NAR: Investors buying homes for the long term

© 2005 FLORIDA ASSOCIATION OF REALTORS

WASHINGTON -- March 22, 2005 -- While the media has widely reported the National Association of Realtors' (NAR) research findings that 23 percent of all existing homes sold in 2004 were purchased by investors, the association says that it doesn't naturally follow that many of those buyers were speculating on a quick profit, since a separate NAR study found that only 3 percent of all homes were held for only a year or less.

NAR President Al Mansell says people buy homes for the long-term regardless of whether they're owner-occupants or investors.

"Even if you assume that all of the people who sold their home in a short timeframe were investors, it still would be only a fraction of that market segment," he says. "Real estate simply isn't the kind of quick-in, quick-out investment that Wall Street is fond of. It's a tangible asset that provides solid gains over time and isn't subject to the kind of volatility that's common in the stock market."

An earlier benchmark survey of all existing second-home owners, conducted in 2002, showed that typical respondents had owned their second home for nine years.

"Anecdotally, most of the stories we've seen on investment speculation have focused on the new home or condo market, and they've been confined to a handful of areas with very tight supplies of available homes and sharp double-digit price gains," Mansell says. "It's true that some people have made fast profits, but it's not to be expected. In fact, it can be risky, and prospective buyers need to be aware of the facts before they think about jumping in."

NAR's recent second-home study showed that 79 percent of investment properties were a detached single-family home. The lion's share of investment homes, 83 percent, were existing homes. "In other words, the typical investment property isn't a new home or condo as generally described in the stories on speculation," Mansell says.

In a normal market that is balanced between home buyers and sellers, home prices rise at the general rate of inflation, plus 1-to-2 percentage points. In those market conditions, buyers typically need three-to-five years to build up enough equity to trade up to a larger home; most people stay in their home for six years.

"Real estate investment is not for everyone. You should have sufficient resources to cover your expenses for six months -- things don't always go your way in the rental market," Mansell says. "In addition, if the timing of your purchase coincides with the top of local market prices and you're hoping for quick gains, you'll be sorely disappointed -- and if you're not prepared to be a landlord, you'll need to find someone to manage the property for you."

On the other hand, market rents typically are higher than mortgage payments, but conditions vary widely. "Investment buyers need to study and understand the cash-flow scenario and home-price patterns for the neighborhood where the property is located," Mansell says

Eighty-three percent of second-home buyers financed with a mortgage and made a median downpayment of 22 percent, the NAR study shows. Although 45 percent use savings for a downpayment, 29 percent used equity from a previous home. Nearly two-thirds of all second-home buyers purchased investment property.

© 2005 FLORIDA ASSOCIATION OF REALTORS