Why are half of real estate investors bailing?

Why are half of real estate investors bailing?
Hey gang, so Redfin just reported an Investor Housing Crash.... 
 

 
Many major markets across the country have seen massive drops in investor purchases year over year, and Portland is on that list.

Here's a small sampling:

Atlanta, GA down 66%
Phoenix, AZ down 64%
Las Vegas, NV down 60%
Orlando, FL down 55%
Denver, CO down 50%
Sacramento, CA down 50%
Portland, OR down 45%

 

So what does that mean and why should I care?

Well during the crazy buying frenzy of the last near decade, investors were purchasing more and more properties. 

In the beginning of the pandemic, Investors bought nearly a third of all homes in Texas, and that trend was similar across much of the rest of the country. 

Then why has investor purchases dropped so significantly and what impact will that have on the residential real estate market?

 

Many investors buy based on something called a 'Cap Rate'. A cap rate is basically a rate of return for a real estate investment. Almost all commercial real estate is valued based on cap rate. 

The formula for a cap rate is simple: take the annual NOI (net operating income) divided by the market value of the property.

For example, a property worth $10 million generating $500,000 of NOI would have a cap rate of 5%

The lower the cap rate the less profit you make on a year over year basis, the higher the cap rate the more profitable it is. 

If the cap rate on a property is higher than the mortgage rate, it's basically free money for investors: borrow money at a low interest rate, buy real estate with it, and cash flow the difference. 

But money isn't everything.... right?

 

Well it's what drives investor activity.

So what happened is last year the cap rate has been trending down (investors were paying more and more for properties) and the mortgage rate trended up.

Last April those two converged and since then the mortgage rate has far exceeded the cap rates:

 

Bank Certificate of Deposits (CDs) and Treasury Bills (T-Bills) have been paying higher and higher dividends to the point that it's more profitable for investors to buy those and have true passive income, then to buy real estate where a tenant might stop paying or a roof may need replaced.

So why should I care?

The last vestige that's propping up this market and delaying the impending crash is the tight inventory. Homeowners who have 2 and 3% interest rate loans looking at buying properties with a 7% rate is demotivating, so they're not selling.

And against all odds the labor market is outpacing expectations and banks continue to postpone initiating foreclosures, so with no properties being forced on the market the inventory remains tight.

But with investor inventory so high, if they start to sell it could begin the massive flood that tanks prices.

 

Rest assured, I'm keeping a close eye on the data and will continue to report the results to ensure you stay informed. But let's take it a step further. If you or anyone you know has questions about real estate or specific plans in mind, don't hesitate to reach out. I'm here to provide expert guidance tailored to your needs.

The real estate market moves slow. People who remember the last big crash sometimes think it happened suddenly, but the reality is it took nearly 5 years to hit the bottom:

 

We're already seeing several leading indicators that are outpacing what we saw during that crash. As soon as inventory ticks up the you-know-what-is-gonna-hit-the-you-know-what...

that's all for now folks!

my promise to you each and every week is to act as your personal assistant and help you und erstand what's happening in the world of real estate.

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