Real Estate Investors: Are the Best Days Behind Us, or Ahead?

With the price surges we’ve experienced in recent years, some real estate investors are selling their properties. Will new investors come to fill the vacuum?

Maybe not so many — now that some of these properties have become prohibitively costly to buy, finance, and insure. That said, there are some pockets where small rental businesses can tap into profit.

Turning a Profit Is Getting Harder Out There.

Today’s investors need a heaping dose of patience or luck to eke out a profit. As we noted in January:

For those who buy when the market is rising, a home appreciates in value effortlessly. After holding the home five years or more, these owners build up enough equity to consider selling at some point, covering all the closing costs and still profiting from the sale. But over these next five years? It won’t be so easy.

These days, that five-year period is sounding quaint. Properties that once took five years to pan out could now take a decade or longer. Wall Street companies have taken over so much of the landscape that small investors get sidelined if they can’t renovate. And renovation materials are rising in costs, due to inflation and trade wars. This means investors have to cope with shortages and delays when they need wood products, wiring, appliances, fixtures, and installation work.

Then there are the rising costs of property taxes.

So, some investors are now pulling back from the market, preferring to put their cash into high-yield bonds, funds, or savings accounts. They’re hoping to turn a profit without having to deal with owner-renter dynamics and building maintenance.

They have a point. Real estate is a long game. And even if patience is your super power, you might not be so keen on the possible downsides. Like the market fluctuations. Or the possibility that a renter might create extra work or fall behind in payments. Local government rules. The commitment of time and attention.  

Every now and then, even good renters run into financial pressures they can’t overcome. Renters who ghost owners or fail to pay are not typical. But these aren’t typical times. For the investor with just one or two units, the risks are serious.

How Does a Small Rental Business Succeed? Location Is Key.

All of the above acknowledged, are there promising areas where small rental businesses can succeed? Realtor.com believes there are significant profits to be made in the Sun Belt states at this time. The publication, issued by the National Association of REALTORS®, points to a set of “top 10 markets for 2025” and highlights profit potential in these locations:

• Realtor.com’s #1 pick for investors is Colorado Springs.

• Miami and Orlando, Florida are also named as top markets (with Miami ranked #2 in the top 10 list).

• Texas has brisk markets in El Paso and McAllen.

• In Virginia, Richmond and Virginia Beach both offer healthy returns on investments.

• Other sunbelt cities that made the list are Phoenix, Arizona; Atlanta, Georgia; and Greensboro, North Carolina.

Of course, there are no guarantees of success. Investors can be impacted by turmoil in renters’ lives. And the recent pandemic upheaval has changed working people’s employment and credit profiles in some pretty intense ways. Some investors are adjusting their processes to help reduce risks. They might have modified their standard leases — making the terms shorter for future renters — or upped the security deposit requirements for new residents.

New Investors Are Up Against the Hedge Funds.  

If you have only one or two properties, those who are spreading out their risks over more properties will have an advantage over you.  

Multi-unit markets, including rental properties, have proven profitable for large, publicly traded companies. Very profitable. Consider this. Fifteen years back, no one business owned more than a thousand single-family rentals. By 2022, hedge funds and other corporate investors had bought up some 700,000 single-family homes to rent out. By 2030, these wealthy businesses are projected to control 40% of the single-family home rental market.

It’s hard for the small investor to compete with large corporations. Corporate buyers often have large sums of cash to work with. They can get materials and services at discount pricing. They’re constantly buying houses and pushing up both home prices and rents.

Kudos to the small investors who genuinely care about their renters and take good care of their buildings. “Customer care” is the small business owner’s edge over the big companies that now dominate just about every landscape in our lives.

Under the Internal Revenue Code, small investors can get a capital gains tax deferral when selling one investment property to buy another. This — known as a 1031 exchange — is something any new real estate investor should know. So here’s a step-by-step guide to the 1031 exchange.

New Legislation to Level the Playing Field? Let’s HOPE It Passes.

What’s the Humans Over Private Equity (HOPE) for Homeownership Act? Senators Mark Kelly describes this proposed law as “going after hedge funds and other institutional investors that own and control large parts of the housing market.” Senator Kelly, together with Jeff Merkley and co-sponsors, introduced it in February.

The House of Representatives proposed a matching bill, led by Adam Smith and Linda Sánchez. “Homeownership for working families today,” Sánchez observed, “feels more like a fever dream than the American Dream.”

Mark Kelly laid out the problem in a press release:

• Rent prices are high.

• Home prices are causing “the dream of owning a home” to feel unreachable for many people.

• Billionaire corporations buy residential properties and rent them out, and this is making homes scarce and pushing up costs.

• Current law does not put a limit on the number of homes hedge funds can buy.

So, Kelly said, the law will confront Wall Street’s control of the market and let regular people have a chance to succeed. Holding their own deeds, Kelly said, is “one of the foundations that working families need to thrive.”

Precisely what would the HOPE for Homeownership Act do? Stop the hoarding of real estate by big business. Specifically, the Act would:

• Tax hedge funds 15% per home sale price or at least $10K when they buy homes.

• Remove tax incentives like depreciation and mortgage interest reductions for corporate deed holders.

• Disincentivize house hoarding, by way of a $5,000 per home tax on any hedge fund that won’t completely sell off the homes they control over a 10-year period.

Organizations that back this proposed law include Consumer Action and Americans for Financial Reform.

Thank You, Readers. We Leave You With a Few Final Words.

You might be interested in what many call passive income from the rental market. But for those who run small rental businesses, there’s nothing “passive” about the earnings.

Are you prepared to stick with it for a couple of decades or more? To buy enough real estate to spread out the risks? If not, you could be in for a lot more work than today’s market can fairly reward.