Amateur real estate investing

ABSTRACT

About half of the rental properties in the U.S. are owned by small- to medium-sized investors, many of whom enter the trade with little prior experience. This paper considers the factors that motivate these amateurs to purchase real estate in high-poverty neighborhoods—an investment that involves high levels of financial risk for the inexperienced. Drawing on in-depth interviews with 93 investors in three real estate markets—Baltimore, Maryland; Dallas, Texas; and Cleveland, Ohio—this paper finds that amateurs decide to become investors due to anxieties regarding their financial position, specifically professional dissatisfaction and a lack of retirement savings. Real estate is particularly appealing because it provides a cultural repertoire aligned with middle class aspirations of independence and self-sufficiency. Consequentially, these ideologies motivate and legitimize strategies of action that allow for sometimes imprudent investments, presenting risks to the investors themselves and the communities in which they invest.

Acknowledgments

The author would like to thank, first and foremost, Eva Rosen and Meredith Greif, his partners in landlord data collection. Stefanie DeLuca and Kathryn Edin provided masterful insight on early drafts and served as PIs on the project. Nicholas Papageorge, Tim Nelson, and Anna Rhodes also commented on this paper in rich and thoughtful ways. The author would like to further acknowledge Jennifer Darrah-Okike, Barbara Kiviat, Christine Jang, Brianna Bueltmann, Ann Owens, Noah Saganski, Ben Schwartz, and Stephan Wong for assistance with data collection and coding.

Disclosure statement

No potential conflict of interest was reported by the author.

Disclaimer

The work that provided the basis for this publication was supported by funding under a grant with the U.S. Department of Housing and Urban Development. The substance and findings of the work are dedicated to the public. The author is solely responsible for the accuracy of the statements and interpretations contained in this publication. Such interpretations do not necessarily reflect the views of the government.

Notes

1. This finding only applies to small-scale amateur investing. Corporate large-scale investment in real estate, such as Real Estate Investment Trusts (REITs), generates fairly reliable returns (Chan et al., 1990; Ross & Zisler, 1991) and there are significant opportunities for profit in single family rentals (Demers & Eisfeldt, 2018).

2. Throughout, the term investor includes both individuals who purchase housing for resale (“flippers”) and those who purchase houses to rent (landlords).

3. In that they require no specialized skills or credential. Skills are, of course, helpful for success. This is not to say that there are no barriers to entry, as most investment vehicles require investors to put up some personal capital, but only that these barriers are lower than many other entrepreneurial activities. While the barriers were certainly lower prior to the lending reforms brought on by the Great Recession, access still compares favorably to other forms of self-employment.

4. It is important not to assume that small rental properties are necessarily owned by amateur investors, particularly given the attractiveness of SFRs to institutional investors in the wake of the Great Recession (Mills et al., 2019; Raymond et al., 2018). Such analyses are also challenged by the prevalence of Limited Liability Companies that can mask some degree of ownership consolidation.

5. To ensure that our respondents covered the full range of neighborhood context, we endeavored to sample equal numbers of landlords with focal properties in each racial stratum and twice the number from poor than from low-poverty tracts.

6. Seventy-one percent of the random sample, 74% of the purposive sample, and 82% of the REIA sample.

7. Wholesaling is the process of identifying properties with motivated sellers and connecting them buyers, collecting the difference between the negotiated selling and buying price.

8. Limited Liability Companies, or LLCs, are a popular corporate structure for amateur real estate investors, who sometimes start a separate one for each property. They provide personal protection from liability, while having far fewer requirements than S and C corporations.

9. The distinction between seminars and REIAs is somewhat fluid. Generally, seminars are purchased individually and are one-off trainings or events. REIAs, in contrast, host weekly or monthly meetings. The REIA number includes respondents who were recruited from the REIAs and falls to 17% once those respondents are excluded.

Additional information

Funding

Funded by grants from the Furman Center for Real Estate and Public Policy, the Department of Housing and Urban Development, and the Annie E. Casey Foundation.

Notes on contributors

Philip M. E. Garboden

Philip M. E. Garboden serves as the endowed HCRC Professor in Affordable Housing Economics, Policy, and Planning in the Department of Urban and Regional Planning and the UH Economic Research Organization at the University of Hawai`i at Mānoa. Broadly construed, his work considers how supply side actors—particularly landlords and property managers—respond to local, state, and Federal housing policy.