The greatest challenge facing small investors and Americans planning for retirement is figuring out how to get a good return from a safe investment. It’s interesting to note that the current housing recovery is not being driven by an increase in demand from buyers looking for a place to live. This time, the housing recovery is being led by big Wall Street players who are piling into the housing market.
Billionaires and private equity firms have dove into the housing market purchasing single family homes by the tens of thousands. According to the National Association of Realtors, cash buyers make up 32% of sales nationally and are comprised largely of investors. This group has poured over $10 billion into residential real estate purchases. Some of the largest investors include The Blackstone Group, Colony Capital, American Residential Properties and Waypoint Homes. The Blackstone Group alone purchased 20,000 homes and has spent $3.5 billion in the past year, while Colony Capital has purchased 8,000 homes at about $1 billion.
These large investment firms have chosen real estate because of the attractive rental returns that have been driven by low interest rates engineered by the Federal Reserve and high demand from homeowners who have lost their homes to foreclosure and short sales. According to US Census figures, 12% of all US households, about 14 million people, are presently renting and the average tenant rents for about 4.5 years, making real estate a stable investment option. That number is expected to increase as more families who don’t have strong enough credit or enough savings are locked out of homeownership. According to Christopher Thornburg of Beacon Economics, we are at the beginning of a rental boom.
The criteria employed by the investor groups include:
- Markets with cheap housing
- Job growth
- Neighborhoods with low crime rates and good schools
- Properties near freeways and shopping areas
Investment in residential housing has always been attractive to professionals such as doctors, lawyers and accountants, yet many investors in this group have chosen to stay on the sidelines because they were burned by real estate investments made at the height of the boom. Although the strategy at that time was terrible, every investor knows that timing is everything. At the present time, properties can be bought with cheap borrowed money and may be undervalued. If past boom and bust cycles are any indication, housing prices should increase significantly from their recession lows. Additionally, the yield from renting the property out should be very attractive indeed. Investors with cash should follow the lead of the big equity firms and take advantage of the window of opportunity before prices go up and it closes.