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This article was last updated Sept. 29, 2023.
Tracking market shifts and identifying new opportunities is one of the basics that never goes out of style. Although most agents only focus on what is happening in the single-family market, tracking what is happening on the investment side of the business can be a rich resource for locating new ways to grow your business.
I recently interviewed Kurt Carlton, the president and co-founder of New Western, the largest marketplace for investors who want to flip, rehab or invest in housing. They currently have 165,000 investors on their site, did $2 billion in revenue last year, and sell one home every 10 minutes, according to Carlton.
Although residential real estate typically turns to companies like Attom Data, CoreLogic, and Redfin, New Western analyzes the data with an eye to the investment market.
New Western’s recent survey of their users uncovered seven hidden trends that virtually no one is discussing. Capitalizing on these trends can give you a huge competitive edge in your market.
IBuyers and institutional landlords have ‘fallen off the map’
After reading Redfin’s report from the fourth quarter of 2022 showing that investment purchases were down by 50 percent, Carlton was convinced that Redfin’s data didn’t provide the complete picture. When New Western surveyed their membership to see if this was the case, they were shocked by what they found.
- Purchases by the major iBuyers, REITS and institutional landlords were down by 90 percent. In contrast, individual investor market share was through the roof as the independents reclaimed the market.
- From 2020 to 2022, investors were also competing with the neighbor down the street. The condition of the house didn’t make any difference because homebuyers were so desperate to purchase. Today, this is no longer the case as days on market are much higher.
- The sentiment among New Western investors was optimistic and upbeat. They were happy about being in a less competitive environment.
- For those who are flippers, the markets have loosened to the point where they can now risk adjust and find good deals.
Gen Z: New generation, new playbook
Gen Z, those born in 1997 or later, are investing early. Seven percent of the investors at New Western are Gen Z. What’s fascinating is how Gen Z is reinventing the investment playbook to make seemingly unprofitable types of investments that won’t cash flow profitably. For example, Carlton said:
We had an individual (Gen Z investor) in Seattle, a higher-priced market where everyone says cash flow is dead because of the price point versus the rental. (This investor) decided to rent out the individual rooms of the house (he purchased). A typical old-school real estate investor would never think that would ever fly or that they could ever manage it. When you think about the Gen Z renter in a market like Seattle, they’re happy with it.
In terms of the economics of this approach:
A $700,000 house might command a rent of $3,600 per month for the whole house. When you charge $1,500 per bedroom (for three bedrooms) and $2,000 for the master, it’s a different game when it comes to cash flow and making that asset work.
House hacking and flipping are interchangeable skills
According to Carlton, “house hacking,” as opposed to flipping, is when you live in the property while you’re upgrading it. The drawback with house hacking is that you are usually limited to doing one unit at a time.
On the other hand, the advantages of purchasing one to four units that you owner-occupy are substantial. You can obtain 30-year fixed-rate financing, which is a hedge against inflation.
Carlton said, this type of investment:
Is a great way to build up some sweat equity … In the small business world, it’s very accessible because it’s housing, and people generally understand it better than other [types of investments].
Gen Z is also reinventing the playbook in this area as well. According to Carlton:
Thirty years ago, it was hard to learn about real estate investing and how much risk you had to take. Now you just go on YouTube or on social media and see all the different strategies everybody’s using. You can look at an asset and say, which of the eight different strategies do I want to apply here? At the same time, you’ve got so much more data available today. I think this is the result of institutional landlords coming in and many of them building data companies and services around them.
To illustrate this point, Carlton explains how the explosion of data has made it possible for Gen Z to locate almost everything they need to make a smart investment.
If I live in Seattle, and I’m a Gen Z person, I know how to work tech, access data and do research there. I can use that data to look at zoning requirements, lot layout and rents for $3,500 per month. If the house has the right configuration, I can pour a slab in the back and put in a plumbing (and electric) rough for very little money. I can then purchase an accessory dwelling unit (ADU) online that’s delivered (and has) beautiful high design for $30,000. I can charge $2,500 a month in rent for that unit. That strategy is just so different because of how the environment and access to information and data have changed.
