New Challenges, New Opportunities for Real Estate Investors

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Real estate investors have experienced some big swings in the market over the past decade. We’ve gone from dirt cheap foreclosures after the housing meltdown, to more difficult investing opportunities today. According to a new survey, that’s discouraging many small scale real estate investors, but difficult doesn’t mean impossible. It means you need to be flexible, adaptable, and smart about your choices.

Hi, I'm Kathy Fettke and this is Real Estate News for Investors. If you like our podcast, please subscribe and leave us a review.

Real-estate data company RealtyTrac conducted an investor sentiment survey among 300 real estate investors from across the country. (1) It shows that 48% of them feel that the investing environment is worse or even “much” worse than it was just one year ago. And it wasn’t that much better a year ago. The same survey shows that 45% felt that way in 2020 during the first year of the pandemic.

RealtyTrac defines small scale mom-and-pop investors as those who buy one to 10 properties a year. That includes people who flip homes and those why buy and hold them as rentals. RealtyTrack says 90% of the 19 million single-family rental properties in the U.S. are owned by smaller investors. It also says there are thousands of people flipping homes at a rate of about one a month, although they are facing more competition from iBuyers like Opendoor, Offerpad, and Zillow.

Investor Sentiment Survey

This is the second year in a row for the RealtyTrac Investor Sentiment Survey. RealtyTrac says that last year’s survey was evenly split between flippers and buy-and-hold investors. This year, there were more buy-and-hold rental property investors. Researchers say that could be the result of market conditions which are reducing home-flipping returns.

Previous research by RealtyTrac’s parent company ATTOM Data Solutions shows that the typical gross-flipping profit was $67,000 in the second quarter of this year. That’s a 33.5% return on investment compared to a 40.6% ROI for Q2 in 2020. It’s also the lowest ROI for flippers since 2011. (2)

RealtyTrac’s survey found that real estate investors are most concerned about high home prices. That concern replaced lack of inventory as the biggest worry in last year’s survey. Lack of inventory is now second on the list of concerns. Investors are also worried about the cost of materials and labor along with competition from regular homebuyers.

RealtyTrac’s Rick Sharga says: “Investors are more optimistic about the future than they are about current market conditions. But they do worry about inflation -- about 81% of the investors surveyed were concerned about inflation causing material and labor costs to rise, making affordability an issue for prospective homebuyers and renters, and increasing the costs of financing.”

The survey also asked investors about their foreclosure expectations once government protections expire. About 30% of them expect foreclosures to return to a historical level of about 1% while 33% expect them to increase, but remain below the levels we saw during the Great Recession.

Real Estate Investors Need to Shift Focus

The survey title suggests that “Real Estate Investors Have Soured on the Current Market.” I think a better title might be: “Real Estate Investors Need to Shift their Focus.” At least that’s what we are doing at RealWealth.

The market is changing, again. It’s something that the market will always do, so investors need to be flexible and adapt to new conditions. The last ten or so years have been easy for real estate investors. We had a housing crash and dirt cheap prices. But those prices have been rising for a decade. So what now?

Yes, it’s harder to get inventory. One of our property providers says that foreclosure auctions have completely stopped so she’s trying to build new homes for buy-and-hold rental investors, although that has its own challenges.

We are in a new market cycle, so investors need to be more creative. In California, new laws have neutralized the idea of single-family zoning. You can now subdivide a single-family property into a duplex, or even a four-plex if the lot is big enough. Investors could live in one, and rent the rest. Short-term rentals could also work, if local laws allow them.California also allows in-law units or ADUs on single-family properties which is another way for property owners to create rentals.

Creative Investing for Today’s Market

More creative investors might want to look at ways to help aging baby boomers who need assisted living, or younger professional who need a place to decompress. One of my friends is now turning high-end homes into rehab centers for individuals who need a get-away place to recuperate. Empty hotels could provide an interesting opportunity for apartment conversions.

What should you look for? As you know, homes are selling quickly, but that’s not 100%. You can look for higher-priced homes that have been sitting on the market for too long and negotiate the price tag. At RealWealth, our teams are helping builders buy land for the development of single-family rentals. By contributing to these projects at the beginning, we are also able to help builders understand the difference between a rental home and a primary residence in terms of design and materials.

You can also learn more about single-family rentals by joining RealWealth for free. As a member, you have access to the Investor Portal where you can view sample property pro-formas and connect with our network of resources. That includes experienced investment counselors, property teams, lenders, 1031 exchange facilitators, attorneys, CPAs and more.

You’ll also find links to information about RealtyTrac’s survey in the show notes. And please remember to hit the subscribe button, and leave a review!

Thanks for listening. I'm Kathy Fettke.

Links:

1 - https://www.businesswire.com/news/home/20210929005109/en/Real-Estate-Investors-Have-Soured-on-the-Current-Market-According-to-the-Fall-2021-RealtyTrac%C2%AE-Investor-Sentiment-Survey%E2%84%A2

2 - https://www.attomdata.com/news/market-trends/flipping/attom-q2-2021-u-s-home-flipping-report/

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