POST WRITTEN BY
President of Home Qualified
April 20th, 2020
According to recently released Harvard Study, 2019 was the highest number of renter households since 2006, This was mostly driven by new luxury rentals for Higher Income Renters in city like areas who averaged above $75,000 in income. According to a Freddie Mac study, this type of Metropolitan living fit their lifestyle better. The reason I feel like this stat is significant is because I believe we will see a huge shift in this number and in this specific income group. Living in buildings post pandemic will be forever changed and while they still may choose to rent it will present a great opportunity for landlords to capitalize on a whole new renter pool. Because of housing shortage many buyers have been priced out of the market. With less competition looming you will see a renewed interest to buy and move away from high priced rentals as we have in the past, which we will review later. The biggest reason homeownership has been down amongst the younger generations is because since the year 2000 average home prices have risen 20% and average household income has only increased by 2% according to study by Fannie Mae. When prices outpace income, most people either cannot afford or are too scared to take the risk of buying. We are now looking at an economy that will have trillions of dollars infused into it after this recession. Wages will rise on average; people will want their own space to avoid living the way they have been, and home prices will stabilize with less activity caused by a reduction of investors. The housing boom over the last few years was built on simple supply and demand not irresponsible lending. This was not the case in any other housing markets pre-recession. In 2008 when buyers dried up because of credit restrictions we were already had a surplus of inventory and we were at an all-time high of homeownership rate at 69%. Today we are at historical averages for home ownership and we are still dealing with a National Inventory shortage.
The Three Strongest Real Estate Buys for this market as I see it
Buy Distressed Properties
Single & Multi Family Homes that are undervalued because of their current condition will be your safest buy with the biggest upside post pandemic. Here is why in February of 2013, housing Inventory was at the lowest it had been since before The Great Depression. In the following quarter prices rose 20%. In February of 2020 the inventory of homes was at the lowest point since that date in 2013. This pandemic will now remove more inventory over the next couple of months further increasing this shortage to record levels. The Majority of the homes you will see for sale will be distressed, foreclosures, estate sales or from very motivated sellers. These properties must hit the market they have no choice. The key is to find a property that needs some repairs but based on comparable properties would be worth much more in normal condition right now. So, for example if you could buy a single-family home for $500,000 that would be worth $650,000 with $50,000 in cosmetic repairs. In theory once we are back to regular activity that value would be up 15 to 20% based off historical trends with inventory shortages. This would make your $550,000 investment worth $750,000. The reason now is more of the time than ever for this strategy is because there are less investor financing options, so less investors. As well as less people looking right now because of uncertainty, so less competition and less options so these properties will easier to identify.
Buy Single or Small Scale (1-4 Family) Multifamily Rental Properties
According to the same Harvard study we referenced previously there are two very specific extremes happening in the rental market.
- There is a huge shortage of affordable housing for low income renters.
- Luxury Rentals & Percentage of Luxury Apartments being built are at their highest levels ever historically
Let’s address the shortage first. Affordable rentals will always be valuable, and these stats suggest buying homes that are section 8 eligible would enable you as a landlord to have a large market of renters to choose from. With loss of income over the next few months more of these tenants will be displaced and in need of cheaper guaranteed housing. I believe the combination will make for a boom of these rentals and it is a strategy to look out for. Now onto luxury rentals, let’s look historically to post-recession 2009. Currently there is a shortage of luxury rental buildings in the country. When the recession hit, and incomes were down or lost, these renters flooded the single family and small multifamily mark as they left their luxury apartments. There was a 40% increased vacancy rate in these luxury properties. When vacancy rates went up, so did expenses and even though these buildings were dealing with an exodus they were forced to raise rent. So, with a shortage, their vacancy rates skyrocketed to highest in history. Now we have a market where they are over built, and we have a surplus. As costs go up and incomes have to recover from being temporarily down, I believe you will see a large amount of these luxury renters (defined as someone who makes more than $75,000) hit the single-family rental market or become buyers. This will be a great segment to market to if either of these characteristics are part of your business or investment strategy.
Real Estate Investment Trusts or REITS
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves. These can be bought like stocks which makes them liquid tools. Some REITs invest directly in properties, earning rental income and management fees. Others invest in real estate debt, i.e. mortgages and mortgage-backed securities. In addition, REITs tend to focus on a specific sector of properties, for instance, retail or shopping centers, hotels & resorts, or healthcare & hospitals. REITS have very good long-term growth potential and use a few different strategies to do that. But most of them are at decade lows with an average of a 35% loss in last 30 days and some as high as a 60% loss. The good news for those who own them already or are thinking about investing is that on average they also have huge cash reserves. These cash reserves will mostly be used to buy distressed assets, commercial and residential, when this is over. So, the key in picking the right REIT I believe is to look at the ones with big balance sheets who will be ready to capitalize. You should avoid REITS that have a large concentration of commercial retail space, entertainment space such as movie theaters, hotels or amusement parks. REITS that would be more desirable are those that concentrate on single or multifamily housing as well as warehouse or medical building holdings. Because REITS were so impacted by the 2008 Crisis most have kept their leverage, or amount of investments they finance, at all-time lows. They on average have a very low debt, about 35% of their portfolios. That’s a lot of equity they can use to make investments. In the aftermath of the 2008 recession within 24-month REIT investors were up on average 175% on their investment. For the week of April 6th REITS rose 23% outpacing the DOW 500 by 10%.
As discussed above I believe the three Strongest buys in Real Estate at the moment are distressed properties, single or small-scale multi-family, and REITS or Real Estate Trusts. I predict the number of luxury apartments will decrease after this pandemic, due to people noticing that by purchasing a single family they would pay the same as they due in rent but, for more space and the property being their asset. This crisis will show some people that having space is more of a necessity over living in a luxurious building. Of course, people will still rent, I just see the numbers decreasing due to lack of space and comfort. Distressed properties will be a great buy, as the inventory shortage may increase. Buying distressed properties is a great idea, as long as research is done on the property to make sure not a lot of work would need to put into the property where you would be losing money.