The major trend that no one has really noticed
According to Carlton, this decade has seen two major shifts in the ownership of single-family real estate:
- Residential real estate, one of the world’s largest asset classes, has shifted from being privately owned to becoming a publicly traded Asset Class (Real Estate Investment Trusts — REITs).
- It has also shifted from being local to national. Gen Zers may not be able to afford the American dream where they live, but they still want to grow wealth. Consequently, many are buying out-of-state properties they can manage remotely.
15M vacant homes: An untapped opportunity?
Carlton discovered this statistic in the 2020 census numbers as part of the Build Back Better program. Some of these homes are Airbnbs and second homes. A lot of them, however, are vacant, uninhabitable homes.
“We’re in the middle of an inventory crisis. We’re missing 5 million homes. The last report from the National Builders Association was that we were going to deliver 880,000 homes. At the same time, we have all these vacant homes, most of which are in disrepair,” Carlton said.
Carlton believes a substantial portion of these are inherited properties held by out-of-area owners. Many of these owners are working so hard to keep up with inflation, they don’t have the time or the money to deal with the needed repairs. These properties need to be identified, rehabilitated and put back on the market.
Challenges coming soon to a listing near you
Carlton raised an issue that no one else seems to have addressed: The large percentage of homes that were built 20 to 40 years ago. He believes that we’re moving into the “great renovation” where there will be approximately 25 million homes that will need repairs to the major systems in the home. This can include roof problems that can lead to mold. Plumbing issues can be especially difficult if they have to jackhammer the slab to fix the problem.
“That’s not something a typical homebuyer, someone who has inherited a home, or even what a Realtor wants to do with their client because we all know what it’s like dealing with contractors — at the end of the day, everybody hates each other,” he said.
“Actual rehabs are very local. This is a story about individuals and small businesses really stepping up and fixing a major problem in the United States right now. I think the prospect of becoming a real estate investor that does this full-time is becoming very, very realistic. This is when it goes from being a TV show to a real occupation.”
Carlton believes that this market segment will soon represent approximately 20 percent of the listings on the market. Both Realtors and consumers will have to adjust to dealing with major system repairs in one out of every five listings.
Real estate has become a ‘passion project’ for many investors
The people who are going to fix the problems noted above are individuals, not the government or the technologists. New Western’s research has shown that many younger people are looking at fixing up properties as a creative outlet.
A second group who are active in this market are investors between 50 and 60 years of age who are putting aside properties to generate income when they’re in their 60s, 70s and 80s.
Typically these people are “somebody who has some business chops, they’ve been in corporate America, but wanted more. I don’t mean money. They want control of their life,” he said. “(Many are) these corporate refugees who jump out. We see a lot of husband-and-wife teams, and it’s something they can do together, even if the ROI isn’t through the roof. They just love the challenge.”
Many are also looking at creating multigenerational wealth. They begin by flipping to make income, and then they start to accumulate rental properties along the way.
“Flipping houses is a job. It’s a high-paying job for those who are good at it, but the real wealth is owning assets long-term and being a landlord. So, the pathway is that even if you’re flipping, you want to ultimately get into the long-term hold that gives you consistent income,” Carlton said.
Carlton’s final takeaway
As a Realtor, there are just fewer transactions, and it’s harder to make money. But if you’re a real estate investor, the fundamentals are good for the next 10 years. One of the top five problems we have in the United States right now is the lack of housing inventory. You want to go where the problem is, and where you have a unique skill set to solve it.
The future is good. It’s a $450 billion industry today, and it will only grow rapidly. If you look at real estate and all the different segments or niches you can get into, it’s the one that has the most opportunity moving forward.
Bernice Ross, president and CEO of BrokerageUP and RealEstateCoach.com, is a national speaker, author and trainer with more than 1,000 published articles. Learn about her broker/manager training programs designed for women, by women, at BrokerageUp.com and her new agent sales training at RealEstateCoach.com/newagent.
