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Buy and Rent the New Buy and Flip

for rent

A while back, I wrote about whether it was a good time to buy real estate.

While I argued that it certainly wasn’t a bad time, thanks to the reduced home prices and rock-bottom mortgage rates, I didn’t really touch on why one would buy now.

Back during the housing boom, the thinking was clear. Buy as much as you can now and flip it in six months, a year, etc. You’ll make money!

After all, home prices will definitively be much higher in a few months. And can you imagine how high they’ll be a year from now?

Well, we all know where that mentality got us…in this huge mess we’re in now, because after everyone and their mother got in, scores of homeowners got burned as unsustainable home prices plummeted back to earth.

And most folks had the worst possible mortgages you could imagine, from interest-only mortgages to pay-option arms and worse. That resulted in some really tough times and some exponential losses.

So if we can no longer expect home prices to rise exponentially, what’s the motivation behind buying a piece of property now? If it’s not going to double in a year, why bother?

Isn’t that the point of owning real estate? To experience explosive home price gains and sell in the future for a great profit?

Sure, but that’s simply not going to happen anymore. At least, not until the next big boom, which probably won’t be anytime soon.

Investors Are Buying Again, But Mentality Different

That brings us to who’s actually buying real estate these days. Per the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey released today, it is investors that are snapping up properties at a steady clip.

In October, 22.4 percent of closed transactions were investor purchases, up from 19.6 as recently as July.

Last month also marked the third straight month that investor participation has exceeded 20 percent. Do they know something we don’t?

Meanwhile, rental demand is strong, and Campbell Surveys estimates that 61.6 percent of investment properties purchased last month will be rented out.

The remainder will be flipped, but note that only experienced home buyers will be able to pull off the latter with margins much thinner nowadays. So don’t get any bright ideas now…

Most investors will probably buy, hold, and rent until home prices actually experience some positive appreciation. And that could take years.

So if you’re looking to buy a home right now instead of rent, you should expect to hold on for a long time, regardless of whether you plan to reside in the property or rent it out.

Still, it seems like a good opportunity to get in, especially if you’re a first-time home buyer with no home equity constraints like existing owners.

Just make sure you can generate rental income from the property, or if it’s for personal use, that you actually want to live in it for a while. This isn’t the fast real estate market of a few years ago.

If you think otherwise, you’re probably wasting your time and money.

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