I write today from my perspective as a HomeVestor franchisee in Dallas, but I will write in broad enough terms that my observations here in Dallas, as an active real estate investor, are consistent with what investors are seeing nationwide.
As I explain my observations from personal experience, I will put them it in perspective for both the existing investor and for the investor on the sidelines, the one who is thinking about getting into residential real estate investment but has not, yet, taken action. Some points may or may not be applicable to the existing or potential investor, depending on your market and your investment strategy. Other points may be indicators that now is the time for the non-active investor to get started in real estate. Finallly, we will tie these observations into the type of investor you are, or the type of investor you want to become.
We will focus on what 2015 holds in store for the three fundamental types of residential real estate investors:
1. The rehabber
2. The wholesaler
3. The buy-and-hold investor
Market trend No. 1: Home prices are up
The first observation, and likely no surprise to anyone close to residential real estate, home prices are rising across the U.S. as demand for housing outpaces inventory in many markets. We seeing that as demand outpaces supply, prices rise.
According to Zillow, national home prices are up 4.3 percent in May over a year ago. Prices are up more in some markets, and perhaps less in others but across the board we are seeing strong and healthy home price increases both in new construction and pre-owned homes.
- With high demand for housing, we are seeing days on market significantly lower this year across the U.S. That is exciting for a rehabber or someone considering getting into rehabbing houses. When days on market go down, so do holding costs, which can ultimately translate to increased profit potential on fix-and-flip projects. When holding costs go down, the rehabber is paying less taxes, insurance and utilities because they are not own the home as long.
- Also, we are seeing buyer’s demands decrease in some bargaining scenarios. Buyer sense that, as a result of higher prices, that other buyers are likely willing to pay more in order to get the home of their dreams. As a result of this realization, when buyers place an offer on a home, recognizing there are probably other offers and there is a chance those other offers are higher than theirs, they may lessen their demands on the seller such as requests for paid closing costs, costly repairs, extended closing time frames or buyer contingencies. All with the intent of improving the appeal of their offer and come out ahead of competing buyers.
In this market where we are seeing home prices come up, there are some very unique benefits to the rehabber, however these benefits do come at a cost.
- The challenge for the rehabber, as a result of increased home prices, is that obviously the cost of entry is getting higher. It is becoming more challenging for a rehabber to purchase homes at prices that they are accustomed to. Capital, or cash, is king for a real estate investor. The house that the rehabber bought for $100,000 in the past, may cost $120,000 now. Capital outlays are increased as a result of higher cost of entry/cost to purchase. These increased prices bring some good news for the rehabber, but that news does not come without a cost.
Market trend No. 2: Rental rates are increasing
Whether you are a landlord today or are considering becoming a landlord, this is a crucial point in how you behave as an investor in your local market.
Home ownership rates have been falling for about eight years consistently in this country. We are down to about 63% this year, compared to a peak of 69% homeownership back in 2004. That is eight years of decline, according to a recent Harvard study.
They stated in that study the number of new rental households has increased 770,000 a year since 2004.
You can see the demand for rental properties is growing.
- Increased demand has driven rental rates up. The cost to rent a house on a monthly basis is much higher now than it has been in the past. That is great news for a buy-and-hold investor. The rental demand continues to remain high. We have a rental portfolio here in Dallas that we own and manage. We have 100 percent occupancy. We did fill a property a week ago and we had over 100 inquiries from potential tenants in less 14 days, which is more than we have ever seen. Rental cash flow is rising as a result of these increased rental rates.
If you bought a rental property 10 years ago and you are still renting it today, there is a good chance that if you financed that property, you are likely sitting on a fixed monthly mortgage payment. That monthly mortgage payment is probably about the same as it was 10 years ago. You are continuing to pay down that principal and interest while your rents have increased year over year as we are seeing in the data. That scenario serves to increase your monthly cash flow. That is great news for the buy-and-hold investor.
- Keep in mind, though, there is an inherent challenge in these increased rental prices. According to the data rental rates have been rising in our country, unfortunately, about double the rate of wages. As a buy-and-hold investor you need to be conscious of the fact there is a pool of potential tenants out there whose wages have stayed relatively constant and may not have kept pace with these increased rental rates.
You really need to do your due diligence on background checks and income verifications. As rental rates have increased, there are people out there whose wages have not kept pace but they still need housing. When they go to rent your property they could be in a tight financial predicament. We want to make sure we don’t put potential residents in that position because nobody will win in that case – the resident nor you the landlord.
Market trend No. 3 – Housing inventory is low
We all see the headlines: Inventory is low. Let’s talk about this from the perspective of the wholesaler. That wholesaler is enjoying some great benefits right now as a result of these low inventories. We have not seen inventories this low since 2005.
- These low interest rates have enabled more buyers to move in and purchase homes and get mortgages at affordable rates. We have seen builders who have been unable to keep up production with that demand. And it has really squeezed the housing inventory in many markets across the country. So for that wholesaler it’s been a pretty good time over the past year. As they acquire distressed properties and market those properties to their investor pool, those investor/buyers do not have access to as many investment properties so that wholesaler who has those properties is highly sought after.
You are going to see that same demand coming from landlords.
The buy-and-hold investors are excited about those rising rental rates and they are calling wholesalers daily, to add more properties to their rental portfolios.
As these inventories continue to remain low and tight, that wholesaler (which could be you, as an investor) is going to be highly sought after by rehabbers and buy-and-hold investors, alike.
- Another exciting point as a result of these tight inventories is as a wholesaler or as someone who wants to wholesale but was unable to because they did not have an established buyer network to market to, your problem may be solved.
We are seeing a trend where wholesalers are marketing properties on the MLS, the Multiple Listing Service. The MLS used to be a shopping place for primarily retail or owner-occupied properties. However, we are seeing investors able to sell properties on the MLS because of the increased demand. There are more investors shopping the MLS and buying those properties. That is encouraging for those new investors looking for an audience or a customer base to which to sell properties. If you so not have a buyer’s list before, perhaps MLS is now an outlet to market and sell wholesale properties.
- But even with housing inventory remaining tight and fostering a great environment for wholesalers, beware of the flip side. It’s much more difficult today for those wholesalers to get their hands on properties. If the housing inventory is low, it’s low for the wholesaler too. It’s challenging for wholesalers to purchase those properties they can ultimately turn around and sell. Competition is high. Sellers have a lot of options. That translates into a very challenging time for the wholesale investor when it comes to their ability to acquire properties.
The rest of 2015?
I think for the balance of the year we are going to see what we see today, and barring any catastrophic changes or significant political or economic events. The market for real estate investors is healthy and strong, but not without some natural challenges that come from this type of market.
My key observation for the investor is that the opportunities are out there. But that does not mean one can invest with reckless abandon and count on the market to offset hasty investment decisions.
As an investor, continue to use proper due diligence, practical intelligence and appropriate prudence in your investing and capitalize on the opportunities that make up the 2015 real estate market.
Listen to Kevin talk about these here trends on blogtalkradio.com.
About the author:
Kevin Guz is a residential real estate investor with over 10 years of investing experience based in Dallas, Texas. Kevin is the owner of a HomeVestors or “We Buy Ugly Houses” franchise and is also owner of the Clear Key companies which focus on residential real estate wholesaling, rental property management and self-storage leasing. He is a licensed real estate agent in the state of Texas. Kevin enjoys sharing his on-going personal experiences, perspectives and learnings from his start as a part-time or “weekend investor” and full-time corporate professional to his ultimate transition into his current full-time endeavor as a real estate investor and business owner.