The Invaluable Investor

There’s no speculation on how big this market is (over $300 billion).
By Anne Randolph, Publisher, LORE Magazine // Illustration by Jurgen Mantzke

Real estate investing at the individual level is a large industry that is relatively unstructured, unorganized and underserved. Many people would be surprised to learn that, according to the National Association of Realtors, property purchased purely for investment represented 22 percent of all purchases in 2006. That’s 1.64 million homes and more than $300 billion in sales volume. It only dropped to 21 percent in 2007. The 2005 figures were higher with 28 percent of purchases for investment. The 6 percent difference between 2005 and 2006 can largely be explained by real estate speculation at the top of the market.

LORE recently worked with our friends at Harris Interactive and Personal Real Estate Investor Magazine on a national study, “The Invaluable Investor,” designed to better understand the true real estate investor versus the speculator. The study revealed that successful investors use many of the same factors for decision-making as traditional homebuyers. They buy well-kept homes in good neighborhoods that attract good tenants. We came into the study with the assumption that many real estate investors find a marginal neighborhood or a house in poor repair, improve it cosmetically, and “flip it.” What we found was that this approach rarely pays off in cash flow or appreciation and often results in the huge headache that comes with poor tenants.

The study showed that investors are a strong repeat customer group. They typically buy more than one property per year, hold it for a median of five years, resell it and move to another property. They see real estate as an important part of their financial portfolio and a stable way to build wealth for retirement or other purposes. A recent Wall Street Journal article reported that if one invested in the stock market in the late 1990s, he or she would be almost back to zero today. In contrast, holding a property for more than five years will probably not result in a loss, even with the current market trouble.

While today’s real estate market may seem pretty ugly for people buying or selling their own homes, it’s a perfect positive storm for investors. Home prices are down, mortgage rates are modest, and there are millions of previous homeowners who are returning to the rental market. Normally, about one million people leave homeownership each year due to job loss, medical issues, divorce, death or other reasons. In 2008, that number is expected to more than triple, driving the middle-market rent levels up dramatically.

In the past, the assumption was that future investment value was less important for primary home purchasers than good neighborhoods, good schools and low crime. Our study revealed a sea change; more than 89 percent of primary residence buyers considered the future investment value of the property. In fact, it represented more than 25 percent of the reason they decided to buy. For 56 percent of these buyers, future investment value was at least half of their decision. Add to this the fact that younger buyers are buying first properties primarily for investment instead of shelter (Century 21 Research on First Time Homebuyers), and one can see that the market is moving away from the times when people bought a home, lived in it while their children grew up, and stayed in it to enjoy the grandkids.

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