The Rise of the Mid-Tier Investor

December 18, 2017 Robert Greenberg

As the single-family rental market matures, we are seeing some interesting trends. One that we find especially interesting is the growth of the middle tier — real estate investors whose property holdings are larger than the small investors that own one or maybe just a few buy-and-hold investment properties but are still much smaller than institutional investors.

Over the years, the single-family rental market has been dominated by “mom-and-pop” investors who own one or two investment properties and this is still the case today. However, the market began to change in 2012 when institutional investors swept in and bought up single-family foreclosures en masse.

But here’s what’s interesting: The share of investors owning between 6 and 10 rental homes has increased 65% from February to November 2017 while the mom-and-pop investment share shrunk by 15% in the same time period.

Other “middle” investor classes also expanded during the same time period. SFR investors owning 100 or more rental homes saw their market share go up 59% while investors owning 11 to 100 rental homes saw their market share rise 58%, according to statistics provided by ATTOM Data.

There may be a variety of reasons for the rise of the mid-tier investor. Here at Patch of Land, we believe the increased availability and the ease and speed of obtaining financing may be playing a role. Prior to 2012, many buy-hold investors bought one property at a time in cash. The opportunities for financing were limited and typically involved taking out a conventional mortgage whose rates were based on an investor’s personal income and finances.

That began to change five years ago, when a variety of alternative lenders entered the space and began offering loans based on a rental property’s cash-flow not the investor’s personal finances.

Around this same time, the crowdfunding industry began to take off. Among new startups in the crowdfunding space were several focused on the real estate and mortgage industry including Patch of Land. Many of these new lenders have targeted the middle-tier investor. Besides the buy-hold, fix and flip investors have increased their use of financing with nearly 36% of flips now financed, up from about 32% in 2014, according to ATTOM Data.

As these additional financing options mature, the mid-tier investor is also seeing an opportunity to gain market share and expand their holdings by taking advantage of leverage to expand their investment portfolios. These investors are becoming even more savvy as they gain experience.

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Investors eye properties in the country’s ‘middle’

Besides the growth in the mid-tier for real estate investors there’s another ‘middle’ that is of interest — investments in the middle of the country. With high prices on both coasts, investors are eyeing the country’s mid-section for future real estate investments as home prices nearly everywhere continue to increase.

ATTOM Data recently did a data analysis to show where investors are earning money on their investments and where they are losing it. It turns out some of the best investments are in the middle of the country. The highest cash-on-cash returns in the entire country were in Tulsa, OK (in the 74126 ZIP code), where investors are earning more than $10,000 in annual net cash flow. Other promising markets include St. Louis (ZIP code 63115) and Chester, Pennsylvania (ZIP code 19103). Detroit, Philadelphia and Camden, N.J., also performed well.

Want to examine other ZIP codes? Check out ATTOM Data’s heat map to see more.

 

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