Are you as smart as a private equity firm?

Castles in the Sand

The phrase, “follow the money,” goes back to the Watergate era as a method to shed light on corrupt activities by looking at money transfers. But following the money does not always lead to corruption. It could lead to some really good business advice.

Last week we reported the May real estate sales statistics in both Manatee and Sarasota counties being up substantially to the point of registering the highest numbers post-recession. Manatee County’s median single-family home sale prices were up 4.9% from last year continuing the $300,000 or above median sales price for most of the past year and a half. How much of this increase in selling price is fueled by investors, we have no sure way of knowing. What we do know is investors are totally into the U.S. real estate market.

Based on data released by CoreLogic, Inc., last month more than 11% of U.S. home purchases in 2018 were made by investors. This is a record high of investors, the highest recorded and nearly twice the levels before the 2008 housing crash. Investors are purchasing to flip properties or turn them into single-family rentals. The investor profile is everything from big private-equity firms to real estate speculators and individuals who want to get in on the action.

Investors swooped into the housing market in 2011 and 2012, buying with all cash when prices were low and mortgage credit was difficult to get for the average buyer. Economists gave them credit for helping to stabilize the market but expected the investors to slow down when prices started climbing after everything returned to normal. However, that hasn’t happened, partly because of strong rental demand.

Unfortunately, much of the rental demand is coming from first-time buyers, specifically millennials who are competing with investors that are buying up the low end of the real estate market with all cash transactions. According to the CoreLogic survey, investors purchased one in five homes in the bottom third price range in 2018, exactly where first-time buyers generally start at.

Complicating things further for first-time buyers is technology. The internet has made it easier for smaller investors and foreign buyers to purchase properties sight unseen. A few weeks ago, I talked about iBuyer companies, such as Opendoor, Zillow and Redfin that offer cash to homeowners who want a quick deal, avoiding the stress of putting their homes on the market.

These properties are either flipped or sold to investors for potential rentals. CoreLogic further reported that investors bought about half of the starter homes in Philadelphia last year and about 40% of the lower end of the market in Detroit. Again, first-time buyers are being run over by cash investors and technology.

Investors are also banking on renting vs. buying being a double-edged sword. Owning their home has always been the goal of Americans and many feel that renting is inherently wrong and a waste of money. Now, however, first-time buyers are rethinking that calculation. Mobility for job advancement is important to millennials who understand that about five years is the break-even point between owning and renting and may opt to rent until their careers are stabilized.

Renting instead of buying is a conversation that doesn’t make me happy. I still believe that owning your own home has more benefits than renting and should not be entirely a business decision. My opinion – follow the money straight to your new home.

More Castles in the Sand:

Real independence

The buyer’s best buddy

Real estate selling for the smartphone generation