Residential Investment Properties — Cash Kings But With a Diminishing Supply as Distressed Real Estate Cycles Through the Market

In recent years, with home prices down from the peak to the trough by 32 percent, and almost zero yields on cash in CDs, savings accounts and bonds, the investment opportunities in housing to rent has been a booming industry.  Couple that with the impact of defaults by homeowners, that for financial and credit reasons, will be delegated for several years to be renters rather than owners, increasing down payment requirements and more stringent mortgage loan underwriting standards, and you have growing rental market demand.

The National Association of Realtors® (NAR) annually completes an “Investment and Vacation Buyers Survey.”  The survey was completed this past March by vacation and investment home buyers in 2012.  NAR received responses from 2,326 qualified households that purchased 2,751 dwellings in 2012.

What may surprise some is that investor housing demand since 2003 has accounted for 22.4 percent of all buyers.  In 2003, prior to the housing bubble and before the massive increase in subprime lending, investors snapped up one out of five existing homes sold (22 percent).   The following table shows the investor share of housing purchases for the past decade.

6-21-13 graph1

Demand peaked in 2005 for investor housing, one-year prior to the peak in the housing bubble.  Within three years the number of sales had fallen by more than one-half, and by 2010 had plunged almost 70 percent.  In 2012, one-out-of four homes sold were acquired for investment purposes.  Perhaps the trend in investor housing demand is a key barometer on future owner-occupied housing market performance.

6-21-13 graph2

Investment property median prices rose 15 percent from 2011 to 2012, ending last year at $115,000.  Median investment property home prices since 2004 are shown in the following graph.  Remember the axiom of wherever home sales go, prices follow the next 12 to 24 months   After peaking in 2004 at $183,500, median investor home prices had dived by half (48.8 percent) to $94,000 in 2010.

6-21-13 graph3

Other findings of investment home buyers in the survey included:

  • The average investor home buyer plans to own the home eight years
  • Distressed investor home purchases made up 47 percent of sales volume (24 percent in foreclosure and 23 percent short sales) with the remaining 53 percent non-distressed transactions
  • One-half (47 percent) of investor property owners are likely to acquire another investment property within the next two years
  • One-out-of-three (31 percent) of investor property owners are likely to buy a vacation home within the next two years
  • Median age was 45 years old, with 50 percent of all buyers younger than 45 and 26 percent older than 54
  • Household median income was $85,700 versus $76,600 for primary dwelling buyers
  • More than one-half of all investment home buyers in 2012 had two or more income earners, with 48 percent having two income earners and 8 percent had three or more
  • 25 percent of all investment homes were bought in small towns, 20 percent in rural areas, 28 percent in the suburbs, 20 percent in urban areas/central cities and just 7 percent in resort markets.
  • 58 percent of investment property buyers acquired detached single-family dwellings, 12 percent each were in either condo/duplex with two to four units and townhouses/row houses, while condo/apartments with 5 or more units made up 10 percent
  • Median size was 1,440 square feet, with 25 percent having less than 1,000 square feet and just 8 percent greater than 3,000 square feet in size
  • Median distance from the primary dwelling was 21 miles, with 11 percent located more than 1,000 miles away. 71 percent were within 100 miles of the primary home
  • Almost one-half (47 percent)  purchased their investment property via a real estate agent or broker while 17 percent bought the property directly from the owner whom they knew previously
  • One-half (49 percent) of all investment home buyers paid cash and had no mortgage on the property
  • Among buyers using a mortgage loan, 43 percent put down at least 30 percent, while 8 percent financed 100 percent of the purchase
  • 20 percent of the buyers plan to use the property for vacations or as a family retreat, while 8 percent have targeted the investment home as a future primary dwelling
  • Almost eight out of 10 buyers (78 percent) thought this a was a good time to buy

Given rising rents and having purchased properties in many instances, far below replacement cost, recent buyers of investment properties are looking at attractive investments with very accretive returns.

When giving my presentations across the country, a recurring major concern has been voiced by attendees regarding the impact on the markets when these investment properties are listed for sale back on the market, potentially selling from investors to owner occupiers. With a median eight-year holding strategy (and with 29 percent planning to own for more than 11 years), I have no concern on this potential inventory hitting the market.

Am pretty certain that within two years, most investor home buyers will wish they had acquired more properties than they did from 2010-2012.


Leave a Reply