Investment Banker Turned Corporate Landlord: Daniel Erb’s Quest for Affordable Housing Amidst Wall Street vs Main Street Debate

In 2020, Daniel Erb unwittingly embarked on a journey towards becoming a corporate landlord. His bonus as an investment banker presented him with an unprecedented amount of capital, leading him to seek advice from his cousin, a research analyst at BlackRock.

As they discussed potential investment opportunities, his cousin displayed a compelling chart illustrating the number of “housing starts” in the U.S. since 1950 – a figure representing new houses and apartments constructed each year. The chart indicated that the previous ten years had witnessed the least construction since the 1960s, despite a significantly larger American population.

This revelation marked a decade of underinvestment in housing, prompting Erb and his cousin to focus on single-family homes – the classic houses with yards, often situated in suburban areas. As a millennial, Erb aspired to homeownership but observed that none of his friends had yet purchased a house. Seizing upon this gap in the market, he recognized a lucrative opportunity ripe for exploitation.

To capitalize on this potential, they raised funds from investors and acquired properties in promising locations such as Chatham-Arch neighborhood in Indianapolis – an area characterized by affordability, population growth, and redevelopment. They subsequently leased these homes to tenants presumably seeking a house with a yard but unable to afford purchase. Erb reported that the venture proved profitable.

While not the first New York finance professional to profit from single-family rentals across the United States, Erb’s undertaking was reminiscent of Blackstone’s foray into this strategy under the moniker Invitation Homes in 2012. The firm, now a public company with a market value exceeding $18 billion, pioneered the buy-to-rent approach and set a precedent for corporate landlords.

The emergence of institutional investors as landlords has sparked bipartisan, populist, and patriotic condemnation. Both JD Vance and Kamala Harris have advocated for restrictions on these corporate landlords. Historically, homeownership has served as a primary means for middle-class families to amass wealth; however, private equity firms now outbid aspiring homeowners, exacerbating housing affordability issues.

Some of Erb’s friends even accused him of contributing to this affordability crisis. “Nothing that has stuck with me or made me second-guess what I’m doing,” he said, brushing off these concerns. He acknowledged his role in offering young couples an alternative to homeownership without financial strain, albeit acknowledging the emotional conversations it had prompted.

Over time, researchers have studied the impact of institutional investors on housing markets and discovered a surprising nuance: while they may make homeownership more elusive for prospective buyers as critics claim, they also contribute to making neighborhoods more affordable and diverse by offering rentals. These investors are diversifying suburban areas.

Initially, the U.S. government welcomed institutional investors into the housing market due to concerns over abandoned homes and the perceived benefits of rental conversions. Before the Great Recession, major investors showed little interest in suburbs, with firms like Redbrick Partners abandoning their buy-to-rent strategy in the early 2000s.

However, during the Great Recession – just before the decline in housing starts observed by Erb – a glut of single-family homes in foreclosure emerged. Many were sold en masse, including by the federal government, which organized auctions for investors like Blackstone and even provided a $1 billion loan guarantee to encourage their participation.

This enabled private equity firms and real estate investors to efficiently and economically acquire multiple properties within a single area, addressing both search cost concerns and dispersed maintenance issues. Blackstone then introduced a financial product – the rent-backed security – which supercharged the buy-to-rent sector by enabling investors to purchase homes with future rental income.

In 2012, many government officials welcomed firms like Blackstone into the housing market; however, today institutional investors now compete with middle-class families for starter homes, raising questions about homeownership affordability.