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Jan. 1, 2015 | 9:00 a.m. EST
Whether it makes sense to flip or hold property depends entirely on your region.
Wild fluctuations in the nation’s real estate cycle have taken investors on a roller coaster ride since the early part of this century. From the first decade, marked by overheated home prices in many of the nation’s most popular metropolitan areas, to the post-Great Recession era sending home values into a free fall, investors have had to adjust and adapt their investment strategies to market conditions.
So, going forward, which are the best strategies to pursue for real estate investors next year?
The big picture for 2015. Looking at the nation’s housing and economic indicators, there is plenty of positive news to justify continued investor optimism in 2015. Home sales – both existing and new – are projected to increase next year, which is welcome news for fix-and-flip investors.
At the 2014 Realtors Conference & Expo, Lawrence Yun, chief economist for the National Association of Realtors, or NAR, predicted a rebound for existing home sales for the next two years, and he projects the national median existing-home price will rise at a moderate 4 percent in each of those years. On the new home front, David Crowe, chief economist for the National Association of Home Builders, forecasted in an Oct. 31, 2014 National Association of Home Builders webinar that multi-family housing starts were projected to increase 15 percent in the rest of 2014 and hold steady in 2015.
“Multi-family housing starts have rebounded back to normal since the downturn, mostly due to the strong demand for renting,” says NAR’s Yun, who also notes that renter households have increased by 4 million since 2010, while homeowner households have decreased by 1 million.
Two major concerns remain: tight lending standards, which continue to keep people who could otherwise afford to buy a home from qualifying for a loan to finance the purchase, and interest rates, which are expected to hit at least 5 percent by year-end.
Looking at the numbers. Daren Blomquist, vice president at RealtyTrac, says he believes 2015 is going to be a better year for buy-and-hold investors than for flippers – with the caveat that real estate values vary from area to area and property to property, so investment strategies will have to adjust accordingly.
According to RealtyTrac’s numbers, the volume of properties being flipped declined dramatically, down from their most recent peak of 8.8 percent of all single-family home sales in the second quarter of 2012, to 4 percent of all home sales in the third quarter of this year.
“As home-price appreciation slowed down, the flippers have become less active in this market as well,” Blomquist explains. “The interesting thing is that the volume of flipping is going down, but the average profit on a flip is staying very strong. The gross profit has stayed strong for the past three years in the 30 percent range.”
For buy-and-hold investors, rental properties did well in 2014, although gross rental return was down slightly in the 586 counties surveyed by RealtyTrac, compared to 2013.
“This year was not as good for buying rentals as last year. Last year, we had a 10 percent return because home prices went up, even though rents went up. Returns have slipped a bit because the cost of acquisition went up,” he says.
Still, Blomquist says he believes it is a good time to buy rental properties, because the dynamics of this market are right.
“We will see it flatten out because home prices are starting to flatten out as well. That will allow rents to catch up with home prices, which is good for buy-and-hold investors, but not as good for the flipper,” Blomquist says.
The local perspective. To best-selling real estate author, attorney and longtime investor William Bronchick, 2015 is going to be a good year in the Denver market for owning rental properties, but not as good for flippers.
“It’s great market for rentals, because people still can’t get loans and there’s so many renters. The lending market is tight, so there are more renters, so higher rental rates and lower vacancies make for a great rental market,” Bronchick says. “On other hand, inventory is low, so if you can get your hands on a good motivated property, then you’re good for a flip.”
Working in North Carolina and South Carolina, investor and trainer Larry Goins, says current market conditions in these states are good for both flippers and rental property owners.
“There are deals to be had, but you have to work harder to get them,” Goins says. “I like to buy lower-priced houses and rent them or do lease options or seller financing.”
Specializing in the Atlanta market for decades, Andy Heller, a real estate investor and trainer on these topics, says that since the market crash, a buy-and-hold strategy has made more sense, because investors could buy property very inexpensively.
“Most of the country has settled into a more normal appreciation especially in the last six months or so,” Heller says. “Allowing for the fact that we’re in a time of normal appreciation, what strategy is the best? Both. We don’t have an overheated market and we don’t have a collapsing market.”
In the Greater Phoenix area, supply and demand economics will dictate the right investment strategy in 2015.
“The Greater Phoenix market has been in low supply and low demand for 15 months now,” says Alan Langston, executive director of the Arizona Real Estate Investors Association or AZREIA. “We’re not sure that’s going to change anytime soon. Our market’s been stagnant for a long time, but that doesn’t mean real estate investing has been bad. It’s been different.”
Langston believes investors will continue to be successful, they are whether rehabbing and flipping houses, or holding onto rentals – but they will have to approach the business differently than they used to.
“If you know what you’re doing as a real estate investor, you’re going to adjust what you need to adjust so you do well on your property,” Langston says. “If you’re an informed investor, you’re going to be fine,” he says.
Investor activity varies by investor, region and property types. Auction.com, the largest online real estate marketplace, recently released survey data collected from investors bidding on properties across the country, which confirmed that buying property to hold and rent is currently favored over flipping nationwide. However, investor intent varies considerably between online and offline investors, regions, and property prices.
The study showed that purchasing property to rent is more prevalent in the Midwest and South, whereas there appears to be a higher propensity for flipping in the Northeast. The flip versus rent split is nearly even in the West, with a very slight preference toward renting.
“Real estate investors appear more likely to flip a property in those regions where home values are higher,” says Auction.com Executive Vice President Rick Sharga. “Higher prices can translate to a faster and potentially more significant short-term return on investment. The hold-and-rent strategy seems most popular in markets where home prices are lower, allowing investors to charge a more competitive monthly rental rate and still produce reasonable returns over an extended period of time.”
Joel Cone is a southern California-based freelance business writer who specializes in the fields of real estate, economics and law. His articles have appeared both in print and online for many publications including California Real Estate, OC Metro, GlobeSt.com and The Los Angeles Daily Journal. He is also a contributor to Auction.com.
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