Investors pivot toward rentals, but home flippers are more optimistic

A majority of real estate investors see conditions stabilizing or improving following recent market disruptions, but the past year's developments are leading a majority to focus on using properties as rentals, new research found.

"Despite higher financing costs and the downturn in home sales, investors continue to be pretty resilient, with almost two-thirds believing that today's environment is about the same or better than it was a year ago," said Rick Sharga, CEO of market intelligence firm CJ Patrick Co., in a press release.

Overall, investor sentiment about the current state of the real estate market showed 30% saying conditions are better than they were a year ago, while 32% indicated they were about the same. Another 37% said the environment today was worse than a year ago.

But ongoing interest rate and affordability concerns brought about a shift in strategy among investors, according to the report from CJ Patrick Co. and RCN Capital, a private lender providing commercial loans to the investment community. Almost 53% of respondents to their survey indicated they intended to rent out their purchases, compared to just under 30% planning to flip the homes for resale. 

The data largely underscores some of the ongoing challenges the housing market has faced over the past year, according to RCN Capital CEO Jeffrey Tesch. With languishing sales of existing homes, which hit a five-month low in June, as interest rates and prices remained elevated, "it's no surprise that investors are more focused on rental properties today," he said in a press release.

"Our survey results mirror the trend toward rental investments and reflect what we're seeing in our current loan activity," Tesch noted.

The analysis, based on survey data collected from over 300 investors in June, shows some of the impact surging interest rates are having on consumers. Rates accelerated to more than 6% in the latter half of 2022 and remain above that mark currently. Since the sharp rise, close to 18% of investment businesses said they had seen reduced demand for purchases, while another 32% noted an increase in demand for rentals. More than one third, or 34%, said both were occurring within the markets they served.

Rates are currently more than twice where they were at the start of 2022, suppressing affordability for prospective home buyers and cutting into profits for home flippers. Earlier this year, Redfin reported investors were losing money on over 20% of resale transactions. But sentiment looking at future outlook shows a large share of the real estate investment business thinks the current market environment may have already reached a trough and should at least hold steady in the near term.

Thirty percent of survey respondents said prospects would improve over the next six months, while 44% expect them to stay near where they are currently. Only 26% said the next half year would bring deteriorating investing conditions. 

Despite the higher share at the moment in rental properties, fix-and-flip home buyers were more likely to predict a sunnier second half in 2023, with 38% believing business factors would become more favorable to them and only 19% saying they would worsen. On the other hand, rental operators diverged, as only 19% expressed the view that market opportunities would improve, compared to 31%, who expected them to diminish. 

When it comes to current challenges facing investors, the cost of financing ranks highest, cited by 73% as one of their biggest today, but that number falls to 68%, who think it will remain one at the end of the year. Approximately 48% say lack of inventory is of prime concern, while 44% said it would still be the case in six months.

A looming threat to business interests comes from large institutional investors, though. While they ranked third on the list of current challenges as reported by just over one-third of survey participants, the share who see them as a competitive obstacle six months from now expanded to 44%.

Two-thirds of survey respondents said they expected to buy five or fewer properties over the next year, while almost 21% see six to 10 purchases coming. Meanwhile, close to 6% plan to buy 11 or more units.