Savvy investors know the old real estate adage, you make money when you buy, realizing the profit at sale. And in the interim, it’s very possible to make a decent living as a landlord. With depressed home prices, record low interest rates, strong rental demand, and a slowly recovering economy, investors from an array of backgrounds are taking leaps into the landlord business.
From large institutions to mom and pop shops, the federal government is looking to investors to help remedy and add liquidity into the depressed housing market. In fact, the Obama administration has recently started a pilot program for investors to buy properties in bulk. According to a recent whitepaper distributed to key lawmakers, the Fed notes that, “A government-facilitated REO[Real Estate owned]-to-rental program has the potential to help the housing market and improve loss recoveries on reo portfolios.”
Currently, Fannie Mae, Freddie Mac and the Federal Housing Administration own more than half of all unsold foreclosed homes. There are currently about a quarter of a million foreclosed properties on the books of Fannie, Freddie and the FHA, and millions more are coming. In order to remedy the problem, the FHA announced interested investors may pre-qualify for the bulk sale REO program. Interested investors can register at FHFA’s REO Initiative page for pre-qualification.
Be advised, the following criteria must be met for individual investor pre-qualification:
1. Net worth of $1 million, individual or joint.
2. Net income of $200,000 individual, $300,000 joint.
3. Experience buying, selling, developing, managing real estate with emphasis on risk management ability
One such institution poised well for Obama’s pilot program is California based, Waypoint Homes (Waypoint). Waypoint acquires, renovates, and rents distressed single-family homes and offers “lease-to-own” programs to renters. As of early 2012, Waypoint had over 1,000 single family homes across Southern California in its portfolio. Cofounders of Waypoint Homes, Doug Brien, a former New York Jets placekicker, and Colin Wiel, a former engineer founded the company as they saw an opportunity and a need. “We feel that our insights can help solve a problem that is currently holding back the entire country,” reported Brien to the San Francisco Chronicle. By giving families the opportunity to repair credit while ‘locking-in’ future ownership opportunities as they rent, Waypoint is offering solutions to the social and economical problems which surrounds the housing market.
However, currently, the number of single-family homes being bought by such companies is still quite small compared to the millions of distressed properties. According to the recent whitepaper considering bulk REO sales to investors, it was noted large investors are struggling to acquire a significant amount of properties due to tight financing and their inability to buy enough properties in the same area to make it worthwhile. Similarly, the WSJ reports, “The biggest players in the market are deploying hundreds of millions of dollars, not the billions necessary to make a major dent.”
According to some experts such as David Hicks, co-president of HomeVestors, right now is a “perfect-storm” for mom and pop investors. However, such investors must be advised, real estate acquired today should be planned to be held for years as the housing market recoveries. As rental markets vary by city, 8% annual return is the norm across the nation.
Considering all that goes into being a landlord (tenants, toilets, maintenance, and so forth), coupled with investment risk, such returns are considered too low for some who thereafter steer away from the real estate game (of couse management companies are always an option). For others, the buy and hold strategy is sensible who are planning real estate investment as part of their long term investment plan.
Potential investors interested in jumping into the game must also understand real estate is a dramatically higher risk asset compared to lower risk CDs or bonds. If you are planning to trade cash between assets, you should make sure to vet the RE investment to better increase the chances that property acquired will increase net wealth, rather than decrease it!