Mortgage rates have hit a peak of 6.8%, and the ripple effects are being felt across the real estate market, particularly for investors. What we’re seeing is a widening disconnect between mortgage rates and the returns real estate investors can expect from their properties. For the first time in a long while, it’s hard to make the numbers work for those hoping to turn a profit from buying homes for cash flow, especially in regions like the South, where this trend is even more pronounced.
The fundamental issue here is that it’s nearly impossible to make money buying properties for income at the current interest rates. Most investment properties yield a cap rate of around 4-5% on an unlevered basis. And that’s before you consider financing costs. Once you add debt into the equation, most properties are losing money. This isn’t a fluke; it’s the reality of today’s market.
Let’s break down the numbers. Picture a hypothetical investor purchasing a $350,000 house in Atlanta, with the expectation of renting it out for $2,400 per month. On the surface, this might sound like a decent deal, but when you account for expenses, mortgage payments, and other costs, that investor could end up losing $4,600 a year. It’s not exactly a winning formula, is it?
This is not an isolated issue, either. Rental markets in cities like Atlanta, Phoenix, Las Vegas, Tampa, Nashville, and Austin are all facing similar struggles, with declining rents in many cases. Investors who rely on the traditional approach of buying and holding properties for rental income are starting to see the writing on the wall. The incentives to buy in these environments are rapidly diminishing.
So, what’s the logical next step for investors who are already holding properties that are costing them money? Many are starting to offload their homes. Take, for example, a listing in Atlanta owned by Progress Residential. It’s a 2,600-square-foot house listed for $299,000, and they’re struggling to get the rent they had initially hoped for. They’ve decided to sell, and they likely won’t be the last.
There are approximately 24 million investor-owned homes across America, which accounts for about a quarter of the entire single-family housing stock. Many of these investors bought their properties in the last two to three years, and with mortgage rates skyrocketing, they’re now finding it difficult to turn a profit. Some are even losing money. As a result, we’re seeing a reduction in investor buying activity and an increase in properties being listed for sale, particularly in the South. Inventory data is starting to reflect this shift.
In large markets across the South – places like Dallas, Atlanta, Nashville, Tampa, and Orlando – inventory has spiked, particularly in ZIP codes dominated by investor activity. Let’s take a closer look at Houston, for example. Certain neighbourhoods, particularly in the north, east, and southeast, are now experiencing significant surpluses in housing inventory. In some areas, inventory has risen by as much as 50-100% compared to long-term norms.
But it’s important to note that this phenomenon isn’t evenly spread across all neighbourhoods. There are still areas, particularly in the west and southwest of Houston, where there’s a shortage of available homes. These tend to be higher-income areas with more owner-occupants, and they’re faring much better in terms of inventory levels.
What’s really fascinating about this is that while the impact of investor activity might seem like a national trend, it’s actually highly localised. We’re seeing stark differences between neighbourhoods, even within the same city. In those parts of Houston with an abundance of investor-owned properties, home values are starting to drop. In some areas, seasonally-adjusted prices are falling by around 1% per month, which adds up quickly. On the flip side, in areas where owner-occupants dominate, home values are continuing to rise.
For anyone thinking of buying a home, whether as an investment or as a primary residence, it’s crucial to pay attention to these local trends. What’s happening in one part of town might be the exact opposite of what’s going on a few miles away. Are inventories rising or falling? What do recent price movements suggest? And how could these variables shape the market in the future? These are the questions buyers need to be asking.
Institutional investors, who typically hold large portfolios of properties, are especially vulnerable in this environment. They’re feeling the squeeze of high borrowing costs and shrinking returns, and many are starting to sell off homes to cut their losses. As more of these properties hit the market, particularly in already oversupplied areas, we can expect prices to drop further in those specific neighbourhoods. For individual investors, especially those who bought homes in the last few years at inflated prices, this presents a real challenge. Selling now might mean taking a loss, but holding on could mean bleeding money for the foreseeable future.
It’s not all doom and gloom, though. For prospective homebuyers who have been priced out of the market in recent years, this could present an opportunity. As investors offload their properties, particularly in markets with high inventory levels, we could see home prices become more accessible. But timing is everything, and buyers will need to be savvy about where and when to make their move. The key is to focus on local market conditions and not be swayed by national headlines. What’s happening in your specific ZIP code will have a far greater impact on your potential investment than broader trends.
Ultimately, the story of the current real estate market is one of uneven pressures and localised disruptions. While some areas, particularly those with high investor activity, are seeing significant drops in prices, other neighbourhoods remain resilient. If you’re an investor, now is the time to be cautious and strategic. And if you’re a buyer, it could be a good moment to re-enter the market, provided you’re armed with the right information.
It’s a tricky landscape, and there are no guarantees. But one thing is clear: the days of easy money in real estate are behind us, at least for the time being. Whether this trend continues will depend largely on the direction of mortgage rates and how investors, both large and small, choose to navigate the choppy waters ahead.
