Certainty in an uncertain world …

It’s been said the only thing certain in life is death and taxes.

Of course, properly structured and well-advised real estate investors can usually mitigate most of their taxes. 

Meanwhile, before people die, they live.  Along the way, they get older.  And as people age, their needs change …

… and because entrepreneurship is about serving needs, it’s a safe bet there’s some opportunity in meeting the needs of aging people.

In a recent radio show, we talked about investing in undeniable demographics … specifically, the baby boomers … who are moving into retirement and beyond.

A few days later, this headline popped up in our news feed:

More Growth Ahead in Seniors Housing – NREI August 16, 2017

“… research shows continued confidence in improving fundamentals …”

 Of course, if you’ve been following The Real Estate Guys™ for any time, you know senior housing in general … and residential assisted living in particular … is a niche we REALLY like.

The article affirms our belief that …

“ Demographics continue to be a big driver for development.”

“ ‘As active as the market is with the product that we have today, we are looking at the tip of the iceberg in terms of boomers hitting retirement age,’ says Scott Stewart, a managing partner at Capitol Seniors Housing, a private equity-backed real estate acquisition, development and investment management firm based in Washington, D.C.”

‘The fast-paced growth of that population in that sector is going to make today’s discussion of overbuilding obsolete, because there just aren’t enough places for everybody today,’ ” he says.”

 The article is addressing … diffusing … concerns about over-building in the niche …

“ Demand mops up new supply.”

“Despite the new supply coming online, respondents remain confident in improving fundamentals. A majority of respondents (78 percent) anticipate that rents will rise over the next 12 months …”

Other notable comments include …

“When asked to rate the strength of market fundamentals by region, the South/Southeast/Southwest rated the highest.”

“When comparing with other property types, respondents continue to rate seniors housing as a highly attractive property type. Its scores topped that of the five major property types on a scale of one to 10.”

Okay, so it’s probably clear there’s some real opportunity here. 

But if you’re a Mom-and-Pop investor, does it make sense to jump into a niche that’s attracting big players … or are you just cruising for a bruising?

No … and YES!

When you invest in housing for seniors it’s critical to understand the difference between a high-density community and a residential facility …

… and not just from the investor’s perspective, but from the resident’s perspectve.

Let’s start with the resident …

 There are some seniors … probably MOST … and their children (the decision makers in many cases) who’d rather see Mom or Dad live in a real home …

… in a tree-lined residential neighborhood, with a backyard, and neighbors … where residents don’t feel like inmates in an institution.

Please understand … we’re not slamming the great people or services provided in bigger facilities. 

We’re just saying from a senior’s perspective, having a room in a home in a regular neighborhood FEELS a lot different than living in a room at a campus for old people.

But for a BIG investor, those individual homes are a logistical problem. 

To move BIG money, you need economies of scale and the ability to buy or build a lot of inventory at one time.

It’s the same problem Warren Buffet alluded to when he told CNBC …

“I’d buy up a ‘couple of hundred thousand” single-family homes if I could.”

The challenge, as noted in this Forbes article about Buffet’s statement, is …

“… the cost and logistics of making such an investment in large enough size to move the needle for Berkshire Hathaway is prohibitive.”

The point is big money can’t play well at the single-family residential (SFR) level …

… even if the SFR’s are being converted into highly-profitable residential assisted living facilities.

But YOU can.  And that’s why we like them.  Think about it … 

The supply and demand fundamentals are solid. 

The priority for expenditure is near the top of the list for any family.  Taking care of Mom or Dad is far from a discretionary purchase …

… so as an investor, being that far up your tenant’s payment priority ladder is a much safer place to be in uncertain economic times.

Plus, much of the money to pay you comes from insurance, government, and the senior’s estate.  In other words, you’re very likely to get paid … even in a weak jobs and weak wages economy.

Also, you don’t have to compete with big money investors, even though they clearly see the opportunity and are moving into the space. 

