Investing in real estate on the rise
By Cezary Podkul,
Wayne Cummins’s stock portfolio took a huge hit during the financial crisis, so he has been hanging on to more cash than usual instead of investing it. But with the balance slowly building up and interest rates only going down, something had to change.
“I’m just looking for a better return . . . than .0003 percent on a savings account,” Cummins said. But he wasn’t yet ready to jump back into the stock market, which this week posted some of the worst returns since the financial crisis. And with gold near record highs and a U.S. credit downgrade still threatening the bond market, there seemed no safe place to go.
Except next door.
In July, the Arlington resident put some of that spare cash toward the purchase of a $490,000 townhouse across from his own. Now, he hopes to rent out the home and watch its value appreciate as the years pass.
With mortgage rates at their lowest level of the year and home affordability at a 40-year high, the idea of investing in real estate is appealing to a growing number of people. Investors have purchased about 20 percent of the existing homes sold this year, up from 17 percent last year and the highest level since 2008, according to the National Association of Realtors. While many are probably seasoned investors chasing after cheap foreclosures, some are people like Cummins who are dabbling in real estate because they think it makes good financial sense.
Chris Cormack, a Keller Williams real estate agent in Ashburn, said many of her clients have recently expressed interest in buying for investment purposes. “We’re seeing regular people, customers, saying, ‘I want to buy a townhouse,’ ” Cormack said. “And they’re not professional companies. They’re not looking to own 10. They just want one.”
Cummins certainly doesn’t consider himself a professional investor. He describes himself as a small-business owner who figured he had a good shot at finding reliable tenants and collecting a decent return on rental income. “The idea is to rent the thing out, take care of our tenants and they take care of us,” he said.
A recent survey by Fannie Mae suggests that Cummins is not alone. The poll found that Americans expect home rental prices to rise 3.9 percent on average over the next year, the highest level since the company started tracking the monthly data in June 2010. This phenomenon is already playing out in the Washington region. The latest inflation-adjusted census figures show that area rents soared to the highest level measured in at least 20 years, with rental prices surging 22 percent in 2009 from a decade earlier. The rates jumped in part because 10,000 single-family houses that were occupied by their owners two years ago are now rental properties; those houses tend to be larger and have higher rents than apartments.
Later in life, Cummins may consider selling the townhouse (hopefully at a huge profit) and using the cash to invest in more properties or to help pay for his three kids’ college tuition. If the kids, now in middle school and high school, choose to go to college locally, maybe he can rent the townhouse to them.
Buying a gold bar, he said, certainly doesn’t offer this array of options.
So far, Cummins has reason to expect that his home’s value will appreciate. The Washington area was not as badly hit by the foreclosure crisis as many other parts of the country, and therefore the region’s home values have held up relatively well. This region is the only one of the nation’s 20 major metropolitan areas to consistently post price gains this year, according to the closely-watched Standard & Poor’s Case-Shiller index.
Market experts credit the fundamentals to the region’s ample supply of jobs, which in turn fuels demand for homes. Government spending has kept those jobs going during the past few years, lessening the impact of the nation’s dismal unemployment trends and enabling people to buy homes, lock in low rates and have strong pricing power if they decided to rent them out.
This week, the average rate on a 30-year fixed rate mortgage dropped to 4.39 percent, the lowest level in more than eight months, according to Freddie Mac. The average for the 15-year fixed-rate loan fell to 3.54 percent — the lowest level since Freddie began tracking those rates in 1991.
“The investor picture is really phenomenal,” said John Heithaus, chief marketing officer of Metropolitan Regional Information Systems, the local multiple listing service. Heightened investor activity is one of the reasons area homes are getting snapped up more quickly, he said. The average time on market is 68 days, down 5 percent from a year ago.
Investors might be playing an even larger role in the market if not for the tough standards imposed on investment properties, said Frank Donnelly, a board member of the Mortgage Bankers Association of Metropolitan Washington.
It used to be that investors could put down 20 percent on a home they were buying, but lenders are more likely to require 25 percent these days, Donnelly said. Lenders are likely to tack on 1.25 percent to the closing costs for those with only a 20 percent down payment. Banks are also more conservative about counting rental income from an investment property when documenting a loan and more insistent that investors have at least six months’ worth of mortgage payments in reserve before they buy.
Cummins, who put down 25 percent when he bought the neighboring townhouse, said negotiating with the banks for a loan on that home was an “eye-opener.”
“I’m shaking my head at these guys, I’m going, ‘You guys really, really don’t want to loan money, do you?’ ” he said.
For those who don’t want to deal with banks, there are other, less labor-intensive ways to get exposure to the market. Stocks like real estate investment trusts buy properties, rent them out and pay dividends to their shareholders. And there are also real-estate focused exchange-traded funds, which track the performance of REITs and sell shares on major stock markets such as the New York Stock Exchange.
Of course, that strategy could prove risky given the stock market’s volatility, as witnessed this week.
But “REITs and ETFs are a good way to get exposure for people who don’t want to take on the responsibility of being a landlord,” said David Weliver, author of Money Under 30, a personal finance blog. “A lot of people who want to invest in real estate don’t realize it means waking up at 2 a.m. to fix a leaky toilet.’’
But REITs tend to focus on the commercial property sector, rather than the residential market, where investors sense the big opportunity. That may soon change: Greg Rand, chief executive of New York-based real estate advisory firm OwnAmerica, said the market will soon see the first generation of REITs focused on buying homes across America. He’s currently working with institutional investors and private equity firms to form such a REIT.
“The idea is that you have a sizable portfolio and are able to generate cash flow from rent and also cash flow from sales,” Rand said, adding that, due to its “blue-chip” status, Washington would probably form a part of such a portfolio.
That blue-chip status is convincing other investors to make creative bets on the District’s housing market. In July, Bob Pinkard, a 40-year veteran of the D.C. real estate industry, launched a new venture, Buchanan Pinkard Residential Development, to invest in residential land.
“What we’re doing is looking for land opportunities where we can get in and buy the land that’s master-planned for residential development and do all the entitlement work and sell lots,” Pinkard said. That means looking at communities outside the Capital Beltway, near major transportation hubs and highways that are poised to see their values soar as people move there.
He readily acknowledges that he may have to wait three to four years to find out whether his bet will pan out. But that doesn’t faze him.
“That’s the great thing about real estate,” he said. “You have certain theses, but you’re never 100 percent sure that you’re right.”