Hot Topics: Best investments, vacation homes and cash sales

What’s the best long-term investment? Is it a good time to buy income property? Are cash buyers overtaking the market?

These are hot topics for real estate investors as the US economy gives mixed signals and the spring home-buying season is off to a slow start. Here’s our look at recent news.

Best long-term investment

Real estate is a better long-term investment than stocks, mutual funds, gold, savings accounts, CDs or bonds, according to a recent Gallup poll.

Respondents chose real estate (30%), gold (24%) and stocks/mutual funds (24%) as their top picks. Only 14% chose CDs/savings accounts and 6% picked bonds.

Opinions can be influenced by many factors, including how the investment type is currently performing. In the study, choices were influenced by respondents’ current investments. Those who own a home (33%) were more likely to favor real estate versus renters (24%).

Others don’t agree that savings should be dumped into a “single, large, highly illiquid asset.”

Vacation home sales up, investments down

More than eight of ten second-home buyers think it’s a good time to buy, according to the National Association of Realtors (NAR).

The stock market is up and so are vacation home sales. As high net worth individuals have done well in the market, they’ve become more confident and inclined to buy vacation homes.

Why do they buy? Most want a property for vacations or family retreats (87%). Some will use it as a future primary residence (31%); want to diversify investments (28%); rent to others (23%); or buy for family or friends (22%).

Fewer investors are buying properties as they find fewer bargains and prices increase. In 2013, investor sales were down 8.5%. The median investment home price was $130,000.

Fifty percent of investors purchased for rental income. Others want to diversify investments (34%) or bought for family or friends (22%). On average, investors plan to hold property for five years.

Together, vacation and investment home sales represented a third of real estate transactions in 2013. Purchases totaled 1.1 million investment sales (20%) and 717,000 vacation home sales (13%).

The market is robust, as cash sales remain common and buyers who finance can take advantage of historically low interest rates. Sales were estimated based on household responses, not institutional activity.

All-cash sales climbing

In today’s real estate market, low inventory and tight credit are top challenges for home buyers.

Tougher lending standards make it harder for individuals to qualify for loans. But that’s not an issue for institutional investors who pay cash. In a new report, RealtyTrac says all-cash sales climbed to 43% of sales in first quarter 2014. That figure is up sharply from a year ago, when cash sales were at 19%.

Institutional investors are defined as those who purchase at least 10 properties per year. They compete with individual investors, second-home buyers and owner-occupants.

The share of institutional investors is generally small, making up 5.6% of residential home sales in first quarter 2014. This percentage is trending down, as they’ve “bought up much of the affordable inventory they are traditionally interested in.”

The top five markets for all-cash purchases were in Florida, starting with Cape Coral-Fort Myers (74% of sales), Miami (67%), Sarasota (65%), Palm Bay (64%), and Lakeland (62%).

Other areas with high all-cash sales included New York (57%), Columbia, SC, (56%), Memphis (55%), Detroit (54%), Atlanta (53%) and Las Vegas (52%).

Rounding out the share of all-cash buyers were foreign investors who purchased expensive homes.

Bottom Line

Real estate investing brings risk and reward in any market. Today, inventory is still affordable in many markets and interest rates are still at historic lows. If you plan to invest, consider your own long-term goals and reasons for investing, rather than trying to time the market.

Look for income properties that cash flow now, take a long-term view and focus on the numbers, not the market’s ups and downs.

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“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” –Warren Buffet