Housing horror … or hallelujah?

Regular readers know we follow the news pretty closely. Well, okay … we’re obsessive compulsive news junkies.  But for good reason!

The economy and underlying financial system (two VERY different things) form the environment all our money-making ventures exist in.

When the financial winds change, alert investors adjust their sails to put the wind at their back.

Today’s “booming” economy is creating asset price inflation … including stocks and real estate … depressing bond prices (which in turn, drive interest rates UP).

PLUS the Federal Reserve continues to tighten monetary policy by raising its target rate.

Unsurprisingly, as we discussed last time, mortgage rates are rising along with the 10-year Treasury … and this adds to downward pressure on rising real estate prices.

Mainstream headlines tell some of the story.  But we also watch trade publications for clues that don’t always make it to the mainstream.

So we opened up our news archive and scanned industry headlines for the last few months to see if there’s a discernible trend …

Worst home affordability in nearly 10 years – June 19, 2018

U.S. home prices appreciating at slowest pace in two-years – July 24, 2018

Foreclosure Starts Increase in 44 Percent of U.S. Markets in July 2018 – August 17, 2018

Home flipping returns drop to 4 nearly 4-year low  – September 4, 2018

Rent jumps cool in hot markets, but for how long? – September 11, 2018

Down payments rise with stiff competition for homes – September 20, 2018

Without digging into the weeds of each article (though they’re all interesting reads) …

… it seems like home prices have risen to a resistance point … slowing their upward trajectory … while marginal owners are getting pushed off the back of the bus.

Meanwhile, real estate “day traders” (flippers) are finding it harder to get in and out quickly because the rising-price gravy-train is tapering off.

Okay, let’s take a breath here and process …

If you’re buying real estate for short term passive equity growth, this is probably bad news.  The market isn’t just dumping generous portions of equity on to your balance sheet.

Also, if you’re in at the high end of hot markets, you may have to hold longer than you thought.  Hopefully, the cash flow is there to help you ride out this phase of the cycle.

Those who went into the high-end of hot markets with thin or negative cash flow … whether as an investor or a home-owner … could find themselves land-locked and bleeding for a while.  No fun.

We’d need to dig deeper, but these are often the source of increasing foreclosures.

BUT … if you’re in the middle price range of moderate priced markets, you may end up being the beneficiary of INCREASED demand …

… as folks from higher priced properties and markets, both as buyers and renters, crowd into your space.

Remember, when you’re at the top, there’s no one above you to move down in tough times to boost demand in a soft market.

That’s why we’re fans of middle markets … where there are people below you to move up in good times, and people above you to move down in bad times.

And when it comes to apartments, nearly all new builds add to the top of the market …. increasing competition and pushing down prices at that level.

But it’s not feasible to build new middle market inventory, so while it’s more competitive to buy those properties … there’s also good demand from renters once you have one.

Whether it’s rising mortgage rates, rising consumer interest rates, price inflation, or rising home prices …

… it seems the stars are aligned for strong demand for rental properties.

Just like the financial crisis, housing horror can be landlord hallelujah.

All that to say that the right properties in the right markets with the right financing, while harder to find, still make a lot of sense.

Just be SURE your underwriting is realistic … because right now, the market is saying the easy money gravy train is slowing down.

It’s also probably wise in any market, but especially now, to project growth ONLY on those things you can control (added value) … and not count on a rising tide to lift your boat.

And if you’ve got great properties with equity … and you want to keep them for the long haul … it might be a good time to look at liquefying some of that equity to keep as dry powder if prices soften.

With rising rates, you can probably lend out some of the proceeds on desirable properties for a high yield (first position with a good chunk of protective equity!) …

… or invest into high-yielding properties or pools (mobile homesresidential assisted living, etc.) where the income from only portion of your loan proceeds can cover the ENTIRE loan.

This lets you store the rest for picking up bargains when the falling tide flushes speculators who are out of position to make it to the next up cycle.

Bottom line is those who are great at managing cash flow will win.  Those who aren’t will get flushed.

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.


Love the show?  Tell the world!  When you promote the show, you help us attract more great guests for your listening pleasure!

Finding profits under the radar …

You’ve probably heard the popular adage, “Get rich in a niche!

But what does that really mean?  And how do you do it?

The premise is when you work or invest in something with a high barrier to entry, or that few strong players know about, you face less competition and can therefore enjoy better profits.

Makes sense.

The challenge is finding and mastering the niche.  And common sense says a profitable niche doesn’t stay secret for long.  So when you find one, it’s wise tomove quickly and capitalize ahead of the crowd.

Of course, all that sounds good on the chalkboard.  But how do you make it work in the real world?

We look for clues in the news … and this headline caught our attention …

Sovereign Wealth Funds, Private Equity Step Up MOB Acquisitions

For the unfamiliar, MOB stands for Medical Office Building.

Obviously, MOB is a niche, and sovereign funds and private equity are BIG players … with big research budgets and smart analysts.

So watching what big players are doing is one way to identify a hot niche.  Then you look for a niche within a niche where Main Street investors can play.

But first, let’s look at why the big boys like MOB …

“ … increasingly view medical office space as a core property type with strong fundamentals.

