Homebuyers are facing a new competitor.

In the past 18 months, hedge funds and large corporations have jumped into the red-hot market for single-family homes, intending to manage the properties as rentals. A hedge against inflation and a lack of rental housing is driving this move.

In many metropolitan areas, traditional homebuyers are getting squeezed out in a seller’s market. People looking to own homes are bidding against not only traditional real estate investors who own a handful of properties but also faceless investment firms with piles of cash.

Investors in the first quarter of this year bought one out of every five homes sold in U.S. metropolitan areas, according to the online realty company Redfin. Investors spent $50 billion to buy 77,829 homes in January, February and March—up 30.7% from a year earlier—but down from the record high 93,260 purchased in 2021’s third quarter.

In some markets, like Charlotte, N.C., investors bought nearly a third of all homes sold in the first quarter.

Many hedge funds and large corporations are so flush with cash that they can sidestep the need for financing. Also, they typically offer full asking price, which removes the delay of the appraisal process. After a brief inspection, they often make the purchase—and move on.

Their goal is to rent the houses for enough to produce an 8% annual yield on the investment. The homes also will likely appreciate, especially in the Sun Belt where residences are more moderately priced, providing an extra return on capital.

Hedge funds will also buy houses directly from large homebuilding companies, which soaks up the starter-level inventory, squeezing out first-time buyers. Millennials now comprise America’s largest adult population, and many are finding that availability and affordability are often insurmountable obstacles to home ownership. Therefore, they are relegated to renting, providing hedge funds with even more potential clients for their home inventory.

The best solution to this dilemma is increasing the housing inventory, but that can be problematic, given the high costs imposed by municipalities for land development and building permits. And, even if the housing stock increased, in a rising interest-rate environment, cash is still king, giving the buying advantage to the hedge funds.

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