Even considering the Great Recession, California has enjoyed economic growth rates at or near the highest in the nation for many years running. When you couple that with stagnant wages, aka a cheap and skilled labor force, investors have been flocking to California real estate for some time now.
Local Los Angeles residents are certainly familiar with this trend. Drive through almost any neighborhood, any street practically, and you’ll see single family homes being demolished or gutted and flipped into luxury mansions. But have we seen the peak of this trend?
Maybe. According to a recently released report by the California Association of Realtors, an increasing number of real estate investors are turning to “niche” investment properties in lieu of single-family and multifamily properties.
So what exactly is a niche investment property? Basically, anything that’s not a single family or multifamily unit. Examples include commercial real estate, land and even mobile homes. C.A.R.’s 2016 survey of investors found that these niche investments were up from 6.4 percent in 2014, to 7 percent in 2015 and now 10 percent in 2016.
How do we make sense of these numbers? It’s pretty easy, actually. The decline in these common types of real estate investments is due to the same market force that’s driving down home sale numbers and squeezing pricing: lack of inventory. Inventory of distressed homes, which are defined as such by their being purchased by investors, regardless of the home’s current state, have been declining since 2013.
Three years ago, nearly eighty percent of all investment properties were single-family homes, in 2016 that number is down to seventy percent. And not all of that money is being diverted into apartments, condos, or other multifamily properties. Shares of investors who purchased multifamily properties were also down, though only slightly, from 21 percent in 2015 to 19 percent in 2016.
Yesterday we looked at some of the surprising factors that influence home pricing and average time on the market, like design choices, good school districts and updated kitchens. What about real estate investors? The reasons investors cited for buying a particular property were first and foremost, of course, location (38 percent), close behind was rate of return (30 percent), then pricing (17 percent), and future development potential (7 percent).
Another way the declining number of available distressed properties is affecting the market is in the type of financial transactions being used to purchase investments. Cash was formerly king, but more and more investors are being forced to turn to equity transactions, which have increased steadily, rising from 70 percent in 2014 all the way to 87 percent this year.
The C.A.R. survey also asked what investors planned to do with their newly acquired properties. The number who plan on renting out their properties is down slightly from 62 percent last year to 65 percent in 2016. Twenty-six percent of investors plan on flipping their properties and the remaining twelve percent plan on using it as a vacation rental, or “other” use, including leaving them empty.
If you’re interested in buying or selling a Luxury Home in Los Angeles, please contact us now at 323-829-8811 or email Susan Andrews at susan@luxurylahomes.com.
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