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Things aren’t particularly rosy for real estate investors, but there is reason for hope: Many believe prices have already bottomed out.
A new survey of investors shows that many have a mixed view of the real estate landscape, yet the worst may be in the rearview mirror.
Investors still face issues caused by few homes to buy and the high cost of borrowing money with which to buy them, according to the survey and interviews with investors across the U.S. But investors believe there are reasons to believe things will improve, according to the survey, and the optimism is spreading.
CJ Patrick Company CEO Rick Sharga
“The No. 1 most frequently cited challenge was the higher cost of financing today,” Rick Sharga, former executive vice president with Attom, said on an investor podcast yesterday. “The second one was the lack of inventory.”
As a result, investors are looking for new and creative ways to find homes to make money, investors told Inman. Others are considering whether a short-term loss is worth potential long-term gain as the market rounds a corner, Sharga said on a podcast hosted by Bigger Pockets.
“If you can even break even on a property right now, odds are you’re going to be able to raise the rents over the next couple of years and probably refinance into a lower monthly payment,” Sharga said. “It’s more maybe a future opportunity for some of these rental property owners than it is an immediate market profitability initiative.”
It’s not that this segment of the real estate industry is feeling particularly rosy.
Investors feel largely the same as they did a year ago, and they expect the next six months will be unchanged, according to the survey conducted by RNC Capital and Sharga’s new CJ Patrick Company.
Nearly 3 of every 4 investors surveyed cited the high cost of financing as their top concern for operating in the current market. Almost half said inventory was one of their three biggest issues.
Still, just under 75 percent of the hundreds of investors Sharga and RNC Capital surveyed expect prices will stay the same or rise in the coming six months.
That would be in stark contrast with some investors who predicted home prices would drop at a level that was similar to the Great Financial Crisis, falling 20 to 40 percent, Sharga said.
“There’s nothing in play, none of the dynamics in place that would support that,” he said. “That would be one way of correcting the issue, but that’s not going to happen.”
Struggling to find inventory
As one of the top two concerns for real estate investors, inventory is top of mind. Homeowners are sitting on both low-interest rates and high amounts of equity and deciding not to sell.
“It’s actually gotten worse rather than better and will probably continue to get worse,” Sharga said.
Nine out of 10 homeowners with a mortgage have a rate that is below 6 percent. Seven out of 10 have a rate that’s 4 percent or lower, Sharga said.
“These folks just are not going to be motivated to put their properties on the market until interest rates come down pretty significantly,” he added.
National Real Estate Investors Association Chief Operating Officer Charles Tassell
The same lack of inventory that has kept prices elevated for consumers is making things tougher for investors to find their next deals, Sharga said.
That’s led investors to get back to dated fundamentals for finding inventory, said Charles Tassell, chief operating officer of the National Real Estate Investors Association.
“That means driving neighborhoods, looking for, ‘Hey, there’s weeds at that house, papers piling up,'” Tassell said. “Not to be too macabre, but looking for obituaries, somebody went to the nursing home, does the family want to unload something?”
“It’s really what’s old is new again,” he added.
A new way to get creative
Fix-and-flip investors were quickly impacted by the quick rise in interest rates, given changes in borrowing costs would impact their potential pool of buyers. Still that segment of the investor market is particularly optimistic, Sharga said.
“Thirty-eight percent of flippers expect the market to be better in six months. Nineteen expect it to be worse,” he said.
Before things improve, more investors are looking for new ways to get creative.
Investors have been talking about creative financing for the past year, where they find seller financing and other ways to acquire properties without acquiring an interest rate that will cut into profit margins.
Jordan Fulmer, real estate investor in Huntsville, Alabama
“Especially for long-term stuff, if we’re looking at long-term deals like rentals, creative financing is huge,” said Jordan Fulmer, an investor in Huntsville, Alabama.
Investors are working with homeowners to basically acquire the responsibility to make payments on an existing mortgage with a lower-than-market interest rate, a process that’s known as a “subject-to” loan.
“If you can do a subject-to on a loan that’s like 3.5 percent interest versus 8 percent or whatever it’s going to be getting a commercial loan for a property, that’s like hundreds of dollars a month in cashflow,” Fulmer said.
But with sales volume so low and owners feeling locked into their existing low mortgage rates, Fulmer said he’s come up with a new strategy to source deals.
Fulmer is essentially partnering with homeowners whose houses need repairs before selling to get a higher offer. Fulmer’s team will help conduct the repairs, covering the costs of labor and materials before recouping that cost plus an added fee upon sale.
“They likely would have sold for around $210,000 in its current shape,” Fulmer said. “We came and fixed it up, spent about 25K in repairs, and it sold for $296,000. The seller walked away with $237,000. He literally made $27,000 more than what he would have made selling it as-is.”
Such an agreement is known as a novation agreement, which Fulmer said worked for fix-and-flip investors but without requiring high-interest loans and actually acquiring the property before repairs.
“I feel like I’m sharing the secret sauce here,” he added. “Hopefully I can stay ahead of anybody in my market.”
A new threat on the horizon?
Tassell said investors have growing concerns about upcoming local elections, where candidates are hearing from voters concerned about high rent and high home prices and promising action.
“You’ve got local people running who are maybe not as plugged in and sophisticated on understanding overall housing economics,” Tassell said.
There’s been a wave of calls for tenant protections among candidates to which investors across the country are paying attention.
Tassell said builders backed away from projects in Minneapolis and St. Paul, Minnesota, after recent moves to enact rent control.
“Political instability at the local level is having a detrimental impact on investment,” Tassell said. “Some people realize the way you fix this is supply. Others don’t quite get that basic economic law.”
Source: Tradingeconomics.com
Rates may fall again soon
Investors are waiting to see whether the Federal Reserve is done with its period of aggressive interest rate hikes. If that happens, and if the economy avoids a recession, the outlook for investors will get much rosier, Sharga said.
“If the Fed settled down and we could just take the risk and volatility out of the market, we could see interest rates come down by a full point without anything else happening,” Sharga said. “That would make a material difference in the market.”
Inventory and home sales volume will likely remain low through the rest of the year, Sharga said.
But, he added, “It does look like prices may have bottomed out and are on their way back up.”
And the longer-term outlook supports more home-price growth moving forward, particularly if wage growth remains stronger than home-price appreciation.
“If mortgage rates came down even a little bit and home prices plateaued or started going up at 2-3 percent a year and wages grew at 5 percent a year, over the next few years affordability would feel a little better,” he said.
“You’d see more of these properties come to market, more buyers come to market.”
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