Cutting Edge Insights
with Dr. Lee

“Do as I say, not as I do” – Part 2

Way back in February 2021, I wrote the first installment of “Do as I say, not as I do” when I unpacked the GameStop fiasco. Read it here. In essence, traders on social media schemed to take advantage of a large short position in GameStop by larger institutional investors, causing the large institutional investors to lose big money. They cried foul and asked for SEC intervention.

The irony was that, as of 2017, “regular stock investors” were thought to account for only 10% of all stock transactions – the remainder conducted by institutional investors. The institutional investors, the big boys and girls, the mutual fund companies, etc., would rather have you and I invest with them than have a voice in – or perhaps some degree of authority over – the placing of our investments.

Now reflect for a moment on your financial advisor’s reaction when you say you’d rather invest in real estate than the stock market.

Hopefully, supportive. I can’t speak for an industry in which I’m fortunate enough to know only a handful of good apples. But there are some bad apples. And there are some who are very open-minded and well-versed with respect to diversity of investment types, and they also support their clients becoming diversified in this manner. So, I’m really not speaking about financial advisors here – I’m speaking more about Wall Street’s message, “Invest with me through your 401K (or IRA, or what have you), you’re not smart enough to manage your own investments.”  In other words, “we’re Wall Street, we don’t want you to invest in Main Street.”

Your qualified retirement plan would most certainly allow you to invest in a REIT (learn the differences and why tangible real property is better here), but never would suggest actual, specific parcels of real property to purchase through your plan. That simply can’t happen.

As a side note, there are other options. Although self-directed IRAs were recently deemed illegal by the IRS, the eQRP is a vehicle that allows self-directed investments and its legality is both written into the tax code and has been tested by court cases. Disclaimer – no financial interest.

Fast forward to Q2 2022 and reflect upon:

  1. The housing shortage (I’ve written about it too many times to reference but see www.CEassets.com/blog)
  2. Housing affordability (I’ve pontificated about this as well)
  3. Interest rates increasing (This is new and I haven’t written about it other than to report experts predicting it and rates indeed have increased.)

Now consider what Jared A. Brock insinuates in the title of his article,
“1 in 7 Homes Sold Last Year Was Purchased by Wall Street.”

If you read the article, you get the message that all investors are “Wall Street” and “Wall Street’s actions are contrary to your and my interests and well-being.” I disagree with most of what he says, but that is irrelevant. Tim Glaze presents the data differently in, “Investors are buying up single-family homes across the US.”  He cites the same Redfin study cited by Jared A. Brock, but he says “investors,” not “Wall Street.”

The former article boldly states that “renters are broke because they rent, they don’t rent because they’re broke.”

What?

I suppose a deeper dive into socioeconomic factors and renting versus home ownership would be appropriate. But I definitely don’t like that generalization. I know several people who rent simply because it’s more convenient. And some renters even own homes that they rent to others. Because they know that real estate is a sound investment.

I cite the same Redfin resource below, but I had difficulty gleaning the exact data to which the other authors refer that would allow me to either support or refute their positions.

Q:  What does it matter?

A:  If “Wall Street” really did purchase 1 of 7 homes within a recent period (and 1 of 5 starter homes), Wall Street is a bigger hypocrite than I’ve always thought it was. Tells us to send money its way to purchase shares of companies as well as shares of companies that own shares of companies. And tells us to do this instead of purchasing real estate. And then purchases the real estate it told us not to purchase.

However, the distinctions between “Wall Street,” “investors,” and “institutional investors” are not made clear.

If I buy an investment property, I’m an investor – not an institutional investor.

If I syndicate a larger property purchase because I can’t afford to do so entirely on my own, I’m still not an institutional investor.

If I raise millions and file documents with the SEC and start a real estate fund, I’m an institutional investor.

If “Wall Street” really means any entity other than an owner-occupant, that doesn’t bother me and maybe Wall Street is not as big a hypocrite as I’ve been making it out to be.

Perhaps I’ll stand corrected. I’m not afraid to accept that, but also not ready to concede. As long as I’m disparaging the system that lives under the umbrella of Wall Street, I don’t feel as if I’m singling out individuals who may indeed have your interests in mind.

Other data from other sources imply that the level of institutional ownership of single family rental homes in this country does not exceed 2.5%. That doesn’t seem significant. So, the ownership by regular investors, mom and pop landlords, would amount to 97.5%.

There are some really big players. Consider BlackRock, the largest institutional owner of single family rental homes, owning 80,000 in the U.S. I don’t have a problem with this, although I wouldn’t want to be the tenant in a home owned by such a behemoth.

A real problem is one that is agnostic of ownership entity – small investor, or institutional/Wall Street.

It’s one of accessibility. And one component of that is affordability. We’ve let prices spiral out of control since well before the pandemic. I don’t mean only home prices; I mean typical mortgage amount relative to typical take-home pay. I’m working on my own solution to that problem.

Another one is restrictive zoning ordinances in many communities. Some are actually coming around and allowing ADU (accessory dwelling unit) construction on a property otherwise zoned for only one residence.

Inflation is also playing a role. And availability of construction materials. And workers.

If there is one takeaway from the literature cited within, for me, it would be as follows:

Irrespective of what they say, the actions of the institutional investors imply that they know what I’ve been saying all along:  that real estate is a great investment.

Until next time,

Dr. Lee Newton

How A Doctor Learned To Develop Real Estate

References:

 

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“Do as I say, not as I do” – Part 2

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