Returns are better on the lower end of the market, and demand for rent there is higher. Which is why most residential investment is at the bottom end, not the top end.

In most markets I'm guessing an 800k house is at the higher end of the market.

That aside, housing portfolios always plan for a certain amount of unoccupied space. It's built into the model. (That's partly why small investors who own 1 or 2 properties get hit harder by this.)

Equally, even if the house is empty, there's usually some capital gain going on.

Investing in property is a long-term investment. The cost of buying, or selling is very high. So it's about getting quality units, in the right market space, and then leveraging that for a decade or more.

Yes there are lemons. And yes they'll get sold, perhaps at a loss. But being unoccupied for a bit doesn't make it a lemon, and being unoccupied won't necessarily trigger a sale.

Institutional investors are much more experienced and thus also a lot more likely to not buy lemons in the first place. Most "mom and dad with a second property" investors either inherited a place, kept an earlier property they lived in, or bought another property in their own neighborhood. They're typically gonna make some mistakes along the way.