True "institutional investors" buy large quantities of properties in an area, generally for one of two reasons...1)  an appreciation play for profit; 2) to park capital.  Large investors are typically into a long-term buy & hold strategy for maximum cash flow.  They conduct the same types of analysis on properties a small investor does.  "Institutional Investors", while they are smart and aren't just scarfing up war zone properties, are generally less worried about the numbers on any particular transaction.  They work on volume.

Now, with all that said, the fact the large investors are working in the Metroplex is a great indication they expect the rental market to remain robust. The bad news is that they have a serious competitive advantage. Since most of those guys are either self-funding or have portfolio deals & LOC's in place, they pay a lot less for their funds than the average individual does. They also have a higher risk tolerance. And, they have all the benefits of systems & economies of scale. It doesn't matter if that is contracting crews or PM's. They get it cheaper than we do.

Since I work primarily in the Far North Dallas areas, I'm much more familiar with the economic climate there.  However, the entire Metroplex is pumping out new jobs...net new from organic growth & expansion and from companies moving into the area.  I will tell you that right now, the biggest issues I see for buy & hold are 1) an inverted Rent to Value ratio, that should improve over the next 12-months; 2) serious lack of inventory in areas of high desirability.

If you are cash flowing at good levels for your particular scenarios, then keep doing exactly what you've been doing, until it stops working.  ;-)  The December rental was an aberration, if your properties are in desirable areas.  People hate moving in December, because of the holidays and the fact kids are in the middle of a school year.

@Hattie Dizmond  Thank you for that feedback and education, I owe ya :) 

I definitely see the inverted price-to-rent ratios you mentioned. I'm trying to counter that by searching for a 25%-to-30% discount at purchase (it used to be that around a 15% or even 10% below value number resulted in decent cash flow for me in the past). I seemed to have woken up from my buying off the MLS dream, so direct mail and driving around is the new strategy :)

The major impact of major funds buying in any area is that prices go up. An investor friend of mine recently was sharing with me that the prices in every area in Dallas County went up so much, that now even the low income areas are seeing a spike in prices.

One thing to consider are blue collar neighborhoods. The funds typically don't buy there, which helps, but these are very solid rentals with good tenants.

And you are right...buying of the MLS in a hot market is not going to get you far or many deals. I would look into off-market properties, like you are already doing.

Hey Anderson - Good point regarding the blue collar neighborhoods. That was something I had considered in the past but never pulled the trigger on because I knew the day-to-day management effort was a bit more intensive (I self manage my small portfolio). Time to rethink, especially given the higher returns. 

@Tony Sera  I think you'll actually find the blue collar neighborhoods - not war zones - to be less of a management burden than some of the better neighborhoods, particularly if you find blue collar areas with good schools.  The folks there are less able to move and remain in areas of good schools.  

It's that mid-point type neighborhood you're looking for.  The people are generally stable, with great work history & ethic.  However, they don't make enough above their monthly expenses to put together a down payment on a home of their own.  Many of those areas are heavily minority based.  Don't shy away from that.  Those tenants are a lot less likely to call the landlord every time a light bulb burns out than a white collar office worker is.  

Just sayin'  ;-)

Ha, that's a tough one. I'm all about great school districts and schools, in fact I do extensive research into the assigned elementary school for any property I consider for purchase. If they are not ranked top 20% in the State, I generally stay away. Having said that, those same neighborhoods are ones where I encountered the big dawgs and hence the reason this thread got started :)

Planning to pull up a map of North Tarrant next to try an identify that neighborhood profile - blue collar, top 20% schools and homes built after 1995 (one of my other criteria). I have a feeling I will need to flex one of those variables. 

Thanks for the homework @Hattie Dizmond  , any hints would be welcome :)

Hehehe...I love inadvertently assigning homework!

You're likely to have to move a bit further out, mostly because of your 1995 sticking point.  The example I'll give is Richardson ISD, East of 75 and areas South of Arapaho between 75 & Hillcrest.  Those areas are predominately blue collar or the lower end of the white collar spectrum.  However, you don't find a lot of homes, except where there has been tear down activity or in the far Northeast corner of Richardson, built in the 80's and certainly not the 90's.  Richardson is just one of the older suburbs. 

Another thing about those areas is that the school evaluations are not quite so cut and dry.  Richardson offers multiple "Academies" or Magnet type schools.  And, while a particular elementary school in the Richardson ISD may be a "6", it is still in the Richardson ISD, and you can bet there is substantial effort underway to raise those rankings.  This is where we factor in the overall quality of the school district, rather than just the particular feeder schools.  Richardson ISD is ranked in the top 25 in the nation.  It rivals Highland Park & Southlake.  There are specific elementary schools in RISD that are equal to the best private schools in the Metroplex.  But, the reality is it's difficult for most renters to afford houses that start at $250k, which is the starting point for most properties feeding those elite elementary schools.  So, you're elementary is only a 6?  Well, it's the entry point in an elite district.  

When you're talking about districts like Richardson, Lovejoy, Grapevine-Colleyville, etc., you're looking at the overall quality of the district, which elevates even those schools that fall below the norm for that district.  That's contrasted to say Dallas or Ft Worth ISD, where the highly rated elementary schools have become the exception.

Anyway...just my 2 cents about the school issue.  My business partner has done a complete analysis of every single school in the districts we target, because that's how focused we are on the school quality, and because she's an engineer and just has to do those kinds of things!  ;-)

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