“ … demand for space continues to grow amid an aging population in need of more medical services …”

 “This particular sector of commercial real estate benefits from one of the largest and fastest-growing components of the U.S. economy: healthcare … ”

That “aging population” they’re referring to are the baby-boomers.  This huge demographic wave is sometimes called “the silver tsunami” because of its economic size and impact.

It’s something we’ve been following closely … including which industries and geographies stand to benefit.

But if the big boys are already in the space, is it too late?  Or is there still opportunity for Main Street investors?

We think there is.  And clues in the article support the thesis …

“ … risks facing medical office investors …  tenants are increasingly facing reimbursement pressures from insurers and government payors such as Medicare and Medicaid … ” 

“…  medical office facilities do not offer tenant diversification … tenants are exposed to the healthcare sector, unlike conventional office buildings …”

 “ … a shift of providing high-quality care … [in] alternative settings …” 

So let’s consider how these clues might fit together to spell opportunity …

First, it’s not MOBs that big money is excited about.  It’s the demographic and industry that the properties support.  It’s about elderly people and healthcare.

The properties are actually a problem because they’re specialty use.  A medical building is typically only suited to medical uses.  That can be risky.

So, even though medical buildings appear strong for the long haul, it’s still a one-trick pony.  If the sector cools, you’re trapped in a property that’s not of much use for anything else.  Yikes.

Next, the tenants of MOBs are healthcare providers whose income is largely derived from insurance and government reimbursements, which are facing downward pricing pressure.

Savvy landlords always look past the tenant to the tenant’s ultimate source of income.

In this case, “commodity” healthcare providers are getting squeezed by stingy insurance companies and social services.  Not good.

Lastly, the article reports a “shifting preference” by tenants (healthcare providers) towards “providing high quality care [in] alternative settings …”

Now THIS is interesting!

It seems those providers being squeezed are moving towards sub-niches where there’s more profit.

In fact, people we know in healthcare say a popular strategy for combating the declining margins of “commodity” healthcare …

(commodity healthcare are the kinds of services major insurers and government programs aim their cost-cutting strategies on)

… is to focus on boutique services for affluent clients who pay by cash or through private insurance.

That’s a clue.

How can Main Street real estate investors play?

Since we’ve already identified the demographic (boomers) and economic sector (healthcare), let’s focus on the property.  After all, we’re real estate guys.

We’re looking for a property well-suited to a boutique healthcare for an affluent, self-paying, or privately insured sub-demographic.

Of course, Main Street real estate investors aren’t healthcare professionals.

So we either need to find tenants who are, or find a simple healthcare service we can deliver through readily out-sourced operators.

And we’ll need to pick a property type that works well for the healthcare service … but also other things, so we don’t get trapped in a single-purpose property.

Sounds like a tall order …

Or maybe the answer is right in front of you … or next door … or down the street.

Single-family homes!

But not just ANY single-family homes … residential assisted living homes.

This is an exciting sub-niche of the healthcare real estate niche that checks a lot of boxes …

First, your tenants are the parents of boomers (today) … and will soon be the boomers themselves.  That’s a substantial long-term pipeline of tenants.

Plus, boomers are the most affluent demographic right now … and paying for Mom or Dad’s care is a TOP budgetary priority.

It’s always good to be at the front of the line for getting paid.

Also, care fees (rent) are often paid out of a combination of the parents’ estate, private long-term care insurance policies, or incomes and assets of the adult children.

So when you’re in what our residential assisted living guru Gene Guarino calls “the sweet spot” … you’re not dependent on government reimbursements.

Residential assisted living homes are boutique, high-quality, “alternative setting” healthcare … which, as the article points out, is the trend.

Another investing adage is, The trend is your friend.

Check.

Next, residential assisted living homes are NOT big, single-purpose commercial buildings well-suited only for use as a medical facility.

Residential assisted living homes are operated in single-family houses located in regular residential neighborhoods.

No special zoning.  No commercial location.

So if for some reason the bottom falls out of the sector … the home can be rented to a residential occupant (albeit at a much lesser rent), or simply sold on the open market to an owner-occupant.

In other words, you’ve got multiple exit strategies.  You aren’t trapped by your niche.  This mitigates one of the major risks the big boys fear.

Check.

But perhaps one of the greatest advantages in the sub-niche of residential assisted living homes is the ability to QUICKLY right-size to changing market conditions.

Big-box commercial properties are all-or-nothing propositions.  That’s another worry for the big guys.

When you have a 120-bed medical facility and profits get squeezed or things slow down, you still have 120-bed facility … and all the fixed costs which come along with it.

There’s no throttling capacity up or down based on demand.

But when you own ten 12-bed homes and things pick up a little … you simply add one more home to your collection and increase capacity to 132 beds.

Compared to a big-box, the properties are easy to find, set up, and get optimized.  You can catch an “up” wave sooner and ride longer.

Even better, if things slow down, you simply consolidate your residents into fewer homes … and sell or rent out the excess properties individually.

Again, there a multiple exit-strategies, and when it comes to real estate, single-family homes are arguably the most liquid.  A big-box?  Not so much.

This is HUGE in terms of maintaining profit margins … even in a declining market.

Think about it …

A big-box can’t cut facility overhead.  They either own the whole property or they don’t.  It’s all or nothing.

So the only way preserve margins when occupancy is down is to cut back on staffing, care, and amenities.  Not good for the resident under care, nor the staff or brand