Buy-and-rent investors get squeezed

  @CNNMoney January 2, 2014: 7:15 AM ET
chicago foreclosure

Profits on Chicago foreclosure have shrunk this year.

NEW YORK (CNNMoney)

It's getting harder to make a bundle buying up foreclosures and renting them out.

The auction prices of homes climbed faster than rents in 2013, so returns on investment dropped, according to a report from CoreLogic.

That's a change from the past several years. In many cities where mortgage defaults spiked after the housing crash, investors were able to buy foreclosed homes at prices so low they were able to make big rental profits.

The practice is still profitable, but in many places not as much as it was.

"It's gotten so competitive that discounts at foreclosure are not where they were," said Daren Blomquist, spokesman for RealtyTrac. "It's harder for third party purchasers at auction to make a profit."

Related: Housing markets to watch in 2014

According to CoreLogic, return on investment fell in eight of the 10 best buy-and-rent cities.

In Tampa, which was the top city in 2012, returns declined to a yield of 9.7% in 2013 from 10.5%.

The reason for the decline: An influx of institutional investors with money to spend at Tampa's foreclosure auctions.

"It's much more difficult to get a return when prices have been pushed up," said Sean Galaris of financial services firm LM Funding, which is based in Tampa.

The yield represents an investor's rental profits divided by how much he spent to buy and rehabilitate the property.

Chicago was CoreLogic's top market for investors in 2013, but the yield dropped to 9.9% from 10.4% in 2012.

In Orlando, yields fell to 9.4% from 10.3%. Atlanta returns went to 9.3% from 10.2%.

Related: Real estate: Look for value in 2014

Only two cities of CoreLogic's top 10 recorded gains. Houston's average return rose to 8.8% from 8.5% and Charlotte's inched up to 7.9% from 7.8%.

Nationally, homes sold in foreclosure auctions now go for just 4% less than regular sales, down from 16% in 2012, according to RealtyTrac's Blomquist.

Home prices in general have soared this year, jumping nearly 14% annually through October, according to the latest S&P/Case-Shiller report.

Related: 5 biggest housing comebacks in 2013

And rents have lagged. Census Bureau numbers show that rents only grew an average of 2.2% during the first nine months of 2013, compared to the same period in 2012.

As profits on foreclosures drop, investors will cut back on purchases.

Glenn Plantone, a real estate investor in Las Vegas, said that there were only 208 properties sold there at auction to third party purchasers -- not lenders -- in October. That was the first time in six years that a month had fewer than 300 of such sales. To top of page




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