US real estate investors are losing money on about one in seven homes they sell — one of the worst since 2016. And these five cities are the cities most likely to suffer a setback
The golden days when real estate investors bought and sold houses to make a quick profit seem to be over.
In select US cities, investors have been forced to sell homes at a loss as soaring house prices and elevated mortgage rates dampen demand from homebuyers.
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Investors lost money on about one in seven (13.5%) homes they sold in March, according to a new report from Redfin. In comparison, just 4.8% of all US homes sold in March were sold at a loss.
That was followed by a bad month in February, which saw real estate investors lose money on 14.5% of homes sold – the highest rate since 2016 and a far cry from the monthly record low of 2.8% in May 2022.
This debunks the myth that buying and selling real estate is an almost guaranteed moneymaker — but the stats are still pretty solid for investors.
Where are homes most likely to sell at a loss?
According to Redfin, real estate investors are most likely to lose money in markets where house prices have risen the most during the pandemic. The report analyzed data from 40 of the most populous US metro areas.
High mortgage rates have eroded investor profits and dramatically increased the typical homebuyer’s monthly payments. This has slowed demand for homes and depressed selling prices, meaning the proportion of homes selling at a loss has increased.
In March, the hardest-hit market was Phoenix, Arizona, where 30.7% of homes sold by investors suffered losses. Phoenix was followed by Las Vegas, Nevada (28%), Jacksonville, Florida (20.9%), Sacramento, California (20.2%) and Charlotte, NC (17.4%).
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“I recently showed one of my buyers a three bedroom single family home in Glendale that was listed by an investor,” said Phoenix Redfin agent Van Welborn. “My client ended up finding another house he liked better and the investor ended up losing about $20,000.
“The investor bought the house for $450,000 and sold it for $480,000 but put in $50,000 in work. The home also sold below the list price of $550,000 after being on the market for almost four months.”
Affordable areas where home prices have not risen as much during the pandemic, as well as certain South Florida markets, are less likely to cause investors to lose money.
In Virginia Beach, Virginia, just 1.7% of homes sold by investors sold at a loss in March — a big difference compared to Phoenix. Virginia Beach was followed by West Palm Beach, Fla. (2.4%), Miami (2.5%), Florida, Fort Lauderdale, Fla. (2.5%), and Warren, Michigan (2.6%).
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Why are investors selling at a loss?
“You may be wondering why investors don’t just wait until the real estate market recovers to sell,” said Sheharyar Bokhari, chief economist at Redfin. “Many long-term investors who rent their properties do, but many pinball machines — especially those who recently bought — can’t afford it.”
According to Redfin, home flippers — according to Redfin, investors who buy and sell homes over a nine-month period — sold about one in five homes at a loss in March.
“Sticking with houses that don’t generate income can be expensive because the owner has to pay property taxes, along with utility costs and in some cases monthly mortgage payments,” Bokhari added. “Many short-term investors are also choosing to sell, knowing that prices may have more room to decline and wanting to cut their losses.”
While the number of homes being sold at a loss by investors is quite high right now, it’s important to remember that many real estate investors — whether large corporations or retail investors — continue to make profits from buying and selling homes, even during the slowdown in the housing markets .
According to Redfin, the typical investor sold a home in March for 45.9% ($145,714) more than the price it paid. However, those gains have declined from 55.3% ($173,458) last year to a pandemic peak of 67.9% ($199,274) in June 2022.
With fears that the economy and property prices will continue to slow, creating even more headaches for home investors, there are other ways to get involved in the real estate market.
Other ways to invest in real estate
With buying and selling homes off the table (for now), consider investing in real estate in other ways.
Prime commercial real estate has outperformed the S&P 500 over a 25-year period – and until recently only the super-rich, with millions invested, could partake in this development. But new platforms have opened up such opportunities for regular retail investors.
Another great way to profit from the real estate market is to invest in a Real Estate Investment Trust (REIT). REITs are publicly traded companies that own income-producing properties such as apartment buildings, shopping malls and office towers. They collect rent from tenants and pass that rent on to shareholders in the form of regular dividend payments.
If you’re keen to invest in real estate, Moneywise’s investment finder tool can help you find an option that best suits your needs by answering a few quick questions.
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This article is for informational purposes only and should not be taken as advice. The provision is made without any guarantee.