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According to government-backed housing lender Freddie Mac, there are currently 30 renter households for each house for sale. For real estate investors, the message is clear: There has never been a better time to own income-producing property.
These striking numbers are due to a lack of inventory. The demand for rentals has been ticking up since 2006 when there were only 10 renters per house. However, the 2008 recession caused homebuilders to slow down and banks to tighten lending requirements, thus decreasing the supply of available homes.
The low level of inventory has caused house prices to increase, making Freddie Mac’s help in assisting first-time homebuyers get mortgages invaluable. According to its report, in the second quarter of 2024, the government-sponsored enterprise (GSE) financed approximately 200,000 primary home purchases, 53% of which were for first-time homebuyers. The GSE also launched a platform to help potential buyers work with their lenders to find down payment assistance programs.
However, investors are also competing for these homes, and in the case of all-cash buyers looking to park money while enjoying cash flow and appreciation and waiting to refinance when rates drop, the squeeze has made affordability a major issue in an overly competitive market.
“Less affordable housing is acutely felt by those seeking to buy their first homes, especially those without substantial wealth at their disposal,” the Freddie Mac report states.
Increased Equity Means More Homeowners Have Cash to Invest or Renovate
The upside of decreased inventory and high prices means that those who own a home are sitting on a lot of equity that can be deployed into investments—assuming they can find deals that make sense. Alternatively, investing in home improvements that help increase the value of a home is likely to be a by-product of falling interest rates. Harvard University’s Joint Center for Housing Studies estimated that spending on home renovation should reach an annual rate of $477 billion by October 2025, close to the record set when rates were low.
Decreased Mobility Means More Creativity
Those who have stepped onto the property ladder might be stuckfor a while. Homeowners with growing families looking to move into larger homes might have to get creative to create more space, such as buying ADUs or converting basements, attics, and garages.
“The starter home for many has become a keeper home, unfortunately,” Susan M. Wachter, a real estate professor at the University of Pennsylvania’s Wharton School and a former assistant secretary at the Department of Housing and Urban Development, told theNew York Times.
What the Market Means for New Investors
So, what does all this mean for real estate investors, especially those entering the market?
An investor’s idea of stability should differ from most homeowners
While homeownership is still firmly rooted in the American dream and the notion of stability and freedom from ever-increasing rent—a LendingTree survey found that 84% would rather own than rent—for Americans looking to chart a course for financial freedom, personal homeownership should not always be the first box to check. There are several reasons to buy an investment property before a personal residence.
Conventional mortgages are interest-heavy for the first half of the loan, with over one-third paid in interest during the life of the loan. Thus, rather than pay interest on personal property, it’s better to offset that in an investment with cash flow, tenant loan paydown, appreciation and depreciation, and other tax benefits.
Continuing to rent while generating income allows owners to demonstrate a profitable business, enabling them to qualify for more loans and engage in creative financing strategies such as BRRRRing, rent-to-own, subject-to, and flips.
Ongoing moderate rent increases are important tools for landlords to keep up with increased building expenses. For larger buildings, higher rents increase the value of the asset. A large tenant pool will allow landlords to accomplish this.
When and how investors should consider buying a personal residence
Naturally, investors will want to get off the rental carousel and buy their own residences at some point. The mistake many investors make is buying personal homes that are too expensive.
To become successful as an investor, keep living expenses low. Thus, taking advantage of FHA low-down payment programs and matching a mortgage payment to an equivalent rental payment or less will enable an investor to curtail paying increasing rents while still reinvesting their cash flow into building a portfolio or taking care of repairs on their investments.
As thisWall Street Journal article shows, there are many ways to be creative in affording a personal residence. These include:
Moving in with family members to save for a down payment and closing costs, or even the cost of an entire home, depending on your location.
Use a homebuilder-financed mortgage to cover the closing costs and secure a lower interest rate.
Receive financial help from a family member.
Move to a cheaper area and work remotely.
Buy and co-live with friends.
Final Thoughts
There has never been a better time to own residential rental real estate, but equally, never a more difficult time to buy it. Turnkey investments are harder than ever to come by due to low inventory, high prices, and interest rates, so investors’ buying criteria are different from those of previous years.
Achieving high cash flow is not easy unless you are OK with buying in so-so neighborhoods. You will need tobe prepared to put in some sweat equity or get creative with assumable mortgages or subject-tos to secure low interest rates. Alternatively, simply breaking even could be a win for some investors looking to make the most of tax breaks, tenant paydown, and equity appreciation.
For existing landlords, high demand means they can use their cash wisely by investing in repairs and saving for more properties.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
