A new report revealed that real estate investors are buying a large percentage of U.S. homes that hit the market. Investor-purchased homes accounted for more than 18% of all sales in the fourth quarter of 2021. In December of that year, investors purchased nearly 44% more homes — more than 80,000 total — than they did during December 2020. Small individual investors are responsible for some of the purchases, but the majority are likely the result of deep-pocketed institutional investors.
More than 75% of investor-purchased homes in the fourth quarter of 2021 were cash sales. Buying and selling homes with cash is becoming more common because of the competitive market and companies such as Orchard.
Low-priced homes have long been preferred property for beginning real estate investors because the profit margin is higher if they’re flipped and rented or resold. However, in 2021, more than a quarter of investor purchases were for mid-priced homes. Low-priced home sales fell to a record low of 37% — compared to 45% in 2020. This suggests that investors anticipate mid-priced homes to be easily rentable as more people with mid-range incomes are priced out of the expensive housing market.
Regardless of the price, single-family homes are still the most popular investment property, comprising 75% of investor purchases. Multifamily properties made up only 4% of their purchases. Most investors operate in just a handful of markets, including Atlanta; Charlotte, North Carolina; Jacksonville, Florida; Las Vegas; and Phoenix.
Real estate is usually a solid investment for individuals. Rising home values and a tax code that helps investors protect their profits with provisions like the 1031 exchange have attracted savvy investors, and in the past few years, corporate investors have gotten in on the action. Here’s why investors are pouring money into the real estate market.
Mortgage Rate Increases on the Horizon
Potential home buyers are still financially struggling two years into the pandemic, making it tough to afford rising home prices. It may be even tougher as the Federal Reserve raised mortgage rates in an effort to slow inflation. Federal Reserve members have hinted that more hikes are coming.
The move should slow competition and cool runaway home appreciation, but it may make mortgages more expensive, pricing some home buyers out of the market. Yet those people are still going to need a place to live, and rental properties could fill the gap.
Investment giant Blackstone is one of the largest corporate landlords in the United States, and 2021 was its highest-earning year — driven primarily by real estate investments. Blackstone has sunk a ton of money into single-family homes. For example, in 2021, the company bought Home Partners America, which came with more than 18,000 single-family rentals.
In a January earnings call, Blackstone executives said rent prices for their properties had risen two to three times faster than the inflation rate, especially for short-term leases that allow the company to raise rents often. Start investing now to earn passive income over the next few years by being a landlord.
The Rise of iBuyers
An iBuyer company uses algorithms and data analysis to precisely value homes, then uses investor funds to make fast cash offers. Sellers generally sell to an iBuyer because they want a quick, simple sale without the hassle of a conventional listing.
iBuyers had a lucrative 2021, purchasing more than 71,000 homes — compared to 14,000 in 2020. The increase was the result of a more aggressive strategy. In the past, iBuyer offers have been slightly below market value — the price sellers pay for all that convenience. In 2021, their median offer was as high as 104% of market value.
iBuyers submitted a lot of offers, too. The acceptance rate ranged between 4%–6% in 2021, which is pretty low considering how many sellers solicit an iBuyer offer just to get a price estimate for their listing. To put it in perspective, iBuyers had about 5% of their offers accepted on average, and they still bought 71,000 homes. iBuyers have refined their data analysis to more precisely value homes and are confident making more offers at a higher price.
A Rosy Forecast
Although home prices have increased in recent years, broader market uncertainty about the long-term effects of the pandemic had many experts predicting a housing market slowdown in 2022. Those forecasts turned out to be a little too pessimistic.
Zillow forecasts that home appreciation will decelerate only a bit in 2022, falling from about 18% in 2021 to 17%. Fannie Mae has also reversed course, predicting an 11% increase after a gloomier 8% increase previously.
Experts almost unanimously agree that 2022 will bring a double-digit increase in home prices. That makes the housing market one of the best and safest investments out there.
About the author:
Luke Babich is the Co-Founder and CEO of Clever Real Estate, a real estate education platform committed to helping home buyers, sellers and investors make smarter financial decisions.
Luke is a licensed real estate agent in the State of Missouri and his research and insights have been featured on BiggerPockets, Inman, LA Times, and more.
Education: BA with Honors, Political Science – Stanford University