“Vulture” Investors Find a New Prey: Rentalsby Tim Manni
Any seasoned investor gauges the current state of the market(s) they are in and makes the necessary adjustments to stay at the head of the pack. Real estate investors are no different.
A novice real estate investor would look at the current state of the housing market and say, “Since prices are cheap, I’ll buy a house and sell it as soon as prices increase enough for me to make a reasonable profit.” Even some house flippers are saying to themselves, “I’ll continue to flip, but my profits aren’t going to be as high as they used to be. I’ll just have to work a little harder.”
On the flip side, the real estate investors who really know the pulse and the behaviors of the current market — beyond cheap prices, tight credit and low rates – realize that it’s time to change focus. Goodbye short-term perspective, hello long-term.
Say hello to the “vultures.” The vultures are the real estate investors that pick on the scraps of dying housing markets, where foreclosures are rampant and prices are at rock-bottom levels. A few years back, these same vultures were flipping and selling housing quickly for a hefty profit. Yet today, the vultures are still buying “distressed properties,” but they’re holding on to them for a lot longer than they used to. Many vultures are going from buyer and seller, to buyer and landlord:
In the boom years, they would buy a property and flip it for a quick cash out. Today, they are holding and renting for hefty, steady incomes.
“People are not in it to flip like back in the old economy,” said Matt Martinez, an investor and author. “The new economy dictates that you have to have a long time horizon.”
[Investor Tanya] Marchiol, for example, does not even factor in home price appreciation for at least a year. After that, she calculates only a 3% annual increase — a return that won’t turn heads of investors who only want to buy low and sell high.
Marchiol projects [some of her] apartments will rent for $600 a month each, for a total rent roll of $2,400. That gives the owners a profit of $1,100 per month and $13,200 per year — a nearly 70% annual return on investment
There are several factors presently occurring in this country’s real estate market that back up this long-term, renting strategy:
1. Home prices aren’t rising: The golden ticket in the hand of house flippers during the boom was ever-rising home prices. It was all buy cheap sell high. Today, that would translate to, buy cheap, and sell not as cheap.
2. New wave of renters: Foreclosed borrowers have to wait years before they can buy again. In markets like Phoenix where the foreclosure rate is high, former borrowers looking to rent are perfect for investors who just purchased rental properties for pennies on the dollar.
3. Short sales: “The banks make better profits with short sales, so they’re not foreclosing,” [real estate investor Glenn] Plantone said. Marchiol also mentions the fact that “amateurs” have swooped in on the foreclosure market, causing sale prices to rise. ”Foreclosure auctions are no longer a fertile hunting ground for Marchiol,” writes CNNMoney’s Les Christie.
There has been quite a bit of discussion lately over whether Americans are better off as renters or owners. We tackled the subject in a post titled “Is the American Dream Turning Into the American Nightmare?” Whether Americans are better off renting or owning, you can bet real estate investors will be right there along for the ride, no matter which.