Accidental Investors Are Staying Landlords Intentionally

Some home owners who decided to rent out their places during the housing bust aren't selling, even as the market improves.

August 13, 2013

At the depths of the housing depression, my sister-in-law bought a small townhouse in Baltimore for her daughter to live in while she attended law school. Her daughter’s now married and busy with a legal career, but since Baltimore home prices still aren’t so great, my sister-in-law is renting out the townhouse.

A friend of mine in Los Angeles was forced to move for her job. Instead of selling at a loss, she opted to rent out her home. Two jobs later, she’s still a landlord.

The housing slump created a new class of residential real estate investors called “accidental investors” or “accidental landlords.” They never intended to get into real estate investing, but one way or another, they found themselves owning and managing a rental property or two. Like my L.A. friend, some had to relocate during the worst housing market in a generation. Rather than take a beating on the sale, they decided to wait until times improved. Others got tired of flushing away monthly mortgage payments, so they rented out their homes until they could figure out what to do with them —all while moving into other rentals themselves. Still others inherited property or otherwise ended up with real estate that was bound to appreciate in time.

Estimating the number of accidental investors is difficult, largely because they don’t consider themselves investors at all. Very little research has been done on this phenomenon, even though there could be many more accidental investors than intentional ones. Last May, I worked with Memphis Invest, a real estate investment company, on a national opinion survey, which found that there are three times as many accidental investors as there are intentional investors.

However, in today’s real estate economy, accidental investors are a wild card. They represent a huge potential source of new inventory, which would be a good thing in some markets if it were gradually listed to meet demand, but not such a good thing in others where the recovery has yet to make much progress.

Last May, Ken Fears, the manager of regional economics and housing finance policy at NAR, made the case that accidental investors offer a convenient solution to the inventory shortage.

“Between April of 2006 and April of 2011, the median home price fell 27.6 percent. However, the median price rebounded 19.7 percent over the subsequent two years. While many formerly underwater home owners are just now getting their first shot at taking advantage of record affordability, others who opted to rent their properties will now be able to sell them, releasing much needed inventory to the market,” he suggested.

Many took the suggestion, especially those in hot markets experiencing double-digit price inflation where new listings are in greatest demand. Former rentals helped dampen prices in markets such as Sacramento and Oakland, Calif. However, even as prices rose and stabilized, most accidental investors didn’t sell.

Why not? Perhaps they did the math and realized that a one-time capital gain would be nice, but a steady cash flow was even nicer. Perhaps they discovered that they like their tenants, and maybe some found a measure of fellowship and friendship mixed in with performing the duties of a landlord.

Hundreds of thousands of accidental landlords crossed an important threshold this spring and summer. No longer are they accidental. Now they’re in it for the long haul.

Steve Cook is co-publisher and managing editor of Real Estate Economy Watch, which was recognized as one of the two best real estate news sites of 2011 by the National Association of Real Estate Editors.  Previously, he was vice president of public affairs for the National Association of REALTORS®.  Twice he has been named one of the 100 most influential people in real estate.