The Invaluable Investor: Report Shows Rich Investor Market Neglected By Real Estate Industry

     The real estate investment market is bigger and more lucrative than suspected, according to a new study released in April.       

Investors spent more than $320 billion on real estate in 2006, buying 1.64 million homes, or about 22 percent of the entire market. Despite housing market turmoil, investors are dedicated to long-term results buying in good single-family home neighborhoods, the report suggested.  

UNSERVED MARKET OF LONG TERMERS       

As a market, real estate or non-traded asset investors feel underserved in comparison with the traded assets sector. It’s difficult for them to find one-stop shopping, advice, and management. They often analyze and research properties using a combination of real estate agents, the Internet, and driving neighborhoods.       

More than 400 people who purchased real estate in 2006 were surveyed by Harris Interactive. They were people who owned a primary home or people who bought purely for investment or for second and vacation homes.       

The results were a far cry from the popular perception of real estate investors as wild-eyed prospectors, said Anne Randolph, co-author of the study and publisher of Lore Magazine.

“The media fueled the idea that all real estate investors were horrible people who speculated on the market, forced the market into a downturn, and then acted like maggots picking on the carcasses of foreclosures,” Randolph said. “Cable shows have suggested the best way to make money is to buy cheap and flip.  This study shows that none of those beliefs are true.  Real investors want to own property where a good tenant will want to live – single family residences in good neighborhoods.  The investors who make money consistently over the long term do just that.” 

Who Are Investors?

Real estate investors are generally in the Baby Boomer generation (currently between the ages of 43 and 62), and are more often male than female. More current investors are married versus single, but this is also a characteristic that is changing rapidly. Today, 68 percent of investors are married couples and 26 percent are singles, with the remaining numbers comprised of divorced people or partners in relationships. By comparison, historically first-time homebuyers have been young couples with children or who were thinking about starting a family. Today, this represents only about 25 percent of the market.  

Real estate investors are well educated, with 86 percent having at least some college, and 33 percent having attended graduate school or possessing a graduate degree. They also have higher incomes than primary home buyers. Few people with incomes of less than $75,000 are making investment purchases. However, over $75,000, the income of investors and primary residence buyers are very similar.

Seventy-five percent of real estate investors are repeat investors. The typical investor prefers single-family residences versus condominiums or other types of properties, according to the study. The typical investor owns an average of three single-family residences, and an average of one condominium, multifamily property (duplex, triplex) or a piece of raw land. About 77 percent buy and hold for the long term, usually a median five years. Forty percent buy, hold, and improve, looking for immediate appreciation, equity growth, and cash flow. Almost 40 percent buy and hold with less focus on immediate appreciation. Some investors use a combination of these strategies. 

THE NEXT WAVE

First time investors are typically younger – 18 to 27 years old. Other research indicates that Generations X and Y (ages 18 to 40 years old) are buying their first homes primarily for investment purposes rather than for shelter. The vast majority of investors – 85 percent – are direct owner/landlords. About 24 percent used a property management company. The fewest investors bought pre-construction, raw land, real estate investment trusts, or indirectly owned homes.

Seventy-two percent of respondents felt that they were either successful or very successful at using real estate investment to build wealth. About 21 percent felt that they were neutral, and 6 percent felt that they had been either somewhat unsuccessful or not at all successful in building wealth. The level of success tended to be lower with investment in REITs or other indirect-ownership methods than with direct ownership. Expected returns ran the gamut from 1 percent to 5 percent through more than 100 percent.    

How Investors Buy

For both primary residence and investment purchasers, driving around to get a feel for the neighborhood was the most helpful source of information, followed by the Internet and real estate sales professionals, according to the report. Investors were more likely to use county records for information, while primary home purchasers were more likely to use friends and colleagues, neighbors and investment or financial advisors.

Investors felt that there was no single source that would provide all the information necessary to make the decision and that they had to analyze properties themselves. This was not because they wanted to do all that work – they just hadn’t found a single source to provide a comprehensive analysis for them. Almost completely ignored as a source are real estate education vendors and real estate investment associations.

While neighborhood inspection, the Internet and a real estate agent are the easiest places to get information in general, the most reliable sources were perceived to be county records, driving around the neighborhood and the real estate professional, versus the Internet. After these four, the reliability drops below 50 percent. Real estate professionals regularly complain that buyers using the Internet are frequently misled by the information they find there, requiring them to re-educate the buyer or seller. This reliability index would suggest that at least investors understand that other sources are more reliable than the Internet.

For investors who have purchased property before, the most reliable sources of information – county records (86 percent) and personal neighborhood inspection (83 percent) - are even more important.With all the available sources of information, 54 percent of investors still use a real estate agent to represent them in the transaction, followed by self-representation (even though unlicensed) and self-representation as a licensed real estate agent. Representation by an attorney or an investment company with licensed agents totaled only about 5 percent.       

Underserved Market       

Investors do not think they know it all, and consider the tasks needed to complete the evaluation and purchase to be somewhat difficult, according to the study. Many feel that the calculations required to assess the future value of a potential property are not that easy; that they have to do most of the work themselves in compiling all the data they need for the calculation of the investment potential and cash flow; and that they haven’t really developed a group of support professionals that can help them achieve their goals. They have a sense of being able to accomplish what they want, but with difficulty.       

“Companies which offer property management and investment services have expanded the types of products and services they offer to potential investors, and we believe they will take a larger share of the investor dollars as investors become aware of these options,” the report said.       

This study was made possible with sponsorship from the California Association of Realtors, Fidelity National Cyberhomes, Wells Fargo, ReMax, Red Door Group, and the Houston Association of Realtors, among other companies.

The complete 68-page report can be purchased at http://www.personalrealestateinvestormag.com/ for $99.

By Scott C. Seckel, Editorial Director, NEXZUS Publishing