With house prices still at affordable prices and with signs the economy will sustain its recovery, more mom and pop investors are getting into the rental game for the first time. They are buying two or three rental houses that cash flow positive. These investors intend to bulk up retirement accounts that took a hit from the recession. In a few years, they expect to sell these houses for a nice profit.
However, according to data just released from Zillow, these investors face stiff competition from first time borrowers. Zillow reports that 4.2 million Americans see the real estate market as appealing for first time buyers. While the over all national spring inventory of residential properties is up 11.1% compared to a year ago, it has declined in 19 of the 20 largest metropolitan areas. That is creating vey different markets depending on location.
Besides the affordability of purchasing homes, what is attracting new investors and first time buyers into the market are the steadily increasing rents. Strong rent growth is happening in both the single-family market and the multifamily apartment market. Average U.S. rents are predicted to continue increasing about 4% annually for years to come although the inflation rate currently stands at 2.9%.
The market is particularly ripe for smaller investors to invest retirement funds through one of the many versions of self-directed retirement accounts. These accounts allow investors to directly purchase a rental house using their retirement funds. This works well in today's market where financing is difficult to obtain.
The monthly rent is then directly deposited, tax free, back into the retirement account. When the house is sold, all of the proceeds are also returned to the retirement account. All rents and profits remain tax free in the account until the owner begins making withdrawals after becoming at least 59-1/2 years old. Typically at a lower tax rate.
Another major competitor small investors are competing with are the institutional investors. By some estimates, institutional investors such as Blackstone Group, Colony Capital, and Starwood Property Trust have bought up to as much as $25 billion in residential homes. Mostly in the foreclosure and short sale markets since 2012.
Blackstone (the most active of the hedge funds) alone has bought more than 366,200 houses since 2011. All are being turned into rentals to take advantage of the highly inflationary rental market. These institutional investors have had a profound effect on increasing home values by paying as much as 25% more than small investors are offering for foreclosures. They are also now in full control of the rental markets in several major cities. This is leaving smaller investors in search of reasonably priced investment properties. Once again, the big guys clobber the little guys, both small investors and renters.
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Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.