Despite some shifts in the housing market that make it more difficult to
earn money investing in residential real estate, a large majority of
people in that field plan to buy as many or more properties in the next
12 months to rent out or sell for profit.
The survey
— sponsored by BiggerPockets.com, the nation’s leading social Web site
for real estate investors, and Memphis Invest, one of the largest
providers of single-family rentals — shows that 65 percent of investors
plan to buy a lot more homes during the next 12 months.
The report points out that investors played a fairly substantial role in
the housing recovery. The housing crisis pushed nearly 4 million
foreclosures onto the open market, devastating home values. This and the
coinciding financial crisis squashed homebuyers’ confidence and their
ability to buy. At that time, real estate investors began buying up the
foreclosures when few other people could enter the market. They bought
up so many properties that they established single-family rentals as a
$100 billion business. In fact, the report says that single-family
rentals now outnumber apartment units.
Still, from my experience in the Washington area, business conditions
are changing with rising home prices, stiffening competition and
shrinking margins. Anyone seeking to get into real estate investing
should proceed with caution and not expect to earn the same money that
has been made in the past few years.
They are also renovating the homes they buy and spending an average
of $7,500 per home. That totals more than $9.2 billion every year in
construction-related spending, according to the report. This is critical
business for an industry that was hit hard by the recession. In 2008, Congress approved the Neighborhood Stabilization Program to
provide funds to municipalities and not-for-profit organizations to
repair damage to foreclosed homes. Up to this point, they have spent a
total of $7 billion of tax payer money.
Some 3 percent of American adults or 7 million people are active real
estate investors, according to the report. These people are actively
looking to buy more property and about half of them make more than five
purchases each year. This is a diverse group of people. About 76 percent
are under the age 55. They are more likely to live in the South or West
of the country and about two-thirds of them make less than $75,000 per
year.
Real estate investors are doing more than this every year with their
own money or money that they borrow. Surprisingly, the report finds that
only one in four real estate investors are cash buyers. In fact,
slightly more than half make down payments and finance the rest of the
purchase amount. If you read my last post, you’ll see just how much most real estate investors pay for financing.
This strikes at one of the prevailing myths about real estate
investors. Very few have cash for their projects. I can also tell you
that most real estate investors are more afraid of you, the retail
buyer, than you are of them. Real estate investors have to pay higher
interest rates than owner occupants and they have many more additional
costs. Back in 2006, real estate investors would come in and buy
properties at market value and then gamble that they would make their
profit within a year on appreciation alone. I can tell you that most all
of those investors are out of business now or they’ve learned very
painful lessons.
Even more interesting, the report tells us that this group of active
investors does not plan to slow down despite rising home prices and
increased competition. About 65 percent of the active investors plan to
buy as many or more properties in the next 12 months as they did in the
past 12 months. This is big news considering that fact that real estate
investors accounted for as much as 25.3 percent of all home purchases as
of May 2012. This indicates that investors have confidence that the
housing recovery will continue and their robust activity will help
ensure it.
Keep in mind that this is a national survey. The Washington area
doesn’t exactly fall in line with national trends. But real estate
investors are very optimistic creatures. When the report says 65 percent
of investors plan to buy more property in the next 12 months, I believe
it. But the key word is plan. I’ve never met an investor who plans to
do less this year than last year.
This market should continue to be strong but I would advise investors to
begin reassessing their business models. I would also recommend extreme
caution to those looking to begin a real estate investing career. You
are probably not going to make money in the next few years in the same
manner it was made in the last few years.
I would expect investor activity to stay fairly strong in this area but I
think demand for rentals will slow a bit as home prices increase. I
also think rehabbers and home flippers will face stiff competition and
less opportunity. I’m already seeing that in my business. I’m getting
tighter on my budgets and spending more time and money to find viable
projects. If interest rates stay low and prices continue to rise,
investors will likely move to land development, commercial real estate
or possibly other markets. At some point, we might also see investors
become sellers as we did in the late 1990s and beyond as they liquidated
holdings they’d accumulated in the down market 20 years ago.