The rise of the out-of-state mom and pop investor: New companies seek high income coastal buyers for out-of-state investment properties.
It appears that rental Armageddon has now gone mainstream. Nearly a decade ago when the first housing bubble was taking off, cautious buyers lamented about the high prices in many coastal areas as they do today. “But real estate is the only way to get rich!” Okay. Then why not buy rental properties out of state? Of course this largely fell on deaf ears since house horny people only wanted to out compete their neighbors in the race to foreclosure glory. After 7,000,000 foreclosures and with 1,000,000 of those happening in California, most people have forgotten the past. Now we’re left with wonderful selection bias where those who timed the market (either by luck or foresight) are telling others that timing the market is impossible. Some people did buy investment properties out in Nevada and Arizona during the early days of the last bubble but these were largely flippers or people who thought they were wealthy enough to have a second home. Rare was the person looking to buy-and-hold for income purposes. So it comes as no surprise that there are now companies catering to high income coastal investors who realize a bubble is occurring but still want the benefits of owning real estate.
The out-of-state mom and pop investor
It is hard to miss the house horny national anthem about owning a home. You get a long list of deductions plus you build equity. Then you get the wonderful benefit of leverage. This is part of the chorus. Of course you get this as well when you buy an investment property. Yet there is one major caveat about buying a home to live in. When you live in the place it is not an investment. Money going out of your wallet is not an investment. You see this with many Taco Tuesday baby boomers. They bought a house a couple of decades ago that is now worth $1 million. Yet they still pay property taxes, insurance, and maintenance. That $1 million isn’t generating a cent unless they sell the place. On the other hand, if you have a rental property in a good market you are getting a check every month. This niche market was largely exploited by Wall Street and big investors when the market imploded many years ago. Now companies are picking up the slack.
“(Reuters) Even with a good salary as a data scientist at a San Francisco technology firm, Yang Guo, 30, knew he couldn’t afford a home in the Bay Area, among the priciest U.S. markets.
He still wanted to own property in addition to stocks, however, and soon found a way to buy cheap rental houses in faraway cities – and to outsource the associated hassles to HomeUnion, a three-year-old startup in Irvine, California.
The firm is among a small crop of new companies, including competitors Investability and Roofstock, that offer ways to buy, renovate and manage properties in markets that command relatively strong rents compared to their low home prices.”
I’m assuming this buyer being a data scientist might be a tiny bit more analytical than some of the folks I see buying in SoCal using lemming Hollywood calculus. The company HomeUnion is based out of Irvine, a market that recently has been dominated by foreign investor money. But even on their site they talk about household income for investment purposes:
When it comes to investment properties, local market incomes absolutely matter. In California, household incomes don’t matter according to the house humping brigade. But it definitely matters if you are trying to turn a profit for rentals. And here you see HomeUnion is using median income as one factor for determining whether a property is a good investment. Good luck doing this in San Francisco where a $1.2 million crap shack would fetch probably $4,500 in rent.
These new investors realize prices are crazy in California:
“There’s too much risk with buying property in the Bay Area,” Guo said. “As long as the cash flow is coming and hitting my bank account, I basically don’t care about seeing them in person.”
Buyers like Guo are attracted to less glamorous regions where home prices and rents have risen at modest rates in the housing recovery. They’re eyeing steady income rather than rapid home-price appreciation.”
And this is happening in many states:
This seems like a much wiser play in my opinion for a young professional if done wisely. Say you buy an overpriced crap shack in California with a 30-year mortgage. Your end game is what you see with many of the Taco Tuesday baby boomers. They have a paid off home but are largely living in a granite countertop HGTV inspired sarcophagus. A million dollar home that isn’t generating a cent – but still takes cash out in property taxes, insurance, and maintenance. And today, the starter home is junk in many cases. Or you can take that large down payment and buy say 5 investment properties out-of-state and in 30-years you have a nice steady stream of income coming your way. These new companies seek to deal with the hiccups many encounter when buying property from afar. Plus you have the mobility to move up the career ladder which may necessitate moving around. The days of staying put in one company for 30 years are largely gone.
However cap rates are getting inflated so deals are harder to find. In California, the mania is out of control and prices are now fully out of whack. Only the diehard house horny try to justify current prices and the easy default answer is “well look at the foreign money! They don’t care about math and will buy anything at any price. Incomes don’t matter when you have suitcases of cash.” In their minds they somehow feel that foreign money likes to burn cash for fun. Money is coming in so long as appreciation continues. We are already seeing appreciation slow and guess what? The foreign money inflows are also slowing. I’ve talked with some of these wealthy foreign buyers and let me tell you something: at least those I have talked with, they absolutely care about making money.
Just like any apex in stocks, bonds, or housing the mom and pop investor is last to get in. Frothy signs are all over the place now. However, if you have the itch to buy it makes way more sense to buy a rental property that cash flows versus buying an overpriced crap shack that can run you $700,000 to $1.2 million. And guess what? Buying a rental property meets all the marketing points from the real estate industry. Clogged toilets in the middle of the night? Get a property manager. It seems like these companies are simply meeting a new market demand.