In cities as different as Philadelphia, Richmond, Virginia, and Jacksonville, Florida, large institutional investors are increasingly buying up single-family homes in distressed neighborhoods and turning them into rentals, which threatens home ownership and wealth building for residents, according to a report by researchers at Drexel University and Reinvestment Fund.
In these cities’ most distressed neighborhoods — defined as places with low sale prices, high vacancies, and elevated mortgage denial rates — homeowners sell to investors in more than one in five sales, according to a September report written by researchers at Reinvestment Fund, the Philadelphia-based community investment nonprofit, and the Nowak Metro Finance Lab at Drexel.
The researchers focused on sales of one- to four-unit homes. From 2020 to 2021, investors bought roughly 24% of these homes sold in Philadelphia, according to researchers. In about 15% of these transactions, homeowners sold to investors. The rest were cases of investors selling to fellow investors.
In 2020 and 2021, 90% of the Philadelphia homes that investors purchased were one-unit buildings, most of which are rowhouses, according to researchers.
Although Philadelphia still has a lot of small landlords who own a few units, the city is seeing more large regional and national companies coming in and turning owner-occupied homes into rentals, researchers said. That trend can squeeze out homeowners and put renters at risk.
How do investor purchases affect home buyers and renters?
Investors typically can pay more than the appraised value of homes, pay cash, and close sales quickly, which are all attractive to sellers. So these investors can outcompete resident buyers who need mortgages.
Wholesalers and institutional buyers also offer to buy homes that aren’t even on the market, which can cheat sellers out of the full value of their homes.
“This is like ‘We Buy Houses’ and ‘Cash for Cribs’ on steroids,” said Emily Dowdall, policy director for Reinvestment Fund’s policy solutions group and one of the authors of last month’s report.
With the rise of investor activity, neighborhoods that historically were made up of homeowners can shift into neighborhoods of renters. And it’s unclear when or whether homes will return to the open market, researchers said. This poses a problem for residents because “in this country, home ownership is still one of the major paths to wealth-building,” Dowdall said.
Large out-of-town institutional investors also are more likely to neglect properties, resulting in poor conditions for tenants.
Who are these investors?
Investors include small landlords and also large institutional ones, such as private equity firms and hedge funds, researchers found. The investing environment varies by city.
In Jacksonville, researchers found that the top investors each accounted for hundreds of the city’s sales from 2020 to 2021. In Philadelphia, however, the top investors accounted for a few dozen sales each from 2020 to 2022.
In Philadelphia, institutional investors tend to be more regional, not the Wall Street private equity firms that are investing in Atlanta and cities in Texas and Florida, Dowdall said. But, she said, “the impacts on neighborhoods are similar.”
Investment is not inherently bad and is needed for the health of communities to some extent. And rentals play an important role in the real estate market, providing housing for those who can’t or don’t want to be homeowners. But, researchers said, the type of institutional investment that is increasing does not enable long-term and historically disadvantaged residents to benefit.
Where are investors buying in Philadelphia?
Areas of the city with the highest shares of sales from homeowners to investors have the lowest median sales prices and higher shares of vacant homes. In about 31% of sales in these areas between 2020 and 2021, a homeowner sold to an investor.
This happened most often in central North Philadelphia in the area around Tioga and Strawberry Mansion. Parts of Southwest Philadelphia, West Philadelphia, and areas around the Germantown and Frankford neighborhoods also have seen higher shares of sales from homeowners to investors.
More investor purchases are likely to happen in areas with higher shares of Black or Hispanic residents, groups more likely to have their mortgage applications denied, researchers said.
“It seems like the increase in investors is further eroding the ability of households to become homeowners over time in these areas where home ownership was already somewhat tenuous,” Dowdall said.
What is Philadelphia doing to protect homeowners and renters?
Researchers pointed to Philadelphia’s home repair grant program and its Do Not Solicit List as best practices other cities should follow to keep residents in their homes and protect homeowners from aggressive sales tactics.
Dowdall and her fellow researchers recommended local renter protections such as providing legal representation for tenants with low incomes who are facing eviction.
In February, Philadelphia launched a pilot program to provide free legal counsel to tenants in two zip codes in North and West Philadelphia, more than two years after Mayor Jim Kenney signed Right to Counsel legislation into law. In the coming months, the city will add two more zip codes, City Councilmember Helen Gym said at a Council hearing last week. Cities such as New York City, Newark, New Jersey, and Baltimore have similar Right to Counsel programs.
To help home buyers compete with investors, local governments also should offer down payment and closing cost assistance, researchers said. Philadelphia and surrounding counties already have programs to help first-time home buyers.
What else can cities like Philadelphia do?
Researchers also recommended that cities inspect rental units regularly to catch properties that investors are not maintaining. According to a report that Pew Charitable Trusts released last year, Philadelphia inspects only 7% of its rental units each year in a system that relies on tenant complaints. Philadelphia’s Department of Licenses and Inspections has a shortage of inspectors, who are leaving faster than they can be replaced.
The researchers also suggested that for tax purposes, local governments should consider assessing rental properties based on the cash-flow generated instead of assessing them as if they are owner-occupied homes. This could make converting homes into rentals less attractive, they said.
Government agencies or nonprofits also could buy portfolios of single-family rental housing when they go up for sale or auction and sell them to residents, researchers said.
Last year, the Port of Greater Cincinnati Development Authority purchased almost 200 single-family homes owned by an out-of-town institutional investor. Tenants living in the properties are getting help improving their credit and saving for down payments so they can purchase the homes, Dowdall said.
“That’s a pretty innovative take that I’d love to see more cities do,” she said.
