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Real Estate Investors Favor Rentals Over Fix-and-Flip Opportunities

According to the Spring 2023 Investor Sentiment Survey from RCN Capital, real estate investors are more focused on rental properties than fix-and-flip opportunities, as 53% of survey respondents indicated that they plan to hold investment properties as rentals, almost twice the 30% share of respondents who plan to flip the homes.

"The National Association of Realtors noted that existing home sales in May were down over 20% from a year ago, and ATTOM recently reported that the number of properties flipped in the second quarter of 2023 was the lowest number in almost two years, so it's no surprise that investors are more focused on rental properties today," said RCN Capital CEO Jeffrey Tesch. "Our survey results mirror the trend toward rental investments and reflects what we're seeing in our current loan activity."

Conducted by market intelligence firm CJ Patrick Company, the Spring 2023 Investor Sentiment Survey found that investors' sentiment on the current state of the real estate market is split fairly evenly, with 30% saying conditions are better than they were a year ago; 32% saying they're about the same, and 37% saying they're worse. Views on the market six months from now are more diverse, with 30% believing conditions will improve, 44% thinking they will be about the same, and 26% feeling they will get worse.

But while the trend among real estate investors may be skewing more heavily towards rentals, fix-and-flip investors are more optimistic about opportunities in the coming months than single-family rental property (SFR) investors. Some 38% of flippers believe conditions will improve in the next six months, with only 19% believing they will worsen. Rental investors believe the opposite—only 19% believe things will get better, while 31% believe they will get worse.

Shifts in the type of housing demand investors are seeing offer some insights into some of the trends noted above. For example, 24% of fix-and-flip investors noted a decrease in demand for owner-occupied homes in their markets, while 31% of SFR investors cited an increase in demand for rental properties. More broadly, 34% of the investors surveyed claimed that they were seeing both less demand for owner-occupied homes and more demand for rental properties.

Researchers found that investors do not expect the kind of housing price crash that some market analysts have been predicting. Nearly 75% of those polled believe that prices will remain the same or go up slightly over the next six months. Approximately 35% of rental property investors expected to see property values increase, compared to 45% of flippers; and 32% of SFR investors expect to see price declines, while the same is true of only 15% of fix-and-flip investors. Some 39% of flippers think prices will remain about the same, while 33% of SFR investors do.

But despite being somewhat optimistic about the market environment going forward, 44% of those surveyed believed that the nation would enter a recession in 2023 or 2024, as only 15% said that the country would avoid a recession, while 41% were unsure.

Investors overwhelmingly cited today's higher financing costs as the biggest challenge facing their business, as mortgage rates continue to exceed the 6.5% mark. Lack of supply is the second highest-rated challenge, followed by competition from consumers, competition from larger investors, and difficulty securing a loan. These characteristics were also cited, in the same order, as the challenges investors are most likely to face six months from now.

One observation from the data is that larger investors–those planning to buy more than 11 properties in the next 12 months–cited the difficulty in securing a loan as a challenge more often than smaller investors, and in fact, it is the second highest-rated challenge by these investors in the next six months. This may be an indication of credit tightening by regional and local banks, which have historically been a source for these types of commercial loans.

"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, CJ Patrick Company CEO. "That's probably good news for a housing market that may be heavily dependent on investor purchases to help accelerate its recovery."

The Spring 2023 Investor Sentiment Survey is the first in what will be a quarterly report from RCN Capital taking the pulse of real estate investors across the country, identifying market challenges and opportunities, and getting feedback on current trends and events.

About Author: Eric C. Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.

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