Mom-and-pop investors have had the upper hand this year, with their share of purchases reaching an 11-year high, according to a Realtor.com report on Wednesday.
Investors with portfolios of 10 properties or less accounted for 66.2 percent of all investor purchases during the first and second quarters, with the majority of their activity concentrated in the relatively affordable Sunbelt and Midwestern markets. The typical small investor bought at a median price of $295,000, potentially reflecting competition with entry-level individual homebuyers who can’t make all-cash offers at the same rate (56.1 percent).
Realtor.com said small investors have always done the lion’s share of deals, but the increase in their purchase share shows the turning of the tide for mega investors who rode the wave of strong rent growth in 2020 and 2021. During those two years, mega investors accounted for 18 percent of all investor purchases and 2 percent of all U.S. purchases — now they account for only 5.7 percent of all investor purchases and 0.6 percent of all home purchases.
Although small investors are outperforming their larger counterparts, overall investment activity is still on the decline, with their share of the overall market declining 0.3 percent year over year to 10.7 percent. There are a handful of markets — Memphis, St. Louis, Kansas City, Wichita and Toledo — where investors are punching above their weight and account for nearly one-fifth of overall buyer activity.
Hannah Jones
Realtor.com Senior Economist Hannah Jones said inventory and softening prices have served as crucial tailwinds for investors. Meanwhile, the 21st Century ROAD to Housing Act has served as a source of uncertainty, given its purchasing ban on investors who own more than 350 homes. That legislative headwind has eased since July, the report said, as investors adjust their strategies.
“Cash still sets investor purchases apart, even though its use has eased from recent highs,” she said in the report. “That’s one sign the market has moved away from its pandemic-era intensity, even as investors remain an important part of home buying. Investor activity reflects local market conditions. Affordability supports activity in the Midwest, while available inventory and softer prices create opportunities in parts of the Sun Belt.”
Though Realtor.com’s report paints a relatively rosy picture for smaller investors, iQRATE Mortgages broker-owner David V. Ghazaryan told Inman that the reality is much more nuanced. Ghazaryan said his home turf, Las Vegas, has been a bit of a mixed bag lately, forcing investors to pay more upfront to make the math work.
David Ghazaryan
“First, as a loan officer, if it’s a cash buyer, I never get to see that person,” he said. “Now, my experience with the guy who wants to finance a property for renting purposes, and I’m not talking about an Airbnb or anything like that, the rent is quite low. In the past, you would need a 20 to 25 percent down payment, and the rent would at least break you even on your mortgage.”
“Now, just to break even on your mortgage with today’s interest rates, the down payment needs to be around 35 percent,” he added. “That’s been the case for the past two or three years, and I am not observing many investors who find that amount of down payment attractive.”
Ghazaryan said the main challenge with investors, or buyers of any kind, is adjusting their expectations. Often, he said, they use past experiences as a guidepost rather than focusing on current affordability and pricing trends.
“Everything has gone up,” he said. “We’re aware of that, but when you gauge the price of real estate, you have to take the current market and look at different areas instead of the past. The past is not coming back, so it really comes down to affordability today.”
Despite the challenges, Ghazaryan said investors still have myriad options at their disposal.
Instead of applying for a 30-year fixed-rate mortgage, some investors are choosing Debt Service Coverage Ratio (DSCR) loans, which let them qualify for a rental property based on its cash flow rather than personal income, W-2s or tax returns.
When it comes to renting their properties, some investors rent by the room, which can mitigate vacancy risk and increase monthly income by as much as 40 percent. However, investors must research the legal and regulatory considerations, which vary from city to city.
“What I’m seeing is investors, builders and contractors that are developing properties where they can rent them by the room,” he said. “This is a big trend because we’re getting inquiries from many states, from Florida, from Texas and here in Nevada. I am working with a builder right now in the Houston area that’s developing a bunch of these and putting them on PadSplit.”
“For the investor, it is way more attractive to buy a house and rent it by the room. They put a lock on each room to secure it, and it increases the return,” he added. “This just tells you where real estate is headed. It’s low affordability, and for that reason, the investors — those that can afford to develop these things — are trying to come up with more affordable solutions.”
