The real reason real estate investors have stopped buying homes
Investors—who have been a key player in the U.S. real estate boom—are starting to have second thoughts—especially when there are far less risky options available.
Between 2011 and 2022, there was a massive gap between single-family rental yields and government bond rates—a much safer investment.
That “meant real estate was very attractive for investors since it provided an excess return,” wrote Nick Gerli, the CEO of Revolut App, a finance platform specializing in housing data.
But with government bond yields skyrocketing since 2022, that's no longer the case.
“Currently, the 10-year Treasury is 4%. And the typical cap rate for a [single-family rental] is 4.9%. The result is that real estate investors can earn a similar return by buying government bonds,” said Gerli.
Unlike real estate investing, which carries significant financial and liquidity risks, government bonds provide virtually guaranteed returns with limited downside.
According to Redfin data, real estate investors scooped up nearly 100,000 properties in late 2021. This figure has since crashed below 60,000 as of the second quarter of 2024.
Although real estate investors purchased more properties in the second quarter compared to a year earlier, activity remains well below pandemic and pre-pandemic levels.
In a changing interest rate environment, real estate is no longer the slam dunk it used to be. Many investors have learned that the hard way.
Real estate investors are hemorrhaging money
A recent survey by Clevel Real Estate revealed that a staggering 90% of residential property investors have lost money on at least one property. More than half said they’ve lost $100,000 or more on their investments.
Nearly half (42%) of survey respondents admitted to having lost more money than they’ve earned on real estate. Investors pin the blame on higher interest rates, rising insurance costs, and expensive repair, which are eating into profit margins.
According to Redfin, 2023 was an especially challenging year for investors.
As of February, 14.5% of the homes they sold went for less than they initially paid for. This was the highest level since 2016 and nearly triple the rate from one year earlier.
“Home flippers aren’t reaping the gains they used to,” said Van Welborn, a real estate agent in Phoenix, Arizona.
Redfin senior economist Sheyaryar Bokhari said it’s probably a better idea for investors to hold off on selling their homes until the market improves. But the problem is “many flippers, especially those who bought recently, can’t afford to,” said Bokhari.
Thankfully, profitability improved in 2024 as investors zeroed in on low-priced properties. As Redfin explained, low-priced properties accounted for 45.2% of all investor purchases in the second quarter.