Whether it makes sense to flip or hold property depends entirely on your region.
There is plenty of positive news for real estate investors to look forward to in 2015.
Wild fluctuations in the nation’s real estate
cycle have
taken investors on a roller coaster ride since the early part of this
century. From the first decade, marked by overheated home prices in many
of the nation’s
most popular metropolitan areas, to the post-Great Recession era sending
home values
into a free fall, investors have had to adjust and adapt their
investment strategies
to market conditions.
So, going forward, which are the best strategies to pursue for real
estate investors next year?
The big picture for 2015. Looking at the nation’s housing and economic indicators,
there is plenty of positive news to justify continued investor optimism in
2015. Home sales – both existing and new – are projected to
increase next year, which is welcome news for fix-and-flip investors.
At
the 2014 Realtors Conference & Expo, Lawrence Yun, chief economist
for the
National Association of Realtors, or NAR, predicted a rebound for
existing home
sales for the next two years, and he projects the national median
existing-home price will rise at a moderate
4 percent in each of those years. On the new home front, David Crowe,
chief economist for the
National Association of Home Builders, forecasted in an Oct. 31,
2014 National Association of Home Builders webinar that multi-family
housing starts were projected to increase 15 percent in the rest of 2014
and hold steady in 2015.
“Multi-family housing starts have rebounded back to normal
since the downturn, mostly due to the strong demand for renting,” says
NAR’s Yun,
who also notes that renter households have increased by 4 million since
2010, while homeowner households have decreased by 1 million.
Two major concerns remain: tight lending standards, which
continue to keep people who could otherwise afford to buy a home from
qualifying for a loan to finance the purchase, and interest rates, which are
expected to hit at least 5 percent by year-end.
Looking at
the numbers. Daren Blomquist, vice president at RealtyTrac, says he believes 2015
is going to be a better year for buy-and-hold investors than for flippers –
with the caveat that real estate values vary from area to area and property to
property, so investment strategies will have to adjust accordingly.
According to RealtyTrac’s
numbers, the volume of properties being flipped declined dramatically, down
from their most recent peak of 8.8 percent of all single-family home sales in
the second quarter of 2012, to 4 percent of all home sales in the third quarter
of this year.
“As home-price
appreciation slowed down, the flippers have become less active in this market
as well,” Blomquist explains. “The interesting thing is that the volume of
flipping is going down, but the average profit on a flip is staying very
strong. The gross profit has stayed strong for the past three years in the 30
percent range.”
For buy-and-hold
investors, rental properties did well in 2014, although gross rental return was
down slightly in the 586 counties surveyed by RealtyTrac, compared to 2013.
“This year was not as good
for buying rentals as last year. Last year, we had a 10 percent return because
home prices went up, even though rents went up. Returns have slipped a bit
because the cost of acquisition went up,” he says.
Still, Blomquist says he believes it
is a good time to buy rental properties, because the dynamics of this market are right.
“We will see it flatten
out because home prices are starting to flatten out as well. That will allow
rents to catch up with home prices, which is good for buy-and-hold investors,
but not as good for the flipper,” Blomquist says.
The local perspective. To best-selling real
estate author, attorney and longtime investor William Bronchick, 2015 is going
to be a good year in the Denver market for owning rental properties, but not as
good for flippers.
“It’s great market for
rentals, because people still can’t get loans and there’s so many renters. The
lending market is tight, so there are more renters, so higher rental rates and
lower vacancies make for a great rental market,” Bronchick says. “On other
hand, inventory is low, so if you can get your hands on a good motivated
property, then you’re good for a flip.”
Working in North Carolina and South Carolina, investor
and trainer Larry Goins, says current market conditions in these states are good for both
flippers and rental property owners.
“There are deals to be
had, but you have to work harder to get them,” Goins says. “I like to buy
lower-priced houses and rent them or do lease options or seller financing.”
Specializing in the
Atlanta market for decades, Andy Heller, a real estate investor and trainer on these topics, says that
since the market crash, a buy-and-hold strategy has made more sense, because
investors could buy property very inexpensively.
“Most of the country has
settled into a more normal appreciation especially in the last six months or
so,” Heller says. “Allowing for the fact that we’re in a time of normal
appreciation, what strategy is the best? Both. We don’t have an overheated market
and we don’t have a collapsing market.”
In the Greater Phoenix
area, supply and demand economics will dictate the right investment strategy in
2015.
“The Greater Phoenix
market has been in low supply and low demand for 15 months now,” says
Alan
Langston, executive director of the Arizona Real Estate Investors
Association or AZREIA. “We’re not sure that’s going to change anytime
soon. Our market’s
been stagnant for a long time, but that doesn’t mean real estate
investing has
been bad. It’s been different.”
Langston believes
investors will continue to be successful, they are whether rehabbing and flipping
houses, or holding onto rentals - but they will have to approach the business differently
than they used to.
“If you know what you’re
doing as a real estate investor, you’re going to adjust what you need to adjust
so you do well on your property,” Langston says. “If you’re an informed
investor, you’re going to be fine,” he says.
Investor activity varies by investor, region and property types. Auction.com,
the
largest online real estate marketplace, recently released survey data
collected from investors bidding on properties across the country, which
confirmed that buying property to hold and rent is currently favored
over flipping
nationwide. However, investor intent varies considerably between online
and offline
investors, regions, and property prices.
The study showed that purchasing
property to rent is more prevalent in the Midwest and South, whereas
there
appears to be a higher propensity for flipping in the Northeast. The
flip versus rent split is nearly even in the West, with a very slight
preference toward
renting.
“Real
estate investors appear more likely to flip a property in those regions where
home values are higher,” says Auction.com Executive Vice President Rick Sharga.
“Higher prices can translate to a faster and potentially more significant
short-term return on investment. The hold-and-rent strategy seems most popular
in markets where home prices are lower, allowing investors to charge a more
competitive monthly rental rate and still produce reasonable returns over an
extended period of time."