That’s because the barrier to entry for the big money isn’t how MUCH money is needed … it’s how LITTLE is needed.

Meanwhile, the customers would rather live in YOUR product than big money’s product.  So while big money is adding to supply, they’re not really in your niche.

This is a BEAUTIFUL thing.

But it gets better …

Residential assisted living homes can’t be mass produced.  They need to be built or converted one at a time.  There’s very little threat of a big player glutting the market.

And taking lessons learned from watching hedge funds move into the SFR space … big money was only able to acquire tens of thousands of SFRs because huge blocks of inventory were available temporarily through mass foreclosures. 

We don’t think there’ll be mass foreclosures in residential assisted living facilities.  They’re way too profitable.

But because this kind of senior housing is in high demand and highly profitable, at some point big money will start assembling them …

… buying up groups of homes from multi-facility operators … and then buying up nearby individual facilities which can strategically integrate into existing operations.

It’s called consolidation … and when it comes, big money will bid up existing operations (creating equity for those already there) …

… because they can recover the “over-payment” through operational efficiencies and financial leverage.

Between now and then, for the street level investor, the big opportunity is to be part of building the inventory by converting homes into residential assisted living facilities …

… cash-flowing along the way … then one day cashing out to big money players. 

And if those big money players never show up … just keep on cash-flowing while providing a much needed service to the community.

Until next time … good investing!


 More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

Clues in the News – Housing Sales, Home Improvement and Foreign Investors

Every real estate investor is afloat in a vast economic sea. As an investor, it’s easy to believe you’re on stable ground … only to wake up and find you’ve drifted far from your goals.

We believe SMART real estate investors (you!) have to act a bit like ocean biologists … tracking the winds, noting the undercurrents, and keeping detailed observations of the environments you find yourself inhabiting.

One way to take your notes is to read the news. And in this edition of Clues in the News, we bring the news to you! Listen in to hear from:

  • Your economic sea biologist host, Robert Helms
  • His lowly research assistant, Russell Gray

Listen



Subscribe

Broadcasting since 1997 with over 300 episodes on iTunes!

real estate podcast on itunesSubscribe on Androidyoutube_subscribe_button__2014__by_just_browsiing-d7qkda4

 

 


Review

When you give us a positive review on iTunes you help us continue to bring you high caliber guests and attract new listeners. It’s easy and takes just a minute! (Don’t know how? Follow these instructions).

Thanks!


Slumps in home sales, builder confidence

This is a trend we’ve been observing for a while … existing home sales are decreasing. In June, they dropped 1.8% to the second lowest level this year.

If we stopped right there, you might think the economy is in trouble because people aren’t buying houses. But let’s take a closer look.

While sales of homes overall are dropping, the median home price in June was $263,800 … 6.5% higher than the same time last year.

All housing types aren’t equal. While prices are rising for houses in the 250k+ category, they’re falling for homes under 100k.

Just further evidence, like Robert Kiyosaki says, that the rich are getting richer while the poor are getting poorer.

The article linked above quotes Lawrence Yun, NAR chief economist, who says, “The demand for buying a home is as strong as it has been since before the Great Recession.”

So why are home sales dropping?

Many factors could contribute to a slow market … the growing number of millennials with high debt and inadequate income, for example. And the flux of institutional investors entering the real estate market.

Severe housing shortages are also leaving folks on the sidelines.

While the average median home price has risen, the median price of a new home has dropped by 3%.

Homebuilder confidence in recent months has reached record lows … leaving buyers hoping for a new home in the lurch.

If you look at the stock market, it would be easy to believe everything is peachy. But look at homebuilders … and you’ll see an indicator that not everyone has a bright outlook right now.

Fewer new homes, more home improvement

Speaking of homebuilders, housing inventory is at a 30-year low.

This while home prices have risen to pre-crisis levels in most markets (and far higher in a select few).

It’s a conundrum. Why are homebuilders moving at a snail’s pace? Why is homebuilder confidence so low?

