In a housing market defined by shortfalls in affordable inventory, first-time homebuyers and real estate investors often find themselves competing for similar units.
In these situations, investors often have the upper hand due to easier access to cash and financing tools like debt-service coverage ratio (DSCR) loans that qualify investors based on a property’s rental cash flow.
Not all real estate investors buy homes for rental portfolios, though. Fix-and-flip investors use six- to 24-month bridge loans, also called residential transition loans (RTLs), to finance purchases and renovations on properties they then try to resell for a profit.
Since the pandemic-era housing boom, a dearth of affordable entry-level homes has fueled demand for the revitalized properties fix-and-flip investors return to the nation’s housing stock. But the affordability challenges faced by first-time homebuyers have presented barriers for these home investors, too.
Rising home prices, for example, mean flippers must sell renovated properties higher than the market can comfortably absorb, or accept a thinner profit margin by lowering their sales price target.
Meanwhile, the cost of home repairs and remodeling rose nearly 3.5% year over year in the second quarter, according to data analytics firm Verisk.
These factors drove home-flipper profit margins to 17-year lows in the second quarter, recording gross returns of 25.1% that were nearly 17% lower than a year ago, according to real estate market analytics firm Attom.
“Market conditions for real estate investors continue to prove challenging, with stubbornly high financing rates, rising labor and materials costs, and soaring insurance premiums taking a toll on investor profit margins,” said Jeffrey Tesch, CEO of RCN Capital, a mortgage lender that specializes in non-QM and investor-purpose loans.
The impact of signature Trump administration policies on tariffs and immigration have hurt investors’ profitability further, according to the results of a recent investor sentiment survey conducted by RCN Capital and advisory firm CJ Patrick Company.
New tariffs on goods imported from Canada, Mexico and China led 56% of survey respondents to report increased construction costs, 36% to report supply chain disruptions and materials shortages, and 33% to report reduced net income margins, while 26% observed no impact to their businesses at all.
Deportations of undocumented immigrants has made finding and retaining skilled workers more challenging for 46% of respondents, raised construction costs for 34% of respondents, and reduced sale and rental opportunities for 20% of respondents, while having no impact on 37% of respondents.
Rick Sharga, CEO of CJ Patrick Co., said rising pressures on profit margins due to tight market conditions and government policies are “most acutely felt by smaller investors, who make up over 90% of the residential real estate investment market.”
More than three-quarters of investors report their investment income as their primary source of income or important supplemental income. “Compressed margins can be the difference between a comfortable lifestyle and financial distress,” Sharga added.
Rising insurance costs or the inability to insure properties is also a rising concern of investors, affecting purchasing decisions for more than three-quarters of respondents. More than 80% of home flippers reported insurance issues causing them to miss out on a deal, compared to 44% for rental investors.
The most significant challenges facing real estate investors today, based on the share of survey responses, are high costs of financing (70%), rising home prices (38%), lack of inventory (36%), competition from institutional investors (34%) and rising material and production costs (28%).
Ultimately, these conditions have forced investor-buyers to shift their investment strategies, with almost 55% of survey respondents reporting having switched their primary buying strategy over the past few years in response to evolving market conditions.
Those shifts are heavily weighted among home flippers. Declining or cooling home price gains have led half of all home-flipper respondents to reduce their sales prices, while driving 52% of flippers to report switching to a rental strategy, compared to just 7% of rental investors switching to home flipping.
The affordability pressures sidelining many first-time homebuyers has produced commensurate demand for rentals. The U.S. homeowner population shrank on a quarterly basis in the second quarter for the first time since 2016, while the number of renter households rose 2.6%, according to U.S. Census Bureau data.
Among all investor sentiment survey respondents, 60% owned five or fewer properties, 20% owned six to 10, 5% owned 11 or more, and curiously, 15% owned none.
By investment type, 44% of respondents were rental investors, 38% were fix-and-flippers and 17% were wholesalers — a middleman strategy that involves contracting with a seller to purchase their property (often distressed), then transferring the rights to that contract to a different investor for a fee.
