Single Family Home Investors: What’s Driving Them?

Why are ordinary Americans jumping back into the real estate investment market so readily. One would think the sector would be avoided like the plague but it appears as if single family homes as investment vehicles may be more popular than ever.

Mind you, it’s hard to get reliable data on how many single family homes have been bought by investors as opposed to owner-occupants but anecdotal evidence as well as some articles I’ve happened upon indicate that investor participation is at lease equal to the level of the bubble years and in some parts of the country might well exceed the previous high water marks.

I can only come up with guesses as to what’s driving these people. Here they are:

  1. I call this the hope springs eternal motivation. These investors are “true believers” who think that once supply and demand evens out we will see significant price appreciation. They are the ones who always said you can’t lose money in real estate and despite all the evidence we now have to disprove that old saw, they hew to it.
  2. In the other corner are the realists. They believe that real estate appreciates slowly but that it does appreciate. By their logic, now is the time to buy because the downside is close to zero. If they’re buying at auctions with good due diligence they might be right, at least as far as the downside is concerned.
  3. Next up are the cash flow seekers. They might be the most rational of the pack. From their viewpoint, single family homes are priced to be able to deliver predictable cash returns. The cash-on-cash return might not knock your socks off but they’ve discovered the virtues of conservatism.
  4. Finally, you have the hopeful. They might fit into any of the above categories but they’re driven by dreams of the S&L crisis. They still regret not having invested in real estate in those days and are not about to let this “opportunity” pass them by. Normally, they remember that many made beautiful returns with property that they bought from the RTC but forget that most of those returns came from commercial real estate not residential and that it took almost a decade for the real payday to come around.

Now, I don’t want to rule out good old-fashioned salesmanship on the part of the realtor profession in enticing many of these buyers, but I doubt that works well without at least some of the motivations I outlined being present.

There is a fair chance that this will work out for a lot of these buyers. So long as they buy at the end of the market that’s been the most beaten up it’s fairly likely that they won’t suffer much if any loss of principal and to the extent they avoid excessive leverage — most seem so far to be doing so — then the likelihood of positive cash flow is pretty good. All things considered, that amounts to a reasonable investment in this environment.

As I reread this post it really seems as if I’m trying to make a case for investing in single family homes. I didn’t start out with that intent but it sure looks like that is where I ended up. Help me out and tell me what I’ve missed. Here’s one I thought of — once the market normalizes there is going to be a surplus of rental units as those who were forced into rental housing by foreclosure regain their footing and buy back into the market.  That’s weak but so far the best I can come up with.

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