With the decline in foreclosures, many real estate industry experts thought the influx of millions of investors into single family rentals would abate. Yet even though foreclosures have fallen to the same level they were in 2006, before the housing crash, the numbers of real estate investors keeps growing. Investors are still buying one out of every 5 homes sold in America every month.
What the “experts” may not realize is that purchase price and the subsequent appreciation of the investment property is only one part of the profit picture. The vast majority of investors today are in it for the long term, and the revenues they realize from rents over ten or more years are much more important that appreciation alone. Yes, foreclosures were nice while they lasted- but thousands of great properties are listed for sale every month waiting for the right investor. With home prices rising again, you can buy a property right off the multiple listing service and do well.
Why Are More and More Investors Getting In?
Here are three reasons why investors dominate the rental marketplace — and why their numbers may increase in 2014.
First, small rental units are an accessible investment. Not too many people have the financial clout to buy an apartment complex, but a house here and there is very plausible, especially with easy financing for properties with one-to-four units.
Second, a lot of people became “accidental investors” after 2006 and 2007. They had homes they wanted to move but buyers were scarce, so they converted the property into an investment unit. Or, they had a property, ran into financial trouble, and rather than a foreclosure or short sale they opted for the rental route. Now, several years later, they have become believers. Many have done much better with their rental properties than their traditional investments.
Finally, though personal tax benefits seem tougher and tougher to find, owning investment real estate can take some of the sting out of April 15. As a property owner you can generally deduct mortgage interest and property taxes, plus it’s possible to claim depreciation.
According to the Harvard Joint Center on Housing Studies, the pace of net conversions from owner to renter tripled in 2005–7 relative to 2001–3 and then nearly doubled again in 2007–9 to 1.9 million units. Single-family detached homes were the driving force, accounting for three out of every four net conversions to rentals between 2007 and 2009.
Figures from the Census Bureau show that in the third quarter homeownership was down compared with 2012. The Census Bureau also found that vacancy rates were down and that the median asking rent for vacant units was $736, the highest on record. Demand for rental units is as strong as ever. Rents are forecast to rise 3 percent or so this year and vacancy rates will remain low. Obviously, rental demand will be stronger in some markets than others.
So, if you missed the foreclosure boat, don’t worry. You have time to catch the next one. Even better, today you can do it with a company that will take care of the research and management of your investment for you. But don’t delay too long. Every month that passes by is another month without a rent check from a tenant.
I thought foreclosures were the reason for the investing boom?
Foreclosures encouraged a lot of people to get into real estate investing because they were so cheap and abundant three or four years ago. However, they also cost an average of about $15000 to rehab. A whole business in buying, rehabbing and selling—or flipping—was born. Flipping is dependent upon access to low cost properties, which is difficult today. Flipping is in decline most places but the “buy and hold” strategy of renting out a home for years works even better today than it did a few years ago because both rents and home values are rising.
What’s the window for getting into real estate investing?
Good question. Conditions are near perfect for real estate investing right now and probably for the next few years as demand for rentals is expected to remain strong. Time will change and conditions may not be as great in the future. However, people have been investing successfully in residential real estate for centuries and they have been successful for simple reason that growing populations create demand for housing. While attitudes may shift up and down, people still want to live indoors!