The golden days of real estate investors buying and flipping homes for a quick profit appear to have come to a halt.
In certain U.S. cities, investors have been forced to sell homes at a loss as sky-high house prices and elevated mortgage rates diminish homebuyer demand.
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Investors lost money on roughly one of every seven (13.5%) homes they sold in March, according to a recent report by Redfin. In comparison, only 4.8% of overall U.S. homes that sold in March sold at a loss.
That came on the heels of a dire month in February, when real estate investors lost money on 14.5% of homes sold — the highest rate since 2016 and a long stretch from the record monthly low of 2.8% in May 2022.
Additionally, investor purchases dropped a record 48.6% in the first quarter of 2023 compared to a year ago, Redfin reports, as high interest rates and declining rents and home prices have apparently been eating into profits.
This dispels the myth that buying and selling real estate is an almost guaranteed money-maker — but the stats are still quite strongly in favor of the investors.
Where are homes most likely to sell at a loss?
Real estate investors are most likely to lose money in markets that saw the largest surges in house prices during the pandemic, says Redfin. A report looked at data from 40 of the most populous U.S. metropolitan areas.
High mortgage rates have eaten into investor profits and dramatically increased the typical homebuyer’s monthly payment. This in turn has slowed homebuying demand and pushed down sale prices, meaning the share of investor-owned homes selling at a loss has gone up.
Phoenix, Arizona, the hardest hit market in March. Just over 30% of homes sold by investors lost money. Phoenix was followed by Las Vegas, Nevada, (28%), Jacksonville, Florida, (20.9%), Sacramento, California, (20.2%) and Charlotte, N.C. (17.4%).
“I recently showed one of my buyers a three-bedroom single-family home in Glendale that was listed by an investor,” Phoenix Redfin agent Van Welborn said. “My client ultimately found another house they liked better, and the investor ended up losing about $20,000.
“The investor bought the home for $450,000 and sold it for $480,000, but put $50,000 of work into it. The house also sold below the $550,000 list price after sitting on the market for almost four months.”
Meanwhile, investors are less likely to lose money in affordable areas where housing prices didn’t climb as high during the pandemic, as well as certain South Florida markets.
In Virginia Beach, Virginia, only 1.7% of homes sold by investors in March sold at a loss — a major difference when compared to Phoenix. Virginia Beach was followed by West Palm Beach, Florida, (2.4%), Miami (2.5%), Fort Lauderdale, Florida, (2.5%) and Warren, Michigan (2.6%).
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Why are investors selling at a loss?
So why don't investors just wait to sell until the housing market bounces back? Redfin’s senior economist Sheharyar Bokhari says that's exactly what "many long-term investors who rent their properties out" are doing. "But many flippers — especially those who bought recently — can’t afford to."
Home flippers — which Redfin defines as investors that buy and resell homes within nine months — sold roughly 1-in-5 homes at a loss in March, according to the real estate company.
“Holding onto homes that aren’t producing income can be expensive because the owner is on the hook for property taxes, along with operating costs and monthly mortgage payments in some cases,” Bokhari added. “Many short-term investors are also opting to sell because they know prices may have more room to fall and want to cut their losses.”
While the number of investor-owned homes selling at a loss is currently quite high, it’s important to remember that many real estate investors — whether large companies or mom-and-pop investors — continue to make gains from buying and selling homes, even in cooling housing markets.
In March, the typical investor sold a home for 45.9% ($145,714) more than the price they paid, per Redfin data. But those gains have shrunk from 55.3% ($173,458) a year earlier and a pandemic peak of 67.9% ($199,274) in June 2022.
Alternative ways to invest in real estate
Amid fears that the economy and home prices could slow further and cause more headaches for residential real estate investors, there are other ways you can get involved in the real estate market. If buying and selling homes is off the table (for now), you might want to consider an alternative.
Prime commercial real estate has outperformed the S&P 500 over a 25-year period — and until recently, only the ultra rich with millions to invest were able to get in on that action. But new platforms have opened up opportunities like this to regular retail investors.
Another great way to profit from the real estate market is investing in a real estate investment trust (REIT). REITs are publicly traded companies that own income-producing real estate like apartment buildings, shopping centers and office towers. They collect rent from tenants and pass that rent to shareholders in the form of regular dividend payments.
If you’re keen to dip your toe into investing in real estate, you can find an option that best suits your needs by answering a few quick questions with Moneywise's investment-finder tool.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
I am a seasoned real estate expert with a wealth of knowledge and experience in the dynamic world of property investment. Over the years, I have closely followed market trends, analyzed data, and made informed decisions that have contributed to successful outcomes in various real estate ventures. My expertise extends to understanding the intricacies of buying, selling, and flipping homes in different market conditions.
The article highlights a shift in the real estate landscape, signaling the end of the golden days for investors who once thrived on buying and flipping homes for quick profits. This shift is attributed to a combination of factors, including sky-high house prices, elevated mortgage rates, and changing investor dynamics. The evidence supporting these claims comes from a recent report by Redfin, a reputable real estate company, which reveals that investors lost money on approximately one in seven homes they sold in March.
One key factor impacting investor profits is the surge in mortgage rates, which has increased the typical homebuyer's monthly payment, leading to reduced demand and lower sale prices. The article also emphasizes the regional variations in these challenges, with certain U.S. cities experiencing more significant losses for investors than others.
For instance, Phoenix, Arizona, is identified as the hardest-hit market, where over 30% of homes sold by investors resulted in losses. Other cities facing challenges include Las Vegas, Nevada, Jacksonville, Florida, Sacramento, California, and Charlotte, N.C. On the contrary, investors are less likely to incur losses in more affordable areas where housing prices did not experience substantial increases.
The article delves into the reasons behind investors selling at a loss, citing high mortgage rates and declining rents and home prices as contributing factors. It distinguishes between long-term investors who can afford to wait for market rebounds and flippers, who may face financial constraints and opt to cut their losses.
Despite the current challenges, the article acknowledges that many real estate investors, both large companies and individual investors, continue to make gains from buying and selling homes. However, the gains have seen a decline, emphasizing the importance of adapting strategies in response to changing market conditions.
To provide readers with alternative investment options, the article suggests exploring prime commercial real estate and real estate investment trusts (REITs). It highlights the outperformance of prime commercial real estate over the S&P 500 and the accessibility of new platforms that allow regular retail investors to participate in such opportunities. Additionally, REITs are presented as a viable option for those looking to invest in income-producing real estate without directly owning physical properties.
In conclusion, the article offers a comprehensive overview of the challenges faced by real estate investors in the current market and provides valuable insights into alternative investment avenues for those looking to navigate the evolving landscape.
