Mom and pop investors propping up home-buying market

ByABC News
February 14, 2012, 10:11 PM

— -- Chicagoans Linda and Debra Basili thought about becoming landlords years ago. But even two professional women's combined salaries were no match for the Windy City's high housing prices.

Then the biggest real estate crash since the Great Depression hit, driving down Chicago home prices by a third in five years. The 54-year-old twins took the leap.

Last year, they bought not one but two condominiums near downtown. They found renters within weeks, and the rent more than covers their costs.

"Tell Donald Trump to look out," says Linda Basili, a State Farm insurance manager.

Mom and pop investors like the Basilis are snapping up homes and condominiums to rent out all over the country. They're capitalizing on a confluence of events: depressed home prices, rising rents and strong rental demand. A typical plan? Buy cheap. Collect rents to cover costs. Cash out — one day — when home prices recover.

"An unprecedented number of investors are looking into this," says John Burns, CEO of John Burns Real Estate Consulting.

Investor purchases are strengthening demand in a still-weak market for home sales. Through the first nine months of last year, investors bought more than 26% of single-family homes and condominiums sold in 167 U.S. markets, indicate data tracked by Burns.

That's up from 21% in 2007.

Even the U.S. government wants to capitalize on a strong rental market. It recently started a pilot program for investors to buy and rent out foreclosed homes owned by government-backed mortgage giants Freddie Mac, Fannie Mae and the Federal Housing Administration. Together they own more than a quarter-million single-family homes.

In a recent paper, the Federal Reserve noted that "small investors" are buying foreclosed homes and converting them to rentals. It also said that larger investors were struggling to do so, in part because of tight financing and their inability to buy enough properties in the same area to make it worthwhile.

"Right now it's just that perfect storm for mom and pop investors," says David Hicks, co-president of HomeVesters of America, known as the "We Buy Ugly Houses" company.

A multiyear investment

As with any real estate buy, good timing is key.

Jason Huerkamp, 35, a Coldwell Banker real estate agent in Minneapolis, got especially lucky.

He and his wife, Brooke, cashed out some stocks in 2006 to buy rentals in their former college town of Mankato, Minn. Nothing panned out, and home prices started what's turned into a five-year fall.

"That was dumb luck," Huerkamp says.

In 2009, the couple bought their first rental. "That was probably premature," he says, as home prices dropped further still.

Since then, the couple have bought four rental homes, plus a duplex. They paid $310,000 for the properties and spent $90,000 to fix them up.

Now, they take in about $7,100 a month in rent and clear about $2,700 after expenses, including financing costs.

While home-loan financing has tightened since the go-go days, the couple secured loans for all the rentals. They did have to put 20% down. Their interest rates are also higher than for owner-occupied homes. At today's rates, that might mean a 5% rate vs. a 4% rate.

Assuming home prices rise in three to five years, Huerkamp says the couple hope to sell the homes at a profit and buy small apartment buildings.