One of the things that people frequently say in criticism of income property investing is that real estate is highly fragmented. This fragmentation makes it difficult to effectively manage a large portfolio of properties, and creates terminal headaches for investors.
As it turns out, this is a good thing.
The reason why you should come to love fragmentation is because it is what keeps institutional investors out of residential real estate. This happens because it is cumbersome to manage a lot of single family houses. Furthermore, large financial companies have much more overhead than an individual investor. They must pay for executives, facilities, contract managers, accounting, auditing, etc. This is why most institutional investors tend to favor commercial properties such as apartments and office complexes. It is much less work to oversee an apartment complex with a full-time manager than to keep track of 300 single family properties.
Thus, what has happened over time is that the inflow of institutional money into commercial property has pushed up the price and compressed the yields. This creates an ideal opportunity for individual investors to capture exceptional returns from single family income properties while the institutions are focused on big properties that are easy to incorporate into a centrally managed portfolio. The relative lack of capital chasing after these property results in reduced price escalation, and higher relative rates of return.
In this way, the “hassle” typically associated with income property investing becomes a source of value, since it keeps the banks, insurance companies, hedge funds, and other institutional players away from the single family income property market. What is commonly viewed as a disadvantage of investing in residential real estate actually becomes a key asset, since it serves as a shield to protect against the entry of large institutional players.
In addition to this, individual investors have the ability to finance their income properties for a fixed interest rate over 30 years. This is another key advantage that many institutional players do not possess, since their financing tends to be much shorter in duration, and is more sensitive to interest rate fluctuations since they need to turn it over as the aged notes come due. When combined with the increased overhead associated with running a company vs. personally managing properties, individual investors possess a highly potent advantage.
