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If your image of a real estate investor is someone like the caveman in the “We Buy Ugly Houses” ads or the fast talkers who sell videos and seminars on the Internet, you’ll be surprised by the results of the latest survey of investors from Move, the company that operates Realtor.com and MortgageMatch.com.
Who is the average investor?
The survey found that the average investor more closely resembles your next-door neighbor or your colleague at work than Donald Trump. Instead of flipping properties for a profit at the earliest opportunity, the average investor is more likely to hold an investment property for five or more years. Only 11 percent expect to sell within 12 months of purchasing the property, and two-thirds of investors surveyed (67.5 percent) say they’re investing for the long term and don’t really care about a six-month horizon.
Most investors are beginners, as only a third of those who think of themselves as investors have done more than one deal. Many got into investing by accident when they decided not to sell property in the down market and instead chose to rent it or hold it until conditions improved. Others figured it’s not very hard to beat the Dow these days, so why not try real estate?
The truth about the cash buyer
The next myth the survey skewers is the cash buyer. “Cash-rich Investors Drive Away First-time Buyers,” scream the headlines these days, and that’s true, to an extent. In fact, the survey found that investors expect to get discounts from sellers for paying cash. But most of the cash is not their own. It’s borrowed—mostly at higher rates than those paid by buyers looking for their primary residence.
Most of today’s real estate investors plan to combine cash and credit to purchase properties as they build their real estate portfolio. Two-thirds plan to put less than 50 percent down on their next real estate purchase and finance the rest. Finding financing is the greatest challenge they face, investors said.
Addressing investors’ expectations
Expectations are high. Nearly half of investors expect a profit of 20 percent or more from their real estate investments, which is equivalent to a 4 percent annual return on investment over five years. However, investing begins with the purchase. The cost of repairs can be significant, but the majority (65.7 percent) of real estate investors don’t expect repair costs to exceed 20 percent of the purchase price of their property investment.
The biggest challenge investors face
Timing, in the end, is everything. The survey reminds us that buying a bargain is only the first step toward a successful investment. Profits aren’t made until you can sell at a sufficiently higher price. Investors, especially those living in the South and Northeast, said selling at a good price is more difficult than any other challenge they face.
We are at a point in the housing cycle where prices can’t drop much farther and the markets will reach an “organic” bottom, free from the taint of government stimuli like the tax credit. For the investor, this is the moment. Buy now, as prices won’t go much lower and you won’t have to hold on long until your investment appreciates.
What a First-Time Homebuyer Needs to Know
Housing Market Predictions: Home Values Continue to Sink
Buying an REO or Foreclosure: What You Can Expect and What Can Kill the Deal
Congress Doubles Funding for Troubled USDA Housing Loans
Home Repairs: Do It Yourself or Hire Help?
Steve Cook is Executive Vice President of Reecon Advisors and covers government and industry news for the Reecon Advisory Report.
Cook is a member of the National Press Club, the Public Relations Society of America and the National Association of Real Estate Editors, where he served as second vice president. Twice he has been named one of the 100 most influential people in real estate. He is a graduate of the University of Chicago, where he was editor of the student newspaper. In addition to serving as managing editor of the Report, Cook provides public relations consulting services to real estate and financial services companies, and trade associations, including some of the leading companies in online residential real estate.
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