A Newfound Hope
How Investors are Shifting with the Market
by Amy Daniel
There is an emerging excitement for investors as activity is beginning to reignite in the space.
For the last few years, there was a pause in the market as rates increased, housing costs soared, and inventory remained low. But as 30-year fixed mortgage rates begin to drop, there is a newfound hope across the entire market, with rates averaging 6.46% in the first week of September, down from 7.22% in early May and a recent high of 7.79% in October 2023. This is the lowest rates have been since April 2023.
While investors typically take on 5-year short term loans that recently have had lower rates than a 30-year fixed mortgage and have been much steadier, changes across the entire market have an impact on the space and investors are beginning to react. We are starting to see things loosen up and investors who sat out over the last few years are coming back, ready to play.
Investor home purchases in the second quarter of 2024 were up 3% year-over-year. That means investors purchased a total of $43 billion worth of properties, according to a Redfin report. The most popular purchase for investors in Q2 was single-family homes, which comprised 69% of all investor purchases.
As investors work on next steps within the every-changing market—whether it is shifting their portfolio or thinking about refinancing — there’s a lot of moving parts that they need to consider.
Impact of the Market
We are seeing a lot of larger investors pruning their portfolios right now, whether there is a certain area that they want to get out of, or they are looking to switch up their inventory. Lower traditional rates will have a large impact on this and should be seen as a positive for those looking to make a change in their portfolio.
As investors sell off assets, simply put, they need someone to buy them. In many instances, they are selling to individual buyers who are purchasing these homes as a one-off asset. As traditional 30-year fixed rates drop, investors can sell off assets faster and make a switch. They are no longer stuck in a market with no movement and can make moves to prune their portfolio.
What is the Right Move?
As rates begin to shift, simultaneously, many investors have loans that were taken out during the hot pre-pandemic market from 2018 to 2020 come due. With this, lenders are being more aggressive and having conversations with borrowers to determine the next steps: Do they want to pay off the loan or pull in different assets and refinance?
With 5-year short-term loans coming due and movement in the market, we are seeing an increase in refinance requests from investors looking to refresh their portfolios.
So, what is the right move? Investors are constantly thinking about the bottom line and there are certainly deals to be had as the market continues to change.
Refinancing can help investors leverage a lower rate or tap into equity to make improvements or rehab a property. It is important to track the data and analysis to determine the next steps.
Historically, refinancing could make sense for investors any time they are saving one or more percentage points. The terms of the loan should also be at the forefront of an investor’s mind when they are considering refinancing. Is there a pre-payment penalty? Carefully reviewing the terms of the original loan is vital. It is important to understand the rules and parameters of the loan before making a move.
The Right Lender
With every decision — from making changes to their portfolio to refinancing — investors must partner with the right lender who will help them make the best decision for their unique situation.
The right lender will be proactive and communicate with investors frequently, keeping them aware of changes in the market and when it might be beneficial for them to refinance. Investors should seek out a lender that is not going to make them jump through hoops and someone who specifically understands the single-family rental space.
Building an ongoing relationship with a lender can make a big difference. Investors should find a lender who understands the space, what they are trying to accomplish, and one who will help them get to their end game.
Looking Ahead: What’s to Come
It is tough for anyone to know what lies ahead but those of us who are in the space are always focused on margin and profitability. We are starting to see some areas where values are coming down and we have seen some rate improvement. If that continues into 2025, despite rental pricing coming down, investors could still find some good deals and make the margins they are looking for in their specific markets. And they should have a healthy swing on portfolio growth and allow for some continued pruning to happen in areas where investors want to sell.
The lower rates will help the one-off purchase of these homes to homeowners. On top of everything else that is going on, we are also in an election year which could spark additional changes in the future for the real estate community.
