Large corporate investors are gobbling up thousands of distressed homes nationwide, in isolated cases squeezing out first-time buyers, but lifting the weak housing market on the road to recovery.

Banks and private equity firms started adding single-family houses to their portfolios five years ago at the height of the real estate collapse, but became even more aggressive when Fannie Mae decided bulk sales of foreclosures were the best way to help stabilize metropolitan areas hardest hit by the crisis, according to both statistics and participants in the industry.

“Even though housing is the biggest sector in the U.S. economy, there are very few ways for institutional or individual investors to play it,” said Andy Richard, managing director in the Real Estate investment banking group at Credit Suisse. “So when you talk about all the institutional money that’s flowing into the space, No. 1 is that people want exposure to the asset class because prices have bottomed. And from a portfolio point of view, housing has cycles and hot buttons that are different from other sectors, so there’s a lot of interest on the part of investors.”

In October, Fannie Mae announced its first two deals – 699 units throughout Florida and 94 in Chicago. The businesses had to agree to rent the properties for at least three years. The other cities that will see sales: Phoenix, Las Vegas, Atlanta, Los Angeles and Riverside, Calif.

The homes in the Windy City went to New York-based Cogsville Group, which paid the government more than $3 billion in 2009 and 2010 for underwater assets. In the Chicago deal, the firm bid $11.8 million, giving Fannie Mae $2 million up front and paying the balance off by splitting the rental income.

“With the shifting fundamentals in the housing market, single-family residential is fast becoming an important asset class and we believe our experience and knowledge of local dynamics will benefit us in achieving economies of scale in Chicago and other markets across the country,” chief executive Donald Cogsville says on Cogsville’s website.

Another example of just how important the big players are: Colony Capital told USA Today that it plans to pump $1.5 billion into single-family properties over the next several months. The California-based real estate investment firm already has more than 3,000 houses and expects to own 15,000 to 20,000 by the end of the year.

The National Association of Realtors, a Washington, D.C. trade group, says investment sales come close to setting a record in 2011 – up 27 percent, just a point shy of the pre-recession high of 2005. Four in 10 of those investors snapped up more than one house.

The median number was three homes, according to NAR’s Walter Molony.

The massive buying has tightened the supply of single-family homes – especially in the $100,000-and-under category — but there are still opportunities for small investors if they do their homework.

“Long-term, one out of five sales will be for investment purposes,” Molony said. “It is — and always will be — a strong market component.”

Credit Suisse’s Richard pointed out that about 4.5 million homes are sold each year in the U.S., while the current size of the institutional market is only about 100,000 homes. “There might be markets or individual homes where the prices get bid up, but in the aggregate, is this investment running up prices in the housing market generally? Unlikely,” he said.

To economist Bill Conerly, the most successful small investor is the one who knows the community, is up-to-speed on property values, monitors the rental vacancy rate and factors in the outlook for growth and job creation.

“The thing I keep reminding people of is that past performance doesn’t guarantee the future… and that investing requires discipline and hard work,” said Conerly of Lake Oswego, Ore., who is also a business consultant and a blogger for forbes.com. “It’s often looking for opportunities that others are running from.”

In Fort Wayne, Ind., a city of 255,000 surrounded by rich farmland, Ed Tobey just bought his third single-family rental for a dirt-cheap $325.

“It’s the best place as far as I’m concerned…and there’ll be an entirely sufficient supply for another couple of years,” predicted Tobey, a 70-year-old real estate agent.

“There are always some opportunities.”

Tobey fell into his investment properties. The first two he had sold to out-of-state investors who didn’t realize how difficult it is to manage a unit from far away.

The last one sat empty for eight years, deteriorating to the point where the county condemned it and put it on the auction block. The neighborhood association snapped it up and resold it to Tobey four months ago.

So far, Tobey has poured $20,000 into the three-bedroom house. He hired an experienced construction crew to do the work — a new roof, new siding, new plumbing, a new electrical system, new windows and new walls.

Tobey plans to recoup his costs by renting the home at $650 a month for three years, which he figures is roughly a 33 percent return. Then, he plans to sell the property for $45,000, give or take.

“Real estate is a great tool for building wealth,” Tobey said. “I just wish I would have started off younger.”

Photo courtesy of Ed Tobey. The home he bought as an fixer-upper investment property for $325 is pictured here.

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