A customer wrote in this morning about an investment property they’re looking to buy in Blacksburg. As many parents of students at Virginia Tech and Radford do, they want to buy a place for their kids to live in while they’re here at school, and the relative stability of the New River Valley market has meant that – for the most part – these have been solid investments. It wasn’t always the case, however. A quick back story …
In the early 2000’s, these types of investment properties were all the rage. Investors were snatching up condos and townhomes like crazy – the cost of borrowing money was low, rents were stable and rising, and there was a steady group of renters year in, and year out. You can see a visual of that in the chart below, showing sales of condos and townhomes in Blacksburg and Radford going back to 2003. After the real estate crash in 2008 (which really hit us in 2010), interest in these types of properties fell dramatically, and that was due in part to much-needed lending restrictions. Lenders were requiring larger down payments, in the neighborhood of 25% or more, and often denying loans due to inflated investor numbers in complexes – in other words, too many investors and not enough owner-occupants.
One note – the volatility of the Radford line below is related to the relatively low number of sales in the area during the time period.
As you can see from the above chart, interest in these types of properties really didn’t start to pick up again until 2014, which corresponds with the relaxation of lender guidelines. Starting in 2013/2014, as we started to see improvements in the overall economy throughout the country, lenders started loosening their requirements on financing for investment properties. But that doesn’t answer the question of WHY condos and town homes can be difficult to finance. As I wrote to a customer this morning, in a nutshell:
For conventional, secondary market loans, banks don’t like to see high investor penetrations in condo complexes. The line of thinking is that people are more likely to default on their investment property(ies) before their primary residence, so guidelines for things like condos are a good bit tighter. It’s important to know that often, traditional banks like will run these complexes through their algorithms and deny the loan due to too many investors in a complex and not enough owners. If they don’t deny it, the other condition they typically add is a higher downpayment, of 25-30% or more. This is why I continue to suggest local lenders – in college markets with high investor numbers, they look at the market as a whole and not as a formula.
If you’re considering buying a condo or townhome here in Blacksburg or Radford – or anywhere in the New River Valley, really – let’s talk. The opportunities to make what has typically been a solid investment are there, but it’s not without risk. Let’s talk about those, as well as the rewards, and see if it makes sense for you.