US real estate investors are losing money on roughly 1 in 7 homes they sell — among the worst since 2016. And they're most likely to take a huge hit in these 5 cities
The golden days of real estate investors buying and flipping homes for a quick profit appear to have come to a halt.
In certain U.S. cities, investors have been forced to sell homes at a loss as sky-high house prices and elevated mortgage rates diminish homebuyer demand.
Rich young Americans have lost confidence in the stock market — and are betting on these 3 assets instead. Get in now for strong long-term tailwinds
UBS says 61% of millionaire collectors allocate up to 30% of their overall portfolio to this exclusive asset class
Owning real estate for passive income is one of the biggest myths in investing — but here is 1 simple way to really make it work
Investors lost money on roughly one of every seven (13.5%) homes they sold in March, according to a recent report by Redfin. In comparison, only 4.8% of overall U.S. homes that sold in March sold at a loss.
That came on the heels of a dire month in February, when real estate investors lost money on 14.5% of homes sold — the highest rate since 2016 and a long stretch from the record monthly low of 2.8% in May 2022.
This dispels the myth that buying and selling real estate is an almost guaranteed money-maker — but the stats are still quite strongly in favor of the investors.
Where are homes most likely to sell at a loss?
Real estate investors are most likely to lose money in markets that saw the largest surges in house prices during the pandemic, says Redfin. The report looked at data from 40 of the most populous U.S. metropolitan areas.
High mortgage rates have eaten into investor profits and dramatically increased the typical homebuyer’s monthly payment. This in turn has slowed homebuying demand and pushed down sale prices, meaning the share of investor-owned homes selling at a loss has gone up.
Phoenix, Arizona, the hardest hit market in March. Just over 30% of homes sold by investors lost money. Phoenix was followed by Las Vegas, Nevada, (28%), Jacksonville, Florida, (20.9%), Sacramento, California, (20.2%) and Charlotte, N.C. (17.4%).
“I recently showed one of my buyers a three-bedroom single-family home in Glendale that was listed by an investor,” Phoenix Redfin agent Van Welborn said. “My client ultimately found another house they liked better, and the investor ended up losing about $20,000.
“The investor bought the home for $450,000 and sold it for $480,000, but put $50,000 of work into it. The house also sold below the $550,000 list price after sitting on the market for almost four months.”
Meanwhile, investors are less likely to lose money in affordable areas where housing prices didn’t climb as high during the pandemic, as well as certain South Florida markets.
In Virginia Beach, Virginia, only 1.7% of homes sold by investors in March sold at a loss — a major difference when compared to Phoenix. Virginia Beach was followed by West Palm Beach, Florida, (2.4%), Miami (2.5%), Fort Lauderdale, Florida, (2.5%) and Warren, Michigan (2.6%).
Read more: Here's how much money the average middle-class American household makes — how do you stack up?
Why are investors selling at a loss?
So why don't investors just wait to sell until the housing market bounces back? Well, Redfin’s senior economist Sheharyar Bokhari says that's exactly what "many long-term investors who rent their properties out" are doing. "But many flippers — especially those who bought recently — can’t afford to."
Home flippers — which Redfin defines as investors that buy and resell homes within nine months — sold roughly 1-in-5 homes at a loss in March, according to Redfin.
“Holding onto homes that aren’t producing income can be expensive because the owner is on the hook for property taxes, along with operating costs and monthly mortgage payments in some cases,” Bokhari added. “Many short-term investors are also opting to sell because they know prices may have more room to fall and want to cut their losses.”
While the number of investor-owned homes selling at a loss is currently quite high, it’s important to remember that many real estate investors — whether large companies or mom-and-pop investors — continue to make gains from buying and selling homes, even in cooling housing markets.
In March, the typical investor sold a home for 45.9% ($145,714) more than the price they paid, according to Redfin data. But those gains have shrunk from 55.3% ($173,458) a year earlier and a pandemic peak of 67.9% ($199,274) in June 2022.
Alternative ways to invest in real estate
Amid fears that the economy and home prices could slow further and cause more headaches for residential real estate investors, there are other ways you can get involved in the real estate market. If buying and selling homes is off the table (for now), you might want to consider an alternative.
Prime commercial real estate has outperformed the S&P 500 over a 25-year period — and until recently, only the ultra rich with millions to invest were able to get in on that action. But new platforms have opened up opportunities like this to regular retail investors.
Another great way to profit from the real estate market is investing in a real estate investment trust (REIT). REITs are publicly traded companies that own income-producing real estate like apartment buildings, shopping centers and office towers. They collect rent from tenants and pass that rent to shareholders in the form of regular dividend payments.
If you’re keen to dip your toe into investing in real estate, you can find an option that best suits your needs by answering a few quick questions with Moneywise's investment-finder tool.
What to read next
You could be the landlord of Walmart, Whole Foods and CVS (and collect fat grocery store-anchored income on a quarterly basis)
This janitor in Vermont built an $8M fortune without anyone around him knowing. Here are the 2 simple techniques that made Ronald Read rich — and can do the same for you
What do Ashton Kutcher and a Nobel Prize-winning economist have in common? An investing app that turns spare change into a diversified portfolio
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.