It’s no secret that insurance companies are in the business of making money, but through that end, some companies are not just pulling out of high-risk areas, but entire states, which have become a major cause of concern among real estate investors according to RCN Capital’s Spring 2024 Investor Sentiment Survey.
The survey, which was conducted by the CJ Patrick Company—a market research and intelligence firm—found that over 68% of the investors surveyed, noted that rising insurance premiums or the unavailability of insurance coverage was a factor in their decisions to buy and sell real estate. Fifty-seven noted that these insurance issues had caused them to miss out on an investment opportunity.
According to RCN Capital, the problem is particularly acute for investors in states which have seen unusually high levels of extreme weather events over the past few years and have subsequently seen homeowner insurance rates double or triple. In some cases, insurers have pulled out of these states entirely. Over 90% of fix-and-flip investors in Florida and 83% in California claimed to have missed out on an investment opportunity due to insurance issues. Similarly, 44% of rental property investors in both states cited insurance matters as their second-biggest challenge in today’s market, behind only the high cost of financing.
“Investors are already facing many challenges in today’s housing market—rising prices, limited inventory, and higher financing costs,” said RCN Capital CEO Jeffrey Tesch. “Soaring insurance costs, and instances where hazard insurance is simply not available is another significant hurdle for these investors to overcome.”
Investor sentiment cautiously optimistic
According to RCN Capital, surveyed investors cited many of the same factors as major challenges to their success as in earlier surveys, but there were some new findings. The high cost of financing was mentioned by 71% of respondents; rising home prices (a new option) was cited by 45%; the lack of inventory of properties for sale was mentioned next by 36% of respondents; and competition from institutional investors by 35%.
These trends were generally the same for both investors and home flippers. Financing costs were noted by 75% of flippers and 78% of rental investors; rising home prices by 46% and 52% respectively; inventory by 34% and 40%; and competition from larger investors by 31% and 35%. But digging into the findings from the two states most frequently mentioned for purchases by investors revealed different local market conditions. While both types of investors cited high finance costs most frequently as a major challenge, flippers in Florida mentioned competition from large investors much more frequently (62%) and noted difficulty securing a loan as their third biggest challenge (57%).
Florida rental investors cited insurance issues as their second-biggest challenge (44%) and 28% mentioned problems securing a loan. California flippers, on the other hand, cited only two major challenges with any frequency: high financing costs (90%) and rising home prices (64%). California rental property investors, like their Florida counterparts cited insurance issues 44% of the time, their second most mentioned challenge. These rental investors also cited difficulty hiring more often than their peers nationwide at 22%.
“If California and Florida can be considered bellwether states in the real estate market, findings in this quarter’s survey may be predicting more widespread problems,” noted Rick Sharga, CJ Patrick Company CEO. “Investors in both states are already facing strong headwinds due to insurance issues, which may be contributing to some of the problems they’re having securing loans. We may start to see similar issues in other states prone to extreme weather events, such as Texas, Colorado, and Louisiana in the future.”
Investors facing new challenges and local issues
But investors are unfortunately expecting prices to only rise, and expect to see the impact of higher home prices and corresponding mortgage rates in their local markets first.
Over 89% have seen either a decline in demand for owner-occupied homes, an increase in demand for rental properties, or both, in the markets where they invest. Investors believe that home prices will continue to increase – almost 59% expect home prices to go up, 31% believe prices will remain about the same, and less than 10% believe they’ll decrease. Despite these higher prices, 55% of respondents expect to buy the same number of properties as they did a year ago. Thirty-one percent expect to buy fewer and 14% expect to buy more. This marks the third consecutive quarter where fewer investors said they planned to buy more properties; interestingly, it’s also the third consecutive quarter where fewer investors said they planned to buy fewer homes.
Most investors opting for rental properties, buying close to home
For the third time in the last four surveys, more investors claimed to focus on buying rental properties than fixing-and-flipping homes. Forty two percent of the respondents buy and rent properties, while 31% fix-and-flip properties to home buyers. Wholesaling—securing the rights to sell a property without taking title—was cited by 22% of respondents as their primary type of investment activity.
As in the previous survey, the majority of investors purchase their investment properties close to home – 35% purchase within their hometown, and 87% within their home state. California, Florida, Texas, and New York were the states most frequently cited by respondents as where they invest today, and where they plan to invest over the next year.
The Spring 2024 Investor Sentiment Survey is the fourth quarterly report from RCN Capital, taking the pulse of real estate investors across the country, identifying market challenges and opportunities, and getting feedback on current trends and events. Click here to view the report in its entirety.
