5 Things Causing Excitement in Real Estate Investing
You can learn a lot by reading the headlines. A good headline can catch your attention and pretty much describe the story. The important part is to CLEARLY READ AND INTERPRET THE HEADLINE. I often get calls from investors who read articles such as “best places to buy a home” and want my opinion on those markets.
They will be shocked when my assessment differs from the article. The difference of course is that the article is talking about a homebuyer buying a home and is a good place to live.
I always say "live where you wish but invest where it is best." Often these are two different locations. For example there are many cities in California that are great places to live, but you could never expect to cash flow those properties as they are so high priced.
When you properly interpret the headlines and read articles there has been some very interesting information that has investors thrilled.
Lately there have been some great topics suggesting a great year to grow a landlord business. A deeper read also may suggest the window of opportunity is narrowing.
Key Headlines Suggest Great Time For Investors
Smaller city rental demands increasing:
I have seen many happy investors over this one. Big cities no longer dominate the rental demands. Plus more and more Baby Boomers have entered the rental market and they prefer to live in smaller cities. The Millennials as well often prefer a smaller city.
As these two groups represent the 2 largest segments of renters, it opens up many more markets for the small investor to diversify their portfolios into markets they feel more comfortable owning property in. Of course as I always remind investors the market should be sustainable. Which means it should be an undervalued market with plenty of job diversity and job growth.
Wall street investors are holding longer than expected:
Remember the iconic headlines (with interviews with Warren Buffet) where he says, “I’d buy up a couple hundred thousand single family homes if I had a way to manage them.” This statement and this recorded replay of Warren's interview jumped started the housing rebound. This is precisely what Wall Street set out to do.
The unfortunate part for many smaller individual investors is they were intimidated by these billion dollar check books buying up all the property. Headlines everywhere talked about the hundreds or thousands of homes they were buying.
The small mom and pop investors thought they were being squeezed out. Well you can now rest comfortably, because this group has gobbled up all it can handle and moved on to R.E.I.T.S and larger apartment buildings.
As it relates to single family homes that are owned by wall street investors, their numbers represent only about 8 % of all investment homes. The interesting thing here is that they planned to buy, put a coat of lipstick on them and sell for a large profit after a year or two. What they learned was that the rental business was too lucrative of returns so they are holding many of these in their portfolio.
Marriages are being postponed:
Here is a headline that you may have overlooked. Many articles can give you clues as to who your tenants are or perhaps where the markets are heading.
Reading between the lines my eyes saw, as people are staying single, they will not be tied down with a mortgage. This is pretty much what the Millennials are looking to do as I have discovered when researching Millennials in the market place. Many Millennials are delaying marriages and delaying having children as they enjoy freedom and mobility.
Most are not getting married (if at all) until mid and late 30s and with such a vast population by sheer number alone, they have created a huge need for rental housing.
Rental demand increases:
These are the best loved headlines and there are many of them. Every week there are articles talking about home vacancy rates decreasing and rental demand rising.
The question I often get asked is will this rental demand be sustainable. Only time will tell this for sure but here is my take on it. For about a 10 year span from the mid-80s to the mid-90s we hovered around a 64% home ownership rate. Then when the mortgage industry switched gears to entice more home ownership the ownership rate increased to over 69%.
We all know this created many challenges and the finance industry collapsed putting us right back to where we were in the mid-80s with ownership rate down to more of a historic average. It appears to me, without the outside influences of programs, rental rates and ownership rates are sitting at a comfortable place for the majority of people.
Many people who were forced back into renting are finding comfort in the mobility and not being tied down to a mortgage. Many have found comfort in renting so I believe we have many years of strong rental demand.
Lower down payment requirements and even FHA financing for investors:
The lower down payment requirements help more people to obtain a mortgage. Yes, your tenants may be able to obtain a loan to buy a house but interestingly enough many don’t even try.
Surveys conducted by lenders show that most people do not even attempt to obtain a loan as they do not believe they will qualify so they opt to keep renting. Whether they can or they feel they cannot these people continue to rent adding a stronger rental base for you to choose from.
The new investors however have the benefit of obtaining FHA loans for 1 to 4 unit investment properties as long as they occupy one of the units. There are many benefits in doing this as well as tax advantages. (This is precisely how I got started years ago.)
Supply and demand appear to be safely in the hands of the landlord
The question now is how long will the window of opportunity exist. This question makes me reflect back to one of my favorite lines from the movie Other People’s Money (with Danny DeVito) “the game never changes, only the rules change”.
The comparison of course is opportunities always exist you just need to change with the times. I believe the next changing tide will be an increase of the interest rates which will prompt changes in what and where we invest. Investors continue to seek comfort in investments they have control over and when doing proper diligence real estate offers this better than any other investment is capable of.