Take a look at capital markets, and you’ll get a partial answer … real estate is heavily dependent on financing, and while the markets may have recovered from 2008’s recession, banks are still wary about giving loans.

In addition, 78% of homebuilders complain that labor shortages are their No. 1 concern.

Reliable, skilled labor is difficult to find. One reason? Construction workers found different careers during and after the recession … then never returned to the home-building business.

In lieu of buying new homes, homeowners are instead spending record sums on home improvements.

According to an article in the Wall Street Journal, “A shortage of new single-family homes across the U.S. is pushing up prices and locking many buyers out of the market.”

Note the certainty in that statement? Reporters are quick to assign cause and effect.

It’s your job to look at the bigger picture and see what’s going on. Then reexamine the conclusions made in the news … and draw your own.

Sales to foreigners up, buyers and sellers struggle outside U.S.

While home sales overall are down, Forbes reports that foreign investments in U.S. properties have skyrocketed recently. Sales to foreigners are up 49% over last year.

If you’re a U.S. investor familiar with the current political situation, you may be wondering what these investors are thinking.

But think about it … the U.S. has strong property rights, lots of renters, a relatively stable government, and strong infrastructure.

Buyers from China and Canada want to move their cash to a place where they see a better long-term future … and the U.S. fits the bill.

Speaking of Canada, a model produced by Better Dwelling predicts that Canadian home prices still have farther to fall.

Canadian real estate markets started crashing when the Canadian government made policy changes that hinder foreign investment.

It’s a lesson for investors to look at both the economics and the politics of a situation … then align themselves financially to policy decisions for the smartest payoffs.

You also need to be aware of the data … and what that means in terms of rising trends. While the Canadian housing market is struggling, lonely urban centers are predicted to be the next big real estate trend in the country.

While our friends across the border are seeing home prices fall drastically, our friends across the pond are seeing a dearth of affordable housing. 

An article we found recommends the London government lower tax rates for new homeowners and suggests 100% mortgages as another option.

The alternative is that London will see a “brain drain” as young workers unable to find affordable housing move outside of London.

This is a problem in the U.S. too, as large companies seek to find locations where workers can afford decent housing and quality-of-life measures are high.

The good thing about problems? (And there is a good thing.) If you’re creative, a problem is only an opportunity to create a solution.

Businesses and people need good places to live. Real estate markets have the opportunity to create them.

Homelessness and hedge fund managers

A recent article in Bloomberg listed the cities where rent hikes leave the most people homeless.

The bottom line is markets with less slack see more homelessness. The message for you? Slack is good.

It’s crucial for you to dig into your local market and figure out the dynamics driving outcomes. Many things can put a squeeze on your bottom line … make sure you’re aware of current and potential trends in demographics, jobs, and the local economy.

Winning markets don’t require a good economy to stay viable. They allow you to stay profitable even when factors change and be the recipient of demand when other markets are struggling to keep prices down and renters happy.

Remember, when you invest in the rental marketplace, you’re getting into a long-term contract. But a stable one.

Stability is probably one of the big reasons hedge fund managers and other wealthy investors are making a break for real estate.

They see the opportunity for a safe haven … but most don’t want to get their hands dirty. If you do, you may find doors opening for you.

Tune in to our next episode to hear an amazing guest make his case for entrepreneurship.

Until then, go out and make some equity happen!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

Real estate prices plunge … and soar

Can real estate crash … and boom … at the SAME time?

Sure.

We were reminded of this when we dug into the following headline …

New York Real Estate Prices Plunge in 4Q As Listing Days and Discounts Soar
Maybe you don’t have any plans to invest in New York real estate … now or in the future.  Neither do we.

That’s not why this headline caught our eye.

Sure, we look for clues in the news to see challenges and opportunities in those markets and product types we’re interested in.

But we also look for patterns and principles … and consider what they teach us about strategic real estate investing, even when the news is about markets we’re not currently following.

So there are a few reasons why this article attracted our attention.

First, we know the world’s wealthy like to store chunks of their wealth in premium real estate in non-domestic markets with strong property rights.

If you’re an American, you’d look outside the United States.  Many non-U.S. wealthy favor U.S. markets. Chinese and European investors tend to like New York … Manhattan,  in particular.

Of course, activity in any specific market is a blend of local and out-of-area demand.  To really understand what’s happening, you need to look into the various components of demand.

From the report the article refers to, we can’t tell what role foreign demand played in the decline of Manhattan prices.

We can’t simply assume a decrease in foreign demand caused prices to drop.  In fact, based on data in the report, we’d expect the change probably was not primarily due to changes in foreign activity.

But we don’t know.  You can read the report yourself and see what you think.

The more important principle for markets you’re tracking is that when prices move … either property prices or rents … it’s worthy of digging in to find out WHY.

If you determine the cause is temporary, it might be a great time to move into acquisition mode … so you have boats in the water when the tide comes back in.

Another thing to look at when the tide recedes … where the demand flowing?

In this case, the pricing collapse referred to is happening in Manhattan,  a sub-set of the greater New York market.  Did the demand flow elsewhere?

Citing a Bloomberg report, the article also says …

“… while buyers are abandoning Manhattan en masse, Brooklyn seems to be the key beneficiary with purchases there soaring 22% YoY and median prices climbing 15%.”
Again, it’s not Manhattan and Brooklyn we’re necessarily interested in.  We’re simply looking for patterns and principles we can apply to any market we’re observing.

The contrast between Manhattan and Brooklyn reinforces the notion that when it comes to real estate markets, there will always be winners and losers.

So a savvy real estate investor should be able to make money in any economic climate by paying attention to these flows.

Does that mean in soft economic times, high-priced markets always lose and low-priced markets always win?

If only it were that simple!  But that’s what makes market analysis and selection so fun.

You have to consider economics, demographics, politics, supply and demand factors, social patterns, taxation, business climate, job and income growth, quality of life, and market sentiment.

That sounds intimidating, but it’s not as tough as it seems.

In fact, it’s largely common sense. After all, you’re a human being. You can relate to why another human being would prefer to live, work, or run a business in one place over another … when you see challenges and opportunities from their perspective.

That’s why doing your homework is important … both statistically and anecdotally.

We like to research markets from afar, and then go there and put boots on the ground to affirm or refute our long-distance assumptions.

Stats only look in the rear-view mirror.  Data tells you what already happened. It’s just one valuable point on a trend line … the past.

But when you add feedback from people who are in direct contact with the market right NOW … bidding on properties, marketing properties, screening tenants … you get another valuable point on the trend line … the present.

And just as businesses are wise to listen to feedback from frontline employees … folks dealing with customers and operational issues on a day-to-day, real-time basis … real estate investors are wise to listen to their property managers, real estate agents, turnkey providers … even the tenants.

These are the boots-on-the-ground folks who are best qualified to say what’s happening NOW.

Your job is to consider the past and the present in the context of macro-factors and your personal objectives.  Then make appropriate moves.

The good news is that real estate markets and trends typically move and develop slowly. 

So there’s usually plenty of time to adjust … to get in when opportunities are emerging … and get out or restructure early as challenges start showing.

But ONLY if you’re paying attention.

The bad news is it’s easy to fall asleep at the wheel.

So as you’re planning the new year, be sure to schedule some time to monitor the news coming out of markets you’re interested in. 

Dig deeper into the reports and data to see what they’re saying.  Then schedule touch points with your team in the markets you’re in or considering.

If you don’t have relationships in the markets you’re interested in, get to work on developing them.

Staying informed and in touch is important and easy to do.  You don’t need a fancy MBA, PhD, or genius IQ.

However, like most things important but not urgent, “easy to do” is also “easy not to do.”  Just remember, life doesn’t give you credit for intentions … only for actions.

Scheduling time converts intentions into actions.

A person of average intellect who acts will always surpass a genius who fails to act.

Until next time … good investing!

More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.