I don’t ever remember a time when so many investment properties were being purchased with cash. With today’s unbelievable real estate prices, many investors are simply forgoing traditional financing as well as hard money financing in favor of cash purchases. In fact, many investors are simply converting their retirement accounts to self-directed accounts and paying cash for investment properties through their IRAs, 401Ks, etc.
One of the reasons cash purchases have become the norm for many investors is because the price-point of many investment properties doesn’t warrant the headache of trying to get financing. Many investors would rather shell out 40K for an acquisition and rehab and let their money earn a solid return – typically much higher than in a traditional investment vehicle like stocks, bonds, etc.
However, I think there are a number of investors who probably prefer to get financing for an inexpensive property, but some of the constraints associated with conventional financing make it too difficult. As crazy as it sounds, many of these properties, selling for less than a third of what they sold for just a few years ago, can’t get financed in the current environment. Sometimes it’s the fact that appraisals are just so bad as a result of heavy foreclosure activity. Other times it’s because lenders aren’t willing to lend under a certain price threshold. Whatever the case, lower priced investment properties just aren’t great candidates for financing right now and investors have responded by buying with cash in record numbers.
Interestingly, with all of the buying activity that is taking place, investors are paying less and less attention to ARV (after repaired value). It’s interesting to me because it’s been pounded into our heads for so many years that a property purchased and rehabbed well below market value was the primary distinction of a good real estate investment. Now, with prices and comparables in the toilet, investors care more about the kind of cashflow that a property will produce and less about the amount of equity (if any) a property may have. Understandably, if a property can be purchased and renovated for 40% of what it would cost to build new while also producing double digit yearly yields … does it really matter if you’re buying at market value? For a cash buyer that doesn’t have to worry about an appraisal, it probably doesn’t. The cash buyer is probably more interested in cashflow and any equity that develops as a result of recovering prices is icing on the cake.
I think most investors realize that the opportunity to buy at these insanely low prices will not last forever. Prices will recover at some point – it’s simply not possible to maintain values in markets that are adding jobs and people. For investors that have cash sitting in bank accounts earning less than 1%, don’t get scared away by depressed prices. The opportunity to put that cash to work in this real estate market is unprecedented.