To invest in Investor heavy markets or Owner occupied markets

9 Replies

Hi

I have been researching on which markets I should go after for my Buy and Hold Investments. Some of my criteria have been Jobs/Economy/Diverse industries, population growth.

As I narrow down to few cities/markets, I am learning that in some markets/neighborhoods the rentals to owner occupied is more than 50%, which is a strong indicator that its a good market for investors. Memphis, Atlanta, Dallas, Indianapolis, Las Vegas, Cleveland are few examples, where I think there is a large investor activity.

I have a couple of concerns buying in a neighborhood which has more investors than owners.

  1. Since there are many rentals available, there will be pressure to lower rents to attract tenants, to keep the low vacancy rates.
  2. My second bigger concern is, home prices heavily dependent on when investors(hedge funds/mid sized investment firms) decide to sell of their portfolio in the neoighborhoods, increasing the inventory, and having a downward pressure on the prices

I feel #1 is more likely to occur, and I am sure some of the BP members may have experienced or know some places where that has happened.

But for #2, I am curious to know if its just a stretch of imagination, or is just as likely as #1, and any markets/neighborhoods you have seen in the past

Looking forward to your opinions, thoughts and experiences !!

Those are both good points. Regarding point 1, I am seeing that already in some parts of Indianapolis. Lots of newly rehabbed homes that have been sold to investors are on the market, keeping rents from rising and increasing vacancy time. OTOH, rental neighborhoods have large pools of renters as well. Higher end owner occupied homes would be out of budget for many renters and those who could afford the rent could probably afford to buy as well.

#2 is valid as well. In many markets the prices surged last year when hedge fund activity was at its peak. BUt it has slowed down now and there is more inventory available. The reverse (hedge funds selling in large numbers) has not happened yet but its quite possible to see the converse in that case as well. However, the fund activity seems to happen in spurts and you could avoid buying/selling in those periods.

Thanks @Anish Tolia

I think you are right about the hedge fund activity. Are there any signs the hedge funds pulling off form the markets(more inventory, lower prices anything else), that might be a good chance to grab more properties.

Yeah, at least in parts of Indy inventory seems to be higher. Last year was very hard to find decent deal.

@Anish Tolia

At some point the hedges will have to sell and when that happens there will be a glut of rental properties in the markets that they were heavy in .. IE Atlanta PHX,, CA and others... There are Very few buyers other than other Hedge funds who can buy groups of 50 to 200 homes at a time.

What had traditionally been a mom and pop bizz has changed dramatically as we know... So the maybe these large bundles of inventory will be sold off to mid level syndicators ,, ( same people that are buying apartment complex's right now)...

What happens in these markets were 50% of the homes are rentals is the rental stock really just keeps being recycled... Investors retire or get burned so bad they just sell out.. Keep in mind that all this inventory for fresh rehab homes comes primarily from an investor who failed and bailed.

Medium ksqoekox 400x400Jay Hinrichs, TurnKey-Reviews.com | Podcast Guest on Show #222

Is be interested to hear why you lumped CLE with markets like Vegas and Atlanta. We're a cash flow market with no material appreciation, outside of forced appreciation. Most PE firms are including appreciation on their models.

@Kiran R. - interesting research! I'd take a look at current (and projected) absorption rates in those markets then cross reference that with current (and projected) population trend from those markets. Because both of those points are only a concern if there isn't enough inventory to satisfy demand.

I suspect once you do that, you'll find that some of those markets will separate themselves from others.

Medium logo1Joe Fairless, Best Real Estate Investing Advice Ever | http://www.apartmentsyndication.com | Podcast Guest on Show #227

interesting discussion on hedge fund involvement with SFH investments. One thing to keep in mind is that hedge funds are basically soulless "Wall Street" type firms. They will sell/dump their homes if they think they have to, hitch could decimate the small investor in that area. OTOH they want to make a lot of money, and if they can they will prefer to sell off in waves that the local market can absorb, so they don't sabotage the value of their remaining holdings.

The other rub is that I do not think that they are effective at managing many single units. There is a reason most REITs and institutional investors prefer large apartment complexes- they are easier to manage effectively with a staff. So that factor is another unknown.

At the end of the day we really do not know how the larger economic picture will play out and if hedge funds can manage SFH's effectively. I'm just fortunate that hedge funds are not a factor in my market, so I worry less about this. But if the stars don't align, this could lead to a giant clusterf*ck, so be careful!

The hedge fund activity in Indianapolis has had an impact on both available inventory and prices.

They tend to buy at or over ARV and then rehab them to offer them at the top of the rental pricing. Yes, at some point they will have to dump them and move on but for now, it hasn't really affected the pool of renters available in other price ranges. The funds only buy 1995 and newer with a typical rent amount of $1,000-$1,300. That leaves a ton of opportunity in the $700-$995 rent ranges. These are typically the post war built ranch in good areas that are totally overlooked by Wall Street.

Of course, there is also a shortage of this type of rental now but we can still pick up several on a regular basis.

Good luck with your search.

Thank you all, this has been good and helpful discussion. I have been looking into Student housing in/near College towns. and in these towns most of the properties are rentals owned by small/mid sized investors and parents.

Any one with experiences in the college towns, From my little research I see that the cons are - frequent turn over, and younger tenants might be irresponsible, so more maintainance.

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