In the current financial environment, residential real estate investing continues to be a viable business, but the business has changed dramatically. There are more challenges and deals require different credentials and strategies compared to recent years of loose lending standards and appreciating prices. Private investment placement managers and established cash buyers are squeezing out the “mom and pop” investors because of lack of funding. .
The housing market, driven by Wall Street speculation and mortgage backed securities, peaked in 2005, softened in 2006, crashed 2007-2008 and is now bottoming in 2009 in many markets. Prices of houses and condos nationally have dropped significantly as has the number of homes being sold. The record number of foreclosures combined with a melt down in lending has created disastrous effects on the economy and changed the business models of most real estate professionals.
Like the businesses of real estate agency and mortgage brokerage, a cleansing of the real estate investment industry is occurring. The Fix and Flippers of the boom years, mostly people who used 100 percent mortgages to buy appreciating houses for quick resale and profits have disappeared in most markets. The real estate investors left over (the ones still in business) are well capitalized and using a buy and hold rental model. Many are turning to private equity instead of banks and credit unions.
One major exit strategy for investment companies now is to sell the properties to passive investors who are getting into real estate as an adjunct to their regular jobs. They are known in the business as “retail” investors. These types of investors can still secure financing on investment property, and the companies servicing them successfully are providing the closest thing to triple-net (NNN) investment that the housing business has (NNN is a commercial real estate investment type where the owner is not responsible for any of the maintenance or expenses of the income property). Pure passive investments in single-family were once difficult to find, but there are more service companies providing these opportunities than ever before. There is also more demand from investors as money pulled from the market sits idle and falling to inflation in zero to low interest accounts.
In addition to the turn-key investment business model for retail investors, high-quality rehab and resale to first-time home buyers will work in some markets. The first time home buyer market will be less affected because the buyers do not have any “baggage” – they don’t have to sell a property to upgrade. Also, the loan programs for this type of borrower are healthier than normal conforming loans.
For most of my real estate investment career, finding the deal was the difficult part of the business. Once you contracted a good deal, the capital was easy to find and it was relatively easy to sell. That has all changed now. There are properties at good values available everywhere from banks and motivated sellers, but the capital and sales are hard to come-by. Once again, we real estate professionals and investors must reinvent ourselves to adapt.
I like the quote from Warren Buffet, “Be greedy when others are fearful and fearful when others are greedy.” As difficult as it may be, I continue to recommend our clients invest in quality real estate now during the down cycle. Please let me know I can be of assistance to you in any way.
