A while back one of my good friends asked me “If you make such great returns on rental properties, why don’t large companies invest in Real Estate as well?” I had a number or reasons why large companies can’t make the same returns as an individual investor, but the truth is large companies do invest in Real Estate.
Blackstone Group is a hedge fund, that has already purchased 3.5 billion in residential Real Estate and they just secured a line of credit to purchase 2.1 billion more. Blackstone is among many hedge funds who have entered the Real Estate game in the last five years. The first hedge funds that started investing in Real Estate, based their model on purchasing large pools of REOs or non performing loans from banks. The hedge funds would buy the loans for a large discount and sell the homes as short sales, REOs or give the owners loan mods. Many hedge funds made a lot of money with this strategy, but now prices are increasing and the banks are no longer selling as many of their assets in large discounted pools.
REO to Rental strategy
Hedge funds like Blackstone are now using a different strategy to profit off of Real Estate. Large hedge funds have started to notice how well the individual investor has done with investing in rental properties. They are buying Real Estate across the country and renting it out in hopes they can cash flow a little bit and houses will appreciate.
Can big hedge funds push out the little investor?
The fact that large companies are investing in Real Estate, is another indication of how great Real Estate is as an investment. Real Estate is not like other business where mass production reduces cost and the large companies can drive out the small, local business. Real Estate is the opposite, the small investor has a huge advantage over the large corporate company. Here a few reasons why large companies have a hard time making the high returns myself and other individual investors can.
1. An individual investor doesn’t have to work on a massive scale like a large company or hedge fund. Hedge funds and large companies have hundreds of millions or billions of dollars to invest. I choose single family homes as my method of investment and I am able to get great deals on homes for a number of reasons. If I had a billion dollars to invest, there is no way I could find enough deals to get the returns I get now (20% + CASH ON CASH). I would be forced to buy houses across the country at near retail prices. My cash flow would be much lower and my risk much higher.
2. A large fund or company cannot focus on one area of the country due to the volume they need. When they buy across the country they have to rely on many local Realtors, property managers and contractors to take care of their properties. The more people you have to rely on to take care of your properties, the better chance your properties are not being taken care of. Investors are on the ground and can physically check up on their properties to ensure they are being maintained. Many hedge funds have as much as 50% of their inventory vacant, because they don’t have the manpower in place to repair and rent homes.
3. With all the different people involved, the hedge funds have to hire more people to look over the people taking care of the properties. The more people on the payroll, the more overhead there us and the less profit. An individual investor can easily take care of a few properties themselves, or hire a property manager to do everything for them for a small percentage.
4. There is no way a Hedge Fund can know individual markets as well as local investors. They have to hope the Realtors they are hiring are giving them accurate values and not just trying to make a sale. An individual investor can spend a lot of time in their local market checking prices and ensuring they are getting good deals. A hedge fund has to buy whatever is for sale and hope it works out.
Hedge funds are still buying
All of these factors cut into the hedge funds profits, yet they are still buying up Real Estate across the country! This shows the potential for the individual investor to make high returns if these funds are willing to invest. The best part is the individual investor does not have to rely on appreciation to make great returns. If prices don’t rise significantly then the investor will still have cash coming if they bought the property right.
What if the hedge funds start selling off properties?
I see many investors express concern over the possibility of hedge funds dumping their properties and flooding the markets with inventory. I can see a chance that some hedge funds will do this, after they realize making money in the Real Estate business is not easy. However, most of the hedge funds are buying in very specific locations across the country. I do not see the hedge funds selling off assets, effecting the entire country. Even though the hedge funds have bought billions of dollars in properties, they have not made a dent in the inventory of houses in the US. The hedge funds may be able to slow down a few local markets where they have bought heavily, but I am not concerned about a national drop in prices.