Hard Times Investing: Real Estate Double Dip Deters Buyers And Investors
Buy, hold and rent is new strategy
Cash is king for deals
Whether the housing market is in another free-fall or not, just the thought of a double dip is forcing real estate investors to re-think how and where they spend their money. And maybe even if they should spend it at all.
"The days of flipping real estate, commercial or otherwise are pretty much over," says Tom Casey, a certified financial planner at Casey, Thomas & Associates, who advises his clients on real estate. "There are very few hot markets for flipping with so many people unemployed and property values down. It's really a time for renting property, not trying to sell it for a profit."
What's forcing the shift to buy and rent is a depressed US housing market that can't recover its once sky-high values. From 1999 to 2006, housing prices doubled. But those days are gone and the doubling is now in the opposite direction.
"Housing is entering a double dip in prices," says Paul Dales, chief economist at the research group, Capital Economics. "They are headed down even more over the next 18 months by as much as 5 percent. Anyone looking for a short term gain by selling a property is heading for trouble."
That's not to say flipping isn't going on—it is. But fewer investors are taking the plunge, according to the National Association of Realtors (NAR). The group says that only 4 percent of transactions this summer were for homes owned less than a year.
One reason for that low figure—flipping a property now comes at a much higher cost to the investor than it did during the housing boom and with less of an immediate return.
"Flipping in 2010 means having to have much more cash on hand than in the recent past," says Greg McBride, chief economist at Bankrate.com."Before, you didn't have to put in capital to fix a place up. You could borrow all the money for the purchase and wait for the price to go up and sell. Now prices aren't really going up. You have to add value to the property, as they're not gaining it on their own."
So if buy, hold and rent is the advised strategy, does it provide a good return on investment? That depends. Both residential and commercial rents in many parts of the country, like California, remain low while New York City and sections of Florida are seeing slight increases in rental fees. Property prices across the country are still on a roller coaster ride as are vacancies.
So what it really comes down to are the expectations of the investor.
"Interest rates are so low that the bar is lowered for investors on what they want from rentals whether it's an apartment or second home," says Diane Saatchi, VP of Saunders and Associates Realty in New York. "If you are getting a 4 percent return on a rental property, you're still beating what a bank or even some other types of investments would return."
With sales of existing and hew home sales declining, due to falling prices and high unemployment, analysts say more people are turning to renting instead of buying and that's spurred investors.
"Housing prices have gotten so low that people have banded together to buy properties," says Marlene Graham is a real estate agent with Downing Frye Realty in Naples, Florida. "We have a group from England looking to buy foreclosures to rent them while waiting for appreciation. Investors are here in droves."
Banks Slowing Down Loan Process
Whether in droves or not, it's investors with cash that will close a deal, says Mark Goldman, professor of real estate at San Diego State University.
"It's brain numbing to close on a loan from bank," says Goldman, who invests in California real estate. "The hoops you have to go through these days. Lenders have increased requirements and restrictions on loans that almost make it impossible to get one. You're better off having cash to close a deal."
But even a lot of cash is not a guarantee in today's market, says Paul Sorbera, who has invested in commercial real estate for the past ten years.
"I offered a bank 72 percent of the $320,000 asking price on a property to take it off their hands," says Sorbera, who is president of Alliance Consulting, an executive search firm. "The property is still sitting there after two years. Banks don't want to take the loss and are taking their time when it comes to selling. I've been turned down on at least 10 properties I've bid on with cash."
Whatever the roadblocks, investors are still investing. The latest available figures show that fourteen percent of all real estate transactions in May were from investors, according to the NAR. The majority of those are distressed or undervalued properties that would still be sitting empty if not bought up by investors.
And as unfortunate as it is—depending on your point of view—there may be even more buying opportunities, both commercial and residential, if the expected increase of foreclosures enters the market in the months to come.
"It's a volatile market but there's no better time in the last ten years than right now to find deals," says Sorbera. "If you look and shop you can find opportunities and I think there will be more chances ahead."
But whether it's now are in the near future, investors are warned to have a good head and big wallet.
"Real estate investing is not a sport for amateurs these days," Diane Saatchi says. "It's hard to get financing, you have to look at whether renters can cover your mortgage if you're looking at a second home. You can't just quickly buy and sell a piece of property like in the past. As an investor, you need a lot of cash and even then you can't guarantee that you're going to get out what you put in."