Domestic investors are snapping up Twin Cities area homes for rent

Twin Cities residential real estate has been slowly reshaped over the past few years by domestic buyers turning single family homes into rentals, but the numbers seemed small compared to the overall market and the effects were marginal.

Now, the data shows that some neighborhoods in Minneapolis and the entire Fridley and Hopkins suburb are being transformed by corporate ownership, a phenomenon that shows no signs of abating.

And the effects – including higher prices across the market, increased competition at the time of sale, and out-of-state owners showing less attention to properties and tenants – are increasingly difficult. to ignore. On top of all that: fewer opportunities for people trying to get their first home.

“It’s an unfair market for the first-time home buyer,” said Henry Rucker, broker at Banneker Realty, based at Twin Cites. “We don’t pay attention to who the buyers are. We just look at how much the seller will earn.”

Investor-owners, defined as those who own two other properties in which they do not live, now own around 4% of single-family homes in the metro, double the share since 2006, according to a new database developed by the Federal Reserve Bank of Minneapolis.

And in half a dozen neighborhoods and suburbs, they own more than 20% of single-family homes.

Turning houses into rentals increases housing options for people who don’t want to buy a house or rent an apartment. But it also makes it harder for people to build wealth through home ownership, especially in areas affordable to working class buyers.

“Investors who are able to make cash offers quickly limit options for families wishing to purchase single-family homes, making home ownership more difficult,” said Libby Starling, director of community development and of the commitment to the Minneapolis Fed.

She is particularly concerned about the potential impact on minority households. Research shows that many of these rentals are concentrated in areas with above average poverty rates.

This summer, an Urban Institute analysis found that the Twin Cities already had the largest gap between blacks and whites in homeownership in the country. He found that while the rate of white homeowners in the Twin Cities remained relatively stable between 2000 and 2018 at around 70%, the rate of black homeowners fell from 31% to 21% in 2018.

The Minneapolis Fed’s new interactive database tracks entities that own two or more properties, excluding apartments and duplexes that have historically been intended for rental. This shows that while the practice is most prevalent in Minneapolis and St. Paul, investors are also making big bets on the suburbs.

In part of northeast Minneapolis, investors now own more than 30% of single-family homes. And in Fridley and Hopkins, over 25% of single-family homes are owned by an investor who doesn’t live there.

Out-of-state owners worry State Senator Kari Dziedzic, who has worked with Senator Rich Draheim to ensure there are no unintended consequences of the trend.

She is troubled by the prospect that out-of-state investors are paying top dollar for properties, raising prices at a time when housing affordability is already declining.

“Not only does this block available inventory in this neighborhood, but it also distorts the housing market in this neighborhood,” she said.

The popularity of single-family rentals is a reflection of recent changes in rental trends driven in part by the pandemic. Over the past decade, demand for compact rentals has skyrocketed as baby boomers downsized and millennials left their parents’ homes.

The opinion at the time was that young tenants were more sociable than previous generations, married and had children later, and did not need the space to be entertained at home. So the developers built studios and one-bedroom apartments.

COVID-19 has turned those expectations upside down. Suddenly, with more people working and studying from home, there was more demand for larger rentals.

While many developers are building single family homes in the Metro Twin Cities area, investors are looking for other ways to meet demand. And it’s attracting national homeowner businesses, such as Invitation Homes and Home Partners of America, which each own more than 800 homes on the metro, according to the Fed.

Their rise comes at a time when competition for the cheapest Twin Cities homes has never been fiercer. This year, only about a quarter of homes for sale in the metro area were priced at $ 250,000 or less, up from about 50% five years ago, according to the Minneapolis Area Association of Realtors, or MAR.

On average, homes sold for between $ 250,000 and $ 350,000 in just 22 days last month, the lowest price of any price range and 40% faster than last year.

For more than a decade, home builders have failed to keep pace with demand in the Twin Cities region, especially for affordable homes for low-income buyers, creating a shortage of new homes that will take years. to replenish itself.

The MAR now considers the price of an affordable home to be around $ 325,000, based on a household spending no more than 30% of its pre-tax income on housing, given current median incomes, house prices and interest rates. Today, most homes in the Twin Cities area cost a lot more than that.

In the past decade alone, the median price of a home in the Twin Cities has more than doubled to $ 340,000, eroding housing affordability for homebuyers like LaTrelle Lloyd, who spent the summer to buy a house and outbid several times.

With a budget of $ 250,000, Lloyd knew he would be competing with hordes of other first-time buyers and was ready to fight. What he hadn’t expected was that he would bid against investors with pockets larger than his.

He bid on nearly a dozen homes but outbid almost every time, although he almost always offered sellers more than they asked for. It assumes that about half of the successful bidders paid cash and were able to waive all normal inspection and evaluation contingencies.

“It was difficult to find a home,” he said. “Not to mention competing with a bunch of people who could easily outbid what I could bid. “

So far this year, more than 12% of all sales made in the Metro Twin Cities area have been cash transactions, up from 10% the year before, according to the regional multiple listing service.

Lloyd and her fiancé were finally able to buy a house in early October. Although this is a remodel, he feels lucky that he got the house for $ 3,000 less than the seller was asking for. And he’s thankful that he can finally start building equity.

“The process of buying a home has been difficult,” he said. “And the house has some issues, but we’ll eventually expand it because we want to start a family. It’s a decent house and in a nice area of ​​Minneapolis. It’s a good first house, and it was in. our price range. “

Like investment companies targeting communities with high demand school districts – because rents tend to be higher and tenants tend to stay longer – families who wish to live in these areas now have less money. options, said Julie Gugin, executive director of the Minnesota Homeownership Center. .

Businesses post ads on telephone poles and signboards offering a quick cash sale. Gugin said they aimed to reach people who experienced financial hardship during the pandemic.

“You see the signs everywhere,” Gugin said. “In my world, it’s a predatory tactic; they are aimed at consumers who may have been affected by COVID-19 and feel they have no other options. “

Gugin said the Homeownership Center and other nonprofits are expanding their efforts to provide more down payment assistance and advice to help buyers stay competitive.

In addition to the proliferation of national real estate ownership companies that turn single-family homes into rentals, buyers also compete with investors who buy homes to be offered for short-term rental, for example through Airbnb and other sites. Vacation Rental Web.

“The market is already not affordable for much of the population,” said Andrea Ferstan, vice president of systems innovation at the Twin Cities-based Center for Economic Inclusion. “And that is likely to get worse as the single-family home market becomes less affordable and more competitive.”

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