After taking a breather during the pandemic, real estate investors are again aggressively buying homes in Metro Denver, roughly one in seven purchases this year, according to a study by real estate broker Redfin.
“We still have a low interest rate environment and investors can borrow cheap money. And they have a clear certainty of future earnings, ”said Daryl Fairweather, Redfin Chief Economist.
This will likely only add to the pressure traditional buyers face when competing for the limited number of offers. Investors typically come with cash offers and a quick deal that sellers find more attractive than accepting an offer from someone with a list of contingent liabilities reaching out to approve a mortgage.
The pandemic pushed people who lived in overcrowded apartments and condominiums to lock themselves in larger rooms. However, investors stayed on the sidelines for longer. During the pandemic, they bought homes slower than 2019 for three quarters in a row, with purchases declining as much as 45.5% nationwide at the lowest point, according to Redfin.
Investor purchases rose 2.7% nationwide in the first quarter, with the largest increase being in single-family home purchases, up 4.8% year over year in the first quarter. Condominium purchases rose 0.9%, while purchases of townhouses and apartment buildings such as maisonettes and triplexes rebounded sharply but were still down year-on-year.
The recovery is much stronger in the Denver subway, where residential property purchases by investors rose 16.8% and ranked 11th out of 41 subway areas surveyed. The metros with the strongest investor recovery were San Jose, California, up 44%; Detroit, up 33.8%; Chicago up 27.2%; and Riverside, California, up 24.5%.
Investors usually have a reputation for defying the market, which is what they did after the real estate bankruptcy a dozen years ago. So what motivates them to buy in markets like Denver where prices have already risen sharply and which may have less chance of appreciation? It’s scarcity and cash flow.
“The rental market is very hot right now, with high demand for rental properties and very little properties to rent, prompting investors to buy rental properties,” said Brady Miller, CEO of Denver-based real estate agent Trelora.
The number of properties Trelora bought from investors in April is three times the number they bought in April 2020, he said.
The more expensive the real estate market becomes, the more potential buyers are valued and prevented from having to rent. At the same time, there are no returns on fixed income, and foamy stock markets could take a big dip if inflation persists.
And while higher mortgage rates could slow the market down and put short-term pressure on property values, Miller said real estate, like real estate, historically provides good inflation protection.
The more competition there is, the more hectic the market becomes. Fairweather said half of the listings on Metro Denver sell in five days, much faster than the 19 days it takes nationally. Both new registrations and sales rose sharply in the past year. However, this reflects the decommissioning orders received last April. Average home prices, not skewed by the pandemic, rose 20% in the Denver metro last year.
“The real estate market is even more competitive this year than last year. The average Trelora listing received 3.7 offers last month, compared to just 2.0 in April 2020, which was already a seller’s market, ”Miller said.
Investors have targeted entry-level homes in the past, but this year they are aiming for high-end homes, which is riskier as these are usually harder to sell and appeal to a limited pool of tenants. The number of high-end homes investors are buying has increased nationally by nearly 20%, while the number of entry-level homes they have bought is down 9.2%, according to Redfin.
Part of it simply reflects what the market is currently offering. But Fairweather said it appears wealthy remote workers are looking for part-time residences in places they find attractive, homes that can also serve as short-term rents when they don’t live there.