The turmoil that has plagued California’s real estate sector has impacted investors as well as individual home buyers. Owners have seen the value of properties go on a roller coaster ride, soaring to new heights in mid 2000s only to crash during the depths of the Great Recession.
Today’s upswing in prices have forced investors to adjust their strategies in face of a changing competitive market.
“It’s actually getting more competitive,” said Peter Westbrook, Owner of Westbrook Real Estate Investment. “Today, everyone is competing for those same houses. (Investors) can’t compete with traditional buyers on most houses.”
That wasn’t always the case. During the Great Recession, financing was nearly non-existent which gave investors with large amounts of cash an inside track on relatively cheap houses, at least by today’s standards.
“I have been doing this since 2009,” said Westbrook. “With the bargains that were out there in 2009, it was easy to choose.”
There are generally three types of investors in real estate. Those like Westbrook, often referred to as flippers, are usually single or a small group of investors that buy distressed properties, repair them and sell them for quick profit. Making money this way usually depends on finding the right balance between money needed to rehabilitate a property and the eventual sale price.
It was a balance that was easy to find during the recession.
“When I started, the market was completely collapsed,” he said. “You needed to have cash or grade A credit, and even then there were restrictions. Investors were the ones that saved the real estate market in a lot of neighborhoods.”
The Great Recession also gave opportunities to a second group of investors, the institutional investor. While some hedge funds and private equity companies helped propel the crash, others found it to be an opportunity.
Such investors, often flush with cash, looked at areas such as the Central Valley with high foreclosure rates and bought hundreds of homes.
The investment groups were often looking for homes that needed fewer repairs as they hoped to hold the homes and use them for rental income.
Investors found banks were desperate to dump houses as the values fell.
One such example of the reach of institutional investors is Blackstone, a publicly traded Wall Street firm that entered into the country’s single-family home market in the depths of the Great Recession in the late 2000s.
Now, the company’s residential investment-focused subsidiary, Invitation Homes, is the largest owner of single-family rental homes nationwide and has about 13,000 homes in California.
“During the recession, (investors) were offered books of houses by the banks and saying buy these off of me,” said Mike Kelly, Realtor and President Central Valley Association of Realtors. “They are no longer doing that.”
The low sales prices meant such investors could achieve a high rate of return for investors.
The last group were young investors looking for a bargain. They were often the products of seminars looking for any property that they believed could produce income through rentals or sales.
As with any roller-coaster ride, the lows don’t last forever, and California real estate has seen an upswing in values as the economy has recovered.
“The market has changed completely,” said Westbrook. “I specialize in houses that can’t be financed.”
He said that investors such as himself need work harder to find the opportunities today.
“(In 2009) the opportunity was massive in foreclosures and vacant houses,” he said. “Today it is back to normal with not as many foreclosures. All prices have gone up even the ones that need work.”
The increase in prices have also chilled the institutional investment in housing as well. In 2017, institutional investors bought just 2 percent of houses sold in California. That is down from the high of 7.1 percent of the market in 2012.
“Today, (the housing market) is very active,” said Kelly. “The prices are increasing at such a pace, it is hard for investors to pencil out the investment. It’s not soft, but it is not as hot as it was.”
Today, wealthy “mom-and-pop” landlords—families that can afford to buy another house and rent it out as an investment—dominate the single-family rental market. Among all single-family rentals nationally, about 80 percent are owned by individuals that rent out just one or two homes, according to a study by ATTOM Data Solutions.
Rising prices are also motivating some investors to sell houses that they were renting out during the recession.
“There are a few investors in Modesto that bought quite a few houses on the courthouse steps,” said Kelly. “They have been slowly going and evicting a tenant and selling the house or offering the tenants the right of first refusal.”
While rising prices are slowing real estate investing, the threat of rising interest rates is not having much impact.
“Investors are less sensitive to rate hikes,” said Kelly. “If they are financing, they are putting 25 to 30 percent down. That gets them better interest rate.”
The future for real estate investors looks similar to that for those looking for a home as a place to live. Kelly believes that conditions won’t change in the next couple years.
“I see the prices continuing to go up,” said Westbrook. “Interest rates are going to rise. Inventory is going to be tight.”