Over 10 years into the current cycle, astute investors continue to defy warnings of a market crash. They stay diligent to an investment plan, focus on local markets, and zero in on opportunities that the news outlets ignore. In this article, I’ll discuss the approaches you can use to find real estate opportunities regardless of where we are in the cycle. If you know what to look for, build the right relationships, and meet the needs of the seller, you’ll continue to build wealth while minimizing your risk.
Turn on the news and you’ll hear warnings about how late we are in the cycle. Analysts argue over whether we’re seeing some of the early indicators seen just before the 2008 crisis. But the reality is, the backdrop today is different than it was in 2005. Back then, there was a lot of financial engineering – including securitizations and commercial mortgage-backed securities (CMBS), subprime lenders, and banks being pulled into deals with 80-90% leverage.Regulators are now much more mindful and watchful of the banks, particularly as related to higher-risk lending in real estate. Good borrowers today can expect 60-70% loans on quality projects. But for second-tier projects, it’s harder to get debt financing. Intelligent investors consider all of this. But it doesn’t stop them from hunting deals in local markets. They let local forces of supply and demand dictate whether an opportunity exists. And some of these forces are too strong to ignore.
Millennials continue to influence many of the population growth waves seen in recent years. They gave rise to 18-hour cities by supporting jobs that hired them, and in a recent article, we explored the possibility of this massive group moving migrating to the suburbs. Understanding trends of large population groups allows investors to buy undervalued properties before any boom occurs. Cities like Charlotte, Seattle, Denver and Portland have already become targets for millennials whose goal is launching or advancing their career.
The U.S. unemployment rate fell to 3.7 percent in September 2018 – the lowest it’s been since 1969 – as reported by the Bureau of Labor Statistics. What’s most interesting to real estate investors however, is which sectors saw growth and decline. Professional and business services grew by 54,000, transportation and warehousing jobs by nearly 24,000, construction by 23,000, manufacturing by 18,000 and health care by nearly 30,000. But retailers cut 20,000 jobs.Keeping a pulse on which industries dominate the area you want to invest in provides insight on how attractive the area will be to future residents. Another big reason to watch job growth is because it greatly affects the Fed rate, which tends to go up when the economy is strong.
The fundamental macro change that is behind all of this is the decline in the homeownership rate. A dozen years ago, it was close to 70%. Today, homeownership is below 62%, and projected to fall to around 60% by 2025. What does that mean? The United States has about 130 million homeowners. And a couple people in each household. An 8-point decline in the homeownership rate represents 10 million households. In other words, 20 million people that used to own homes, that now rent. In places like Portland, Seattle, and Denver – population and job growth is above the national average because millennials are moving there. As a result, rent growth, and the pressure on apartment occupancies goes up. That knowledge might steer your investment decision towards multi-family apartments in urban cities, small-medium office buildings, or even commercial strips in growing suburbia. Investors must follow the cookie-trail and balance findings with their own risk-tolerance.
Seattle, Portland, Denver, Phoenix, San Diego, and Southern California are all great spots to invest in. Besides superior population and job growth – as mentioned above – they’re places where millennials want to live. But peeling back further, you’ll find that these are places with attractive outdoor recreational and cultural activities. People want to live in places that provide a high quality of life. They also have solid transportation systems, and neighborhoods with population centers and suburban areas. If you’re looking at multi-family, you might look for a vintage 1980 that's surrounded by properties that are vintage 2000. This presents an opportunity to bring an old property up to current standards, and get the associated income boost.Many of those markets have natural geographic boundaries that limit the availability of land, and the places you can expand.
When negotiating real estate deals, it’s imperative to meet the needs of the seller to ensure you get the deal. One way to do that is to find out if the seller has a catalyst to sell the property. For example: A patriarch of the family passes away, and the heirs can’t agree on what to do with the estate. What they don’t want – is to collectively invest $2 million to repair the property. Situations like these usually prompt a sale. You may also search for constraints. The family may want to sell, but there’s a loan with a prepayment penalty associated with it. In situations like these, you can get creative and assume the loan from the seller. Real estate investing is about creating value. Traditionally, we think about adding value to properties, but it’s entirely possible to add value to sellers, tenants, and buyers. Win-win situations make the best deals. **********When finding real estate opportunities, use the criteria above to provide a benchmark but keep an open mind about what makes an asset, an area, or a situation unique. That’s only possible by putting in the work, building relationships, and knowing how to spot a great opportunity when it presents itself. It’s not easy, but that’s why you can always find partners with more experience and and expertise that compliment your skills.***********If you like this post, be sure to enroll in our free six week course on the fundamentals of commercial real estate investing — Enroll Now.*