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Posted at 05:30 AM ET, 06/27/2012

Investors are putting cash to work in residential real estate

In the past few years, real estate has increasingly become an investment option that’s difficult to ignore. With moderated pricing and historic financing conditions, the costs associated with acquiring investment properties are within reach of more consumers today than at any point in recent history.

At the same time, rental rates are increasing and vacancy rates are dropping, sparked by the additional demand that comes with declines in homeownership. More renters in the market make the potential return on investment properties even more enticing.

The result is that investment property purchases surged more than 64 percent from 2010 to 2011, according to the National Association of Realtors. In fact, more than one quarter of all residential real estate transactions in 2011 were investment-related sales, NAR reports.
2012 investment and vacation home buyers survey (National Association of Realtors)

“During the past year, investors have been swooping into the market to take advantage of bargain home prices,” NAR chief economist Lawrence Yun said. “Rising rental income easily beat cash sitting in banks as an added inducement. In addition, 41 percent of investment buyers purchased more than one property.”

NAR also reports that nearly half of all real estate investors are paying for their properties with cash. Paying with cash makes it easier for investors to take advantage of discounted distressed assets in the marketplace since they avoid the time and complexity that mortgage financing can entail.

For those who do opt to mortgage their investment purchases, the median down payment was sizeable, NAR reports — 27 percent of the purchase price.

“Clearly, we’re looking at investors with financial resources who see real estate as a good investment and who aren’t hesitant to use cash,” Yun said.

Long & Foster’s property management division reports that investors aren’t necessarily targeting the least expensive homes as investments — they’re looking for appealing homes in good locations so they can attract responsible tenants who may be interested in longer-term leases.

In markets like Washington and other metropolitan areas, tenants in the upper-end of rental properties can include government workers, doctors who come to the region to complete residencies, CEOs pegged to lead companies through transition and embassy officials. With desirable rental properties and a professional partner to help them maximize their investment, local landlords are experiencing returns that wouldn’t have been possible without today’s market conditions.

The housing downturn left many homeowners underwater on their mortgages and, thus, tied their hands in terms of making a housing-related change. Still, people moved for job transfers and other personal reasons, regardless of how much they owed on heir mortgages. In this vein, the “accidental landlord” phenomenon sprang up in the housing market in the last few years.

Many people in this situation retained their underwater property (a property in which

the mortgage is greater than the market value) and rented it out, enabling them to perhaps rent or buy a different primary residence for their own use.

While individual investors are entering the rental property market in record numbers, we’re also seeing significant investment from real estate fund managers. These big players aim to buy hundreds of rental properties all at once to balance an investment portfolio on behalf of their investors. These larger purchases of investment homes, particularly involving distressed properties, not only serve the increasing demand in the rental market, but also help the market clear out the distressed properties in the queue that continue to affect average sales price in a market.

Flipping homes quickly — buying homes at a discount, perhaps doing some renovation work, and then putting them back on the market to sell at a higher price — is a trend of the past, it seems, as many investors have taken a longer-term outlook on owning their properties. NAR notes that the typical investment buyer plans to own their properties for at least five years, a statistic we are seeing play out among our clients at Long & Foster. Investors we work with have found that the pricing and financing conditions they’re experiencing today will deliver significant returns over time so their investment horizons are longer than the “flipping” conditions of past markets.

 

This blog post has been adapted from an article on Long & Foster’s Web site with the author’s permission.

Jeffrey S. Detwiler is president and chief operating officer of the Long & Foster Companies, the parent company of Long & Foster Real Estate.

By Jeffrey S. Detwiler  |  05:30 AM ET, 06/27/2012

 
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