I had a conversation with one of our buyers last week. We were talking about the macro economics of buying investment properties and I thought it would be good to share with you the highlights of that conversation and why cash flowing investment properties are still a good deal.
Rental Demand and Housing Stock
Rental demand continues to be strong. National apartment occupancy reached 95%: the highest in at least 6 years according to Axiometrics. There are many reasons for the tightness in this market.
1. Getting financing isn’t as easy as it once was and there are no signs of this changing anytime soon. Without available financing, most families are forced to wait until their credit gets strong enough to buy. Over 60% of new mortgages are given to borrowers with credit scores over 720. Back in 2000, before the bubble, those mortgages were more evenly distributed.
2. One piece of the American Dream was home ownership. It doesn’t seem to be that way for the Millennials. Millennials are content to rent. They have seen what happened to their parents who purchased the McMansion and they’ve decided it isn’t for them right now. They prefer to live in hip urban areas, in which, homeownership is out of their price range.
3. While the economy on the whole has recovered from the downturn in 2009, the home building market is still in recovery. Single family home construction remains at just 1/3 of the 2007 peak, which leaves a shortage of housing. US Home builders are not building enough homes to meet the nation’s housing demand. Residential construction has declined to historically low levels.
Source: Federal Reserve Bank of St. Louis
Until this demand can be met, occupancy rates will stay at recent highs. But with tight financing, home builders don’t have the customers to sell to, so they don’t build homes. Until there is a change, markets will continue to be tight.
Follow the smart money. Blackstone Group LP, the largest owner of US single family homes, continues to purchase rental units across the country and abroad. One of their most recent deals is a $1.7 billion purchase of 11,000 apartment units spread across the US. The deal will increase the number of apartments they hold to 43,000. This along with the 47,000 rental houses they own demonstrates their view on residential real estate.
Interest rates are low and will continue to be for the foreseeable future. Even with the expectation of rate increases over the next few years. Federal Reserve members see rates getting to around 3% in 2017 and up 3.75% over the longer run. While that is a large increase from their current ZIRP policy but take these facts into consideration: One, the Fed Funds rate has only been below 4% a few times in the last 50 years.
Second, the Fed has been suggesting that they will be going to increase rates for years now and there still has not been a rate increase. As a matter of fact, at the beginning of the year, most fed watchers expected a hike at the June 2015 meeting and nothing happened. Citigroup’s Head of North America Economics, William Lee, suggests that the Federal Reserve is scared to raise rates. (can we get a link to this news too?) If that is the case, then it could continue to be low rates for a while. If you have the ability to get long term financing, there are still deals to be had.
All these facts and figures show that buying an investment property holds a pretty good standing in 2015 and subsequent years. This is also a fact that the current real estate market is not as good as it was back in 2010-12. But don’t let that stop you from getting out of the rat race.
Real estate investment is still one of the best forms of creating a positive cash flow. According to Louis Glickman, “The best investment on Earth is Earth”. There are many good deals out there waiting to be bought with well above average returns. [Click here to read more…]
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