Up until recently, the fact that interest rates continued to be at record lows meant nothing if you didn’t have an accepted offer. Cash was definitely king as investors came to our valley and bought up everything they could to gain a steady monthly rental income. Hedge Funds and Private Equity Firms would pay $5k, $10k, even $15k ABOVE asking price just to secure a home. As much as financed buyers would have loved to get an accepted offer and move forward with their dream home, they just couldn’t compete based on appraisal contingencies.
Having great credit and a pre-approval letter giving notice to sellers that you have serious buying power was as useless as a bag of money in a store where everything is free. While the supply of homes became less and less, the investors continued to gobble up homes. They started at properties valued less than $100,000, then they went after homes up to $125,000, then it was $150,000. All the way up to properties listed at $200,000. There was a total disregard on their part for finding homes that would bring in a cap rate of 10% or more.
With real estate investing there’s a basic rule of thumb…. getting a home that returns a strong capitalization rate. To calculate a “cap rate”, you divide the annual gross rents by the purchase price of the home. The goal is to obtain a property that has a cap rate of at least 10%. Obviously anything greater than 10% is icing on the cake, cherry on top, a successful two-point conversion, etc.
When dealing with individual real estate investors (the “Moms and Pops”) or Small Groups, that 10% return decides whether or not to move forward with buying a specific property and/or the purchase price. Those Hedge Funds and Private Equity Firms were dealing with Millions and Millions of Dollars flexing their muscles and buying every home they could. It was like watching an episode of “Super Market Sweep”. They’re running down the “neighborhood aisles” grabbing home after home and jamming them in their cart/portfolio. This of course dwindled our inventory and caused a surge in property values this past year where some areas have seen an increase close to 40%!! Due to their actions, there was very little inventory. As I referenced in my last blog post, the supply was outweighed by the demand.
While they were successful building their portfolio of rental homes, they were spurned by the monster they created. This “Frankenstein” rental market became flooded and property values increased to a point where the cap rates were maxed at 9%, then 7% and when these groups finally decided to stop buying, some rental returns were as low as 5%! Even with the mass bulk they accumulated, that return was not going to cut-it for their investors and they stopped buying in Southern Nevada for the time being.
So what does this actually mean for our housing climate and the opportunity out there for financed buyers? It means that the individual home buyers now have a chance since they’re not competing against these Hedge Funds or Private Equity Groups. Instead of competing against potentially ten other buyers and their offers, our competition has been reduced and the market has stabilized, returning to a more “normal” housing climate… oh and by the way, as of today the interest rates are still around 4% depending on the loan type. It might actually be cheaper for you to own than to rent!
Sure the home values have increased locally but highly intelligent economists throughout our country still believe that our Southern Nevada Housing Market is undervalued. You’re able to take advantage of historically low interest rates with a low down payment, own versus rent, and make the American Dream a reality! We all strive to make a better life for our families and owning our own home is one of the most impactful actions to achieve that success.
To get started seizing the opportunity and making your dream a reality, contact us today!
Photo by bludgeoner86