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Can Small Investors Compete in the Housing Market?

One result from the recent housing crisis has been growing interest in the nation's rental market. There has been a major shift away from home ownership towards renting, and the big guys have been paying attention, moving into the market to gobble up as many rental properties as possible.

It is easy to understand why people are opting to rent instead of own, and there are multiple reasons why we are seeing the shift.

One is the amount of foreclosures that took place in recent years. People that were forced out of their homes due to foreclosures are going to find it tough to get another mortgage for a few years. In most cases, their only option is to rent, and even if they could get another mortgage chances are that they are psychologically just not ready to take on another mortgage.

Falling home prices are another reason that people who would otherwise be entering the market may decide to hold off and opt to rent. Everyone knows at least one person who is underwater on his or her mortgage. Home prices have been in recovery, but have still not corrected to their pre-recession level. Hearing people talk about how much their homes have depreciated can be a good enough incentive for people to decide not to purchase a new home.

A final reason is tighter lending standards by banks. The foreclosure crisis hurt banks, and as a result their lending standards have tightened. The Federal Reserve has tried to loosen the mortgage market with its near-zero interest rates, but banks are still much tighter than they were a few years ago.

As a result, rental properties are becoming more attractive, and quickly becoming the next asset class.

The biggest player has emerged as Blackston Group (BLX). Since last year, the company has poured $3.5 billion into buying 20,000 rental properties, and it is eager to buy more. The company recently announced that it had expanded a credit line from $600 million to $2.1 billion as it rushes to buy as many properties as it can while prices remain low.

Blackstone is not the only company getting into the game. B. Wayne Hughes, who is the founder of Public Storage (PSA), also owns a real estate company named America Homes 4 Rent in Malibu. He has been buying up properties quickly, already having purchased around 10,000 homes, and has raised $2.2 billion for future purchases.

What does this mean for small investors? Small investors have traditionally been the backbone of the rental industry, and while they are going to benefit from this shift in the short term, the longer outlook may not be as rosy.

In the short term, all this new capital coming into the market will solidify prices, and start sending home prices higher.

The bigger picture is not so attractive. Once these major companies have acquired all these homes, they are going to flood the rental market, which will drive rental prices lower.  Small investors with just a couple of rental properties do not have the capital to grow their number of homes, so they could feel the pinch once rental prices start to decrease.

For small investors that are comfortable knowing that their rental prices will probably be enough just to cover their own mortgage costs, it is still a good business. You are still allowing someone else to buy a home for you, but the risks become greater because since you are not going to be able to charge such a big premium above your mortgage costs. You are going to be under greater pressure to keep it rented, maintained and fix any major repairs.

As usual, in the end the big players are going to win out. This does not mean that owning rental properties is a bad idea for the small investor. It is still a great way to build wealth, but it will become a much longer play as opposed to the current situation where there is profit to be made each and every month.

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.