A Midyear Look into Real Estate Cash Flow and Capital Growth
So how is the market? Yes, this may be the number one question I get day in and day out. The reply is always the same. It is always great to someone somewhere! How the market is depends on what perspective you are asking. To sellers it may be great to buyers it may not, Depending on what you are really asking.
Buyers have an unfair advantage
Sellers love when it is a seller's ‘market as they can get top dollar for their properties. However, a seller needs to wait until the market navigates into a seller's market. Buyers have the advantage as there are always markets within the country that are investor advantage markets.
Therefore a purposeful investor is always poised and positioned to invest their way forward.
Seasoned investor invest up
Seasoned investors that find their existing properties market approach a sellers’ market, love to reposition their asset in the form of a 1031 tax deferred exchange into these buyer’s markets. This way they are always investing forward.
Investors have been enjoying investment opportunities like we never would have imagined. 2015 has been a year of neutralizing and this trend has continued thru 2016. Now in 2017 inventory of the highly sought after investment class properties has been shrinking along with lower inventories and increased prices.
Seasoned investors are Bullish
This is a year that the new investors who have been casually looking into investing will either have to become serious or they will be left behind. The easy investment purchases have been fading away.
The seasoned investors however tend to be purposeful and strategic with their investments. They understand that great investment properties are always available. The question has and always will be where today is the best most investor advantage market?
Where is the location today that reflects the best return on investments?
Seasoned investors tend to do very well in times where the thundering herd is replaced by only serious investors as the competition is less. Today extra diligence is required to find the best properties, along with low interest rates, high demand for rentals and still undervalued markets have the seasoned investors bullish on investing and many plan to continue to buy through all of 2017 and beyond.
Talk of inflation
This has been discussed for a couple of years and, of course, inflation will be tied to home values, interest rates and a number of items. Savvy investors are gearing up to buy everything they can before the pending inflation kicks in.
Interest rate increases
We have seen threats of rate hikes for a couple of years and it looks like they may actually be happening now under the new Trump administration. Feds raising the rates does not necessarily guarantee a rate increase on home mortgages however. It is speculated that the mortgage increases will not exceed a half of a percentage point throughout the year.
New household formation
The population of the U.S. continues to grow; adding to the need for housing is the number of households formed from the millennial children who have finally moved away from their parents and started another household. Investors are excited because of the growing number of these households who have chosen to rent as opposed to buying. Landlords are excited over the huge growth in renter demand.
Rent rate increases
Rental rates this year are at a more modest pace than in the past. As the markets stabilize, landlords will be expected to show tenants they have something to offer them that their competition does not offer. There will be plenty of tenants and the time to impress these tenants is now to secure them long term for you. Tenants will be more diligent in their search now so you will have to show why your property is better than the others or worth more than the others.
New construction homes enter the playing field
With single family homes being the most highly sought after rental property, new home builders have taken notice. They have specifically designed new homes to cater to rentals. Some builders will become landlords while other builders cater their sales to investors.
NOTE: as an investor you want to make sure the builder restricts new home sales to 10% for investors. Many do this but the sustainability of your equity growth will require these neighborhoods to be largely owner occupied areas.
One of the most important attributes for sustainable growth is affordability. Affordable markets rotate all the time. While many affordable markets of the past have experienced growth and may have lost their affordable status, there are always markets that exist that are considered affordable and undervalued. The test for this is the area’s median home price needs to be able to make mortgage payments based on a third of the area’s median income.
Median income x 3 equals affordable
So markets that take less than 33% to pay for housing are considered undervalued. This is where your equity growth will come from. The Midwest markets today tend to be some of the best cash flow markets, we are excited about markets like Kansas City, Indianapolis, Atlanta, and Philadelphia. To see the list and keep current check out the affordable markets here!
With all the household formation there has been a larger buildup of multifamily construction going on. Small investors will not need to be concerned about these however as they are catering to the more affluent and higher priced rentals.
Indeed 2017 will be another great year for investors, more education will be required by newer investors to stay competitive with the savvy investors, but there is always room at the top.