More than four in 10 residential property sales in the first quarter this year were all-cash sales, the highest level since 2011, and increasingly these are smaller, mom-and-pop real estate investors rather than big companies.
The problem – some of these newer rental home investors may not know about common pitfalls that institutional investors already know about.
According to RealtyTrac, institutional investors — entities that have purchased at least 10 properties in a calendar year — accounted for just 5.6% of all U.S. residential sales in the first quarter, down from 6.8% in the fourth quarter of 2013 and down from 7% in the first quarter of 2013 to the lowest level since the first quarter of 2012.
But cash buyers still represented nearly four in 10 home sales this year.
“Strict lending standards combined with low inventory continue to give the advantage to investors and other cash buyers in this housing market,” said Daren Blomquist, vice president at RealtyTrac, referring to the company’s April report. “The good news is that as institutional investors pull back their purchasing in many markets across the country, there is still strong demand from other cash buyers — including individual investors, second-home buyers and even owner-occupant buyers — to fill the vacuum of demand left by institutional investors.”
In a note to clients, the latest Bryan Ellis Investing Letter warns smaller housing investors about three common mistakes and misconceptions that newer and smaller operators often face.
1) You Can Only Buy through Realtors and Brokers
“This is simply untrue. The best deals in your local market will never make it onto MLS, but you can connect with motivated sellers ready to sell right now and dirt cheap by using a few simple, savvy strategies that will enable you to buy quickly and at rock-bottom prices that will set you up in ideal investing scenarios.”
2) All Tenants are Trouble – All the Time
“Think about taking out a loan. The lender does a background check on you, verifies the information on your application, and determines based on your past behavior that you are a good credit risk and likely to pay back your loan. As you pay your loan back, their due diligence is rewarded. Vetting tenants is no different. Carefully screen your renters before you let them move in, and you’ll find that they’re little to no trouble at all. All you need to do is set up the right process and maintain the discipline necessary to get good people in your rentals.”
3) You Can’t Own Rentals without Great Credit, Lots of Cash, and a Good Job
“Owning rentals is a great job, and once you have the skills to buy houses at good prices, rehab them, attract great tenants, and manage those properties in a way that generates great cash flow, then you will be in possession of a very specific skill set that will enable you to set your own price if you choose to work with private investors or private lenders. You’ll also be a great position to joint venture and build a portfolio of rentals without needing great credit, hard cash, or even having an additional job.”
Ellis says that these are three primary reasons that too many investors miss opportunities or leave thousands and thousands of dollars on the table.