Large investment firms are converting single-family homes into rentals and building communities for rent in the Tomball and Magnolia area to help meet the rising rental demand, while the housing shortage is driving more people to rent in the Houston area, real estate experts said.

The Houston Association of Realtors reported June 15 the number of leased single-family home rentals in the Houston area increased 24.8% from May 2021 to May 2022. While rising mortgages and low inventory are contributing to the trend, experts said potential homebuyers are also facing competition from real estate investment firms, or institutional buyers, buying properties to sell or lease.

“These are not mom-and-pop buyers,” said Nadia Evangelou, the director of forecasting at the National Association of Realtors. “They look to buy properties and communities on a large scale and make profit from them.”

Texas leads the nation in institutional buying with 28% of single-family homes sold in 2021 purchased by institutional investors—more than double the national average of 13%, according to data from the NAR. Locally, NAR data showed 38% and 29% of single-family properties purchased in Harris and Montgomery counties in 2021, respectively, were bought by institutional buyers.

Data from the Harris County Appraisal District and the Montgomery Central Appraisal District shows five institutional investors and their subsidiaries owned 413 homes in the six ZIP codes that make up the Tomball and Magnolia area as of June. In order of the amount of homes invested, the firms are American Homes 4 Rent; FirstKey Homes, a subsidiary of Cerberus Capital; Tricon Residential; Progress Residential; and Invitation Homes.

A NAR survey of national Realtors found 29% of their sellers preferred selling to institutional investors due to receiving cash offers, while 18% sold because the investor was guaranteed to buy.

“I had an offer [from an investment firm] for a $240,000 listing; they offered $250,000. Before I even responded, they increased it to $262,000 the next morning, and that afternoon ... they increased it again to $275,000,” said Jane Hardcastle, a Magnolia-based Realtor and HAR member. “I hated it because I was hoping an individual would get it.. ... But I also couldn’t tell my seller that she shouldn’t sell her house for that price.”

David Howard—executive director of the National Rental Home Council, a nonprofit that represents the single-family rental home industry—cited member-provided data to show 1.3% of single-family homes nationwide are owned by large companies.

Howard highlighted the rise of build-to-rent communities with 26% of homes in NRHC company portfolios representing the category as of the fourth quarter of 2021 versus 3% in 2019. In Tomball, the rental community Sydney’s Park, developed by RoseRock, began leasing in 2021, and Tricon Residential Inc. broke ground on Willow Creek Manors off FM 2920 on Dec. 7, Community Impact Newspaper reported.

Mark Stoll, who serves on Tomball’s City Council and previously served on the Tomball Planning and Zoning Commission, said most cities, including Tomball, generally do not have the authority to control development after it has been platted—or after the type of constructed property has been set.

“When a parcel of land is platted or replatted for single-family housing, rental homes fall under that category,” Stoll said. “We don’t control that.”

Invitation Homes and American Homes 4 Rent did not respond to a request for comment, and FirstKey Homes referred Community Impact Newspaper to the NRHC for comment.

Targeting affordable homes

HCAD data shows the five investment firms Community Impact Newspaper tracked concentrated their buying in the Tomball area south of the city with 86 combined homes concentrating in subdivisions within 10 miles of the intersection of the Grand Parkway and Hwy. 249. Common subdivisions for the firms included Westbourne, Northpointe and Pinecrest Forest.

Meanwhile, MCAD data showed investment in the Magnolia area was more spread out with clusters of investor-owned homes appearing north of FM 1488 at FM 2978, south of Pinehurst along Hwy. 249 and along FM 1774.

Appraisal districts showed out of the 413 investor-owned properties, five were appraised above $400,000. Evangelou said investment firms directly compete with first-time buyers, and nationally, counties with higher percentages of investor-owned homes saw higher home prices.

“Institutional investors seem to be taking a significant amount of homes that would otherwise go to first-time, low-income buyers,” she said. “First-time buyers don’t have equity that they have built; they face challenges saving for down payments.”

Changing renter options

HAR data released June 15 showed new single-family rental listings in the Houston area increased 28.6% from May 2021 to May 2022. Evangelou said she believes institutional buyers focusing on rental properties are contributing to surging rentals.

“They create more rental housing, so even if rents rise, there is more supply,” Evangelou said. “With rising mortgage rates, it gives more options for people.”

Single-family homes constructed from 2018-2022 in the area are increasingly being sold as rentals. In Tomball ZIP codes 77375 and 77377, 85 single-family homes were constructed and then leased the same year—up from 22 in 2020, according to Multiple Listing Service data provided by Hardcastle.

Stoll said he was hopeful trends in both individual properties converting to rentals and build-to-rent developments could contribute to Tomball becoming a more affordable city.

“One of the issues I’ve had with Tomball is that land prices are expensive,” Stoll said. ”With [large employers] bringing jobs to Tomball, people need places to live. I wish people the best in the American dream of buying your own home, ... but we need affordable places for people to live, and until recently Tomball did not have that.”

Local government oversight

Stoll cited Sydney’s Park as an example of how city governments do not have the authority to oversee institutional investment or development buying. The plat was approved by Tomball City Council in 2019 for the construction of the 40-home Tomball Heights by MHW Development, Community Impact Newspaper previously reported.

“Once a plat has been assigned, we don’t have any control over what gets built there as long as it’s single family; it can be rental or for ownership,” Stoll said. “We don’t review plats either—all the oversight is during the platting process by the planning and zoning commission.”

RoseRock and MHW did not respond to requests for comments as of press time.

Stephen Sherman, a researcher with the Kinder Institute for Urban Research at Rice University, said local governments could establish rent controls, which would address a root cause of institutional investment by limiting the profitability of rentals. However, he said the presence of real estate in local governing coalitions and the potential for those measures to affect smaller landlords make them unlikely to be successful.

“The ways that you regulate this involve making owning rental properties for profit less profitable,” Sherman said. “Cities such as Houston, Austin and Dallas may try something, but the real estate industry is part of the local governing coalition, and the state government can preempt any rent control law.”