By ERIN FLYNN JAY
When it comes to investment properties, both fix-and-flip investors and rental property owners stand to make money this year, but their outlooks are vastly different.
According to the Winter 2023 Investor Sentiment Survey from RCN Capital, conducted by market intelligence firm CJ Patrick Company, 50% of flippers felt things were better today than last year, and 51% expected things to improve over the next six months.
In comparison, only 20% of rental property owners felt conditions were better today, and 22% expected things to improve over the next six months.
Overall, after jumping from 30% to 39% in the Fall Survey, investor optimism was basically flat with 40% of the respondents saying the environment for investing was better than a year ago. Slightly fewer felt that things were worse: 33%, down from 38% in the Fall and 37% in the Spring, according to a press release.
Most of the investors surveyed were pouring their money into California, Florida, Texas, and New York.
Donald Olhausen Jr., owner of We Buy Houses in San Diego, said the reason that this is the tale of two different markets is because each type of investor makes money in different ways.
“Flippers on one hand make money on a very short time horizon, usually within four to six months,” Olhausen said. “This means that very small and sudden changes in the environment such as price fluctuations can be either good or bad for profit margins. Because we are recently coming off of a 10% dip in the market where many flippers lost money, there is now a renewed sense of optimism that opportunities are starting to finally come back.”
On the other hand, Olhausen said rental property owners tend to look much farther into the future when assessing potential profits, and the industry belief is that housing is once again reaching the top of the market.
“This means less future appreciation for rental investors to cash in on when they do sell their properties,” he said. “Mix this sentiment with the fact that average rental prices are beginning to decrease, and it explains why rental investors are less optimistic regarding the market compared to flippers.”
Andrew Lokenauth, founder of TheFinanceNewsletter.com and a real estate investor/landlord in NYC and Florida, said that in the Sunshine State flippers are thriving because there are opportunities to renovate older homes and sell them at a profit.
“Renting is also strong with a steady influx of new residents and tourists needing places to live,” Lokenauth said.
In New York, flipping homes is challenging in pricey urban areas but can be done in up-and-coming neighborhoods.
“Renting is the safer choice with consistent demand for apartments,” Lokenauth said.
Lokenauth noted that those who favor flipping point to large potential profits but downplay the risks, while rental advocates have steady income streams but criticize caps on rental rate increases.
What pressures are these investors facing?
Because of the different ways in which each side makes money, they both face different challenges in the real estate market.
Olhausen said flippers face challenges such as record high costs for financing, increased competition from other flippers leading to decreased profit margins, the need to finish a project as fast as humanly possible due to many of their expenses being time-dependent, as well as insurance becoming more expensive and, in some cases, unobtainable.
Rental investors, on the other hand, have a much longer time horizon when measuring profits and therefore usually face a different and unique set of challenges.
“These typically include much more expensive housing prices since the real estate pricing boom in 2020, a decrease in rental prices since the peak of the market was reached in 2023, and having a large enough down payment for rents to even come close to breaking even on a mortgage for a single-family home,” Olhausen said. “In addition to all this is an increase in operating expenses due to inflation and you can see why turning a rental property into an intelligent investment is becoming more and more difficult.”
Lokenauth said challenges for flippers include “access to affordable properties, costs of renovations, competition from bigger investors, potential for price drops, and carrying costs of ownership for longer than expected.”
On the renting side, Lokenauth cited “demand for rental units staying high enough to increase rents over time, regulations on how much rents can grow, costs of maintenance and repairs, and the risk of tenant issues and vacancies” as pressures.
Are government regulations helping or hurting?
“Regulations aim to protect residents but are criticized for favoring some groups over others and possibly distorting markets long-term,” Lokenauth said. “Rent controls aim to help renters but may discourage property improvements and new development if profits are capped. Construction permits and zoning rules impact overall supply. Flipping thrives with light regulation but excessive ‘flipping taxes’ may slow home sales and mobility.”
Government regulations differ from market to market. In most cases, government regulations are going to make conditions more difficult for both flippers and rental investors, Olhausen said.
“Flippers need to be careful because many local and state governments are trying to limit the ability of corporations that purchase single-family houses and compete against families for available housing,” Olhausen said. “In an already increasingly tight inventory market, this could be a fatal blow for many flippers.”
For rental investors, Olhausen said there can be issues due to government regulations including difficulties evicting tenants, rent caps, and other local government initiatives that limit profits, increase risk, and make the business of purchasing and renting homes difficult.
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