You probably know someone who had to move during the depths of the housing depression but they didn’t want to—or couldn’t—sell their home into the worst housing market in 70 years. So they rented it out and joined the ranks of residential real estate investors called “accidental investors” or “accidental landlords.”
Other homeowners got tired of flushing away monthly mortgage payments, so they rented out the home they owned until they could figure out what to do with it and moved into a rental themselves. Still others inherited property or otherwise ended up with real estate that was bound to appreciate in time. They never intended to get into real estate investing, but one way or another they found themselves owning and managing a rental property or two.
Largely because accidental investors don’t consider themselves investors, estimating their numbers is difficult. Very little research has been done on this phenomenon even though there could be many more accidental investors than intentional investors. One of the goals of the Joint BiggerPockets.com / Memphis Invest National Survey of Residential Real Estate Investors that we conducted a year ago was to find how many accidental investors there are out there compared to the more active investors who rely on their real sate deals for much if not all of their income.
The Shadow Inventory of Single Family Rentals
We found that one out eight adult Americans either consider themselves residential real estate investors or own residential investment properties today. But 89 percent of that total do not plan to purchase additional investment properties. They do not consider themselves to be investors even though they own residential real estate that generates income. Clearly accidental investors out number active investors even though they are relatively invisible in the market place.
We wanted to find out more about accidental investors, so last May I designed a national opinion survey for Memphis Invest that looked at investors’ purchasing intentions. We found that there are three times as many accidental investors who own investment property but have no current plans to buy more as there are those who consider themselves real estate investors and are active in the market.
Now that three to one majority does not translate into properties. The average accidental investor owns one or many two rental. Active investors own four or more. How many properties do the two groups own? No one knows. The research has not been done. Let’s assume that the numbers are roughly even and both groups own roughly the same number of properties.
Since the onset of the Foreclosure Era about half, 2.2 million of 4.4 million foreclosures, were converted into rentals; the balance were purchased by owner-occupants. Virtually all were bought and rehabbed by active investors, not accidental investors. By definition, accidental investors do not go to auctions or lenders to buy foreclosures or REOs. They acquire their properties by accident without setting out to become investors—moving and converting a full-price home they own into a rental, renting out a home they already own, inheriting, acquiring via a closely held transaction, and renting out a vacation or retirement property. These properties are not entering the rental inventory as the result of a transaction. They are entirely invisible to the economists except for surveys like the Bigger Pockets and Memphis Invest surveys and the Census’ American Community Survey, or listings of properties for rent on property management sites.
So are there 2.2 million single family rentals out there that no one knows about because they weren’t purchased and were not foreclosures? Do accidental investors own and manage millions of invisible single family rentals today—a shadow inventory, if you will—that could rock real estate markets if they were sold?
Accidental Investors are Accidents Waiting to Happen
In today’s real estate economy, accidental investors are a wild card. It’s hard to read the real estate news without encountering a persistent paranoia about investors—whether small active investors or multi-million dollar institutional investors—owning and controlling large portfolios of homes. Inherent in the fear millions of Americans feel when told that “someone on Wall Street” owns the rented place they call home is the potential for that rental to be sold out from under them.
Large volumes of cash sales—which most people equate with investor purchases though that’s not the case—raise fears that home buyers are being squeezed out, as I encountered in an interview last week for American Public Radio’s Marketplace. Nor are hedge funds the biggest player in town. Wally Charnoff did a good job of putting into perspective their role in today’s real estate marketplace in my recent Bigger Pockets interview with him. “Consider that since 2000 there have been on average a million or more transactions a year bought and sold involving mom and pop investors, when institutional investors weren’t even a factor yet. That’s a lot of homes. That’s significantly more than the 50,000 to 60,000 houses purchased that have been purchased so far by institutional investors,” he told me.
Wally’s definition of “mom and pop investors” is a broad one, covering more or less anyone smaller than the Big Dog institutional investors. But his point is valid. Blackstone might be having a local impact on the Tampa market but its holdings pale compared to accidental investors.
One thing that accidental investors have in common is that they consider themselves temporary landlords who did what they needed to do to make some lemonade from the lemon of the housing depression. They took on the burden of ownership and management of properties that otherwise would have sold at a loss. The experience has converted some to become active investors but most are ready for their reward.
Of the three types of single family rental investors that we have discussed—institutional investors, active investors and accidental investors—the group whose assets are most elastic are accidental investors. They can sell quickly, and they are more likely to sell. Both institutional and active investors are largely following a buy-and-hold strategy and are in it for cash flow, not appreciation. Accidental investors are loo king for a long-awaited pay day when their property appreciates to an attractive level. Since many didn’t pay much if anything for their rentals to begin with, pay day is likely to be sooner rather than later.
Sizing up the Shadow Inventory
The shadow inventory represents a huge potential source of new supply which would be a good thing in some markets if it were gradually released on to local markers to meet demand. Yet it is so large–2.2 million homes is about 30 to 40 percent of all the homes to be sold in America this year—that it can swamp the recovery in hot markets and wreak havoc in markets where the recovery has yet to arrive.
Already we may have witnessed how the Single Family Rental Shadow Inventory can come to the rescue of markets in distress. In April and May, a handful of Northern California markets caught fire. Super low inventories depleted by underwater homeowners and buyers eager to purchase before prides rose even higher. By April, median list prices were up 40 percent in Sacramento, 40 percent in Oakland and 20 percent in Stockton over 2012. Inventories were 30 to 40 percent lower than they had been a year earlier.
By July prices were still above 2012 levels by about the same percentages in each city but they would have been much higher without an influx of new inventory. Oakland’s listings grew by a net 46 percent on Realtor.com from April to July; Sacramento’s grew by 54 percent, Stockton’s by 55.6 percent. Accidental investors waiting for a good price must have played a major role in replenishing the for sale inventory in these and other hot markets this past spring. It is unlikely that owner-occupants could have moved as quickly nor would move-up buyers, who would have had to buy a home as well as sell one, be as motivated as accidental investors.
However, what will happen to prices and home values should high prices spark a sell-off by accidental investors in markets where inventories are higher? We know so little about accidental investors and the shadow inventory they have created, it’s hard to know what to expect.