No one can predict how the real estate market will evolve. From the 1990s through 2007, flipping houses was very profitable for many investors. Today the investment model has changed. Investors have been a large influence in the real estate market recovery. Over the past year, investors have heavy handily made between 20% and 23% of all house purchases. But the business model is no longer flipping houses.
Hedge Funds Now Dominate
Hedge funds have had a major impact on the real estate investment business. In times gone by, it has been individual investors that molded the real estate market. It was individual investors that bought four or five houses each year, rehabbed them, and flipped them for a 25% profit. It was a good business.
Hedge funds saw a huge opportunity in the foreclosure market. They started buying up foreclosures by the tens of thousands. Certainly, this helped stabilize the market but it was also a big factor in why home prices took off with gusto. Hedge funds have been bidding against each other. They have priced individual investors, that haven't switched to the new business model, out of the market.
The New Business Model
The hedge fund model is not flipping houses. There are multiple reasons for this. First and foremost, mortgages for Joe Average are almost nonexistent. People that have been foreclosed on are completely locked out of the market by their credit rating. First time buyers tended to be younger and lack an adequate credit history to qualify for a mortgage under the stringent rules that banks are applying. Additionally, young people no longer see owning a house as part of the American Dream after watching millions of people lose their home over the past six or seven years. The younger generation also prefers the freedom to relocate frequently that renting enables.
With major corporations (hedge funds) now firmly in control of the residential housing market, they are redesigning the investment business model. People can no longer buy a house so they must rent. That's the new business model - renting houses. As an individual investor, it would behoove you to follow the new business model and become a landlord instead of trying to flip houses.
It's always about local markets but in all major markets across the country, it's now less expensive to own a house than it is to rent. But with most of the population either locked out of purchasing or electing not to purchase, rents will continue rising for years to come. This makes the rental market attractive to investors.
Profitable Flipping is Years Away
Flipping houses may or may not come back. It's all about the economy. Unemployment is down but people have been forced into lower paying jobs than they previously had. That's going to keep them in rentals instead of homeownership. Even after a foreclosure has been erased from their credit history.
Beyond anything else, it's about the evolving market. Flipping houses had a relatively short history as an investment model. It very well may be a dead business model. It certainly is dead for now. As an individual investor, it's time to move on to the new business model of being a landlord and wait for the big payday when house prices take years, instead of months, to seriously appreciate in value.
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.