According to a report in CNN Money, prices of homes sold in auctions rose faster than rents last year so investors are finding it harder to make money out of buying up foreclosures and renting them out. A report from CoreLogic shows returns on investments have fallen, something that’s quite different compared to the past few years.
Over the past few years the number of mortgage defaults rose sharply after the housing crash in numerous cities. This meant investors were able to buy foreclosure homes at incredibly low prices, enabling them to make huge returns on rental profits. Investors are still able to do this in certain areas and turn a profit, but it is not as easy as it was.
According to Realty Trac, auctions have become increasingly competitive so it’s no longer so easy to gain deep discounts on foreclosure properties, decreasing their appeal to investors. The report from CoreLogic shows returns on investments dropped in eight out of ten top buy to rent cities. Tampa was the top rated city in 2012, giving yields of 10.5%, but last year the yields declined to 9.7%, something that’s due to large numbers of institutional investors who have large budgets to spend at foreclosure auctions in Tampa. CoreLogic rated Chicago as being the top market for investors last year, but in 2012 the yield was 10.4%, dropping to 9.9% in 2013. The yield is calculated by dividing rental profits by the amount spent to purchase and renovate the property. Yields in Orlando dropped from 10.3% to 9.4% and in Atlanta from 10.2% to 9.3%. Just two cities out of CoreLogic’s top ten showed rental yield gains. In Charlotte yields went up from 7.8% to 7.9%, and in Houston yields increased from 8.5% to 8.8%.
Nowadays homes sold in foreclosure auctions tend to go for just 4% less than regular homes, compared to a difference of 16% in 2012. In general property prices increased considerably last year by nearly 14% annually to the year ending October. In comparison rents have lagged behind, increasing by an average of just 2.2% during the first nine months of last year compared to the first nine months in 2012. With foreclosures showing a decline in profits investors are likely to continue to cut back on purchases. In a foreclosure auction in Las Vegas that took place in October last year there were just 208 properties sold to third-party purchasers, the first time in six years that any month had shown fewer than 300 of these types of sales.