It seems the golden days of real estate investors buying homes and flipping them around for a quick buck seem to be over.
In select US cities, investors have been forced to sell homes at a loss as higher home prices and higher mortgage rates reduce demand for homebuyers.
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Investors lost money on one in seven homes (13.5%) they sold in March, according to a new report from Redfin. By comparison, only 4.8% of all US homes sold in March sold at a loss.
It came after a tough month in February, when real estate investors lost money on 14.5% of homes sold – the highest rate since 2016 and a long stretch from a record monthly low of 2.8% in May 2022.
This dispels the myth that buying and selling real estate is an almost guaranteed money maker – but the stats are still firmly in investors’ favor.
Where are homes most likely to sell at a loss?
Real estate investors are likely to lose money in markets that have seen the biggest home price hikes during the pandemic, according to Redfin. The report analyzed data from 40 of the most populous metropolitan areas in the United States.
High mortgage rates eroded investors’ profits and dramatically increased the typical monthly payments for a home buyer. This has slowed home buying demand and pushed down sales prices, which means a higher share of investor-owned homes that are being sold at a loss.
In March, the hardest hit market was Phoenix, Arizona, where 30.7% of homes sold by investors lost money. It was followed by Las Vegas, Nevada (28%), Jacksonville, Florida (20.9%), Sacramento, California (20.2%), and Charlotte, North Carolina (17.4%).
“I recently offered a buyer a three-bedroom, single-family home in Glendale that was listed by an investor,” said Phoenix Agent Redfin Van Welborn. “My client eventually found another home that he liked more, and the investor ended up losing about $20,000.
The investor bought the house for $450,000 and sold it for $480,000, but invested $50,000 in the business. The house also sold for less than the $550,000 list price after being on the market for about four months.”
Meanwhile, investors are less likely to lose money in affordable areas where home prices haven’t gone up as high as they did during the pandemic, as are some South Florida markets.
In Virginia Beach, Va., only 1.7% of homes sold by investors in March were sold at a loss — a huge difference when compared to Phoenix. Willie Virginia Beach, West Palm Beach, Florida (2.4%), Miami (2.5%), Florida, Fort Lauderdale, Florida (2.5%), and Warren, Michigan (2.6%).
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Why do investors sell at a loss?
“You might be wondering why investors don’t just wait for the housing market to pick up again,” said Shahryar Bokhari, chief economist at Redfin. “Many long-term investors who rent out their properties do, but many flappers—especially those who have bought recently—can’t afford it.”
Home flippers — which Redfin defines as investors who buy and resell homes within nine months — sold nearly one in five homes at a loss in March, according to Redfin.
“Holding on to homes that don’t generate income can be expensive because the owner is tied to imposing property taxes, along with operating costs and monthly mortgage payments in some cases,” Bukhari added. “Many short-term investors also choose to go short because they know prices may have more room to run and want to cut their losses.”
While the number of investor-owned homes being sold at a loss is currently very high, it’s important to remember that many housing investors–be they large corporations or mom-and-pop investors–continue to make gains from buying and selling homes, even in cooling. housing markets.
In March, the typical investor sold a home for 45.9% ($145,714) more than the price he paid, according to Redfin. But those gains have narrowed from 55.3% ($173,458) a year ago, and the pandemic peak of 67.9% ($199,274) in June 2022.
Amid concerns that the economy and housing prices will slow further and cause more trouble for residential real estate investors, there are other ways you can get involved in the real estate market.
Other ways to invest in real estate
If buying and selling homes is out of the question (for now), you may want to consider investing in real estate in other ways.
Premium commercial real estate has been outperforming the S&P 500 for 25 years – and until recently, only the very wealthy with millions to invest could participate in the action. But new platforms have opened up opportunities like this for ordinary retail investors.
Another great way to profit from the real estate market is to invest in a Real Estate Investment Trust (REIT). REITs are public companies that own income-producing properties such as apartment buildings, shopping malls, and office towers. They collect rent from the tenants and pass this rent on to the shareholders in the form of regular dividend payments.
If you’re eager to plunge into real estate investing, you can find an option that best suits your needs by answering a few quick questions with Moneywise’s investment finder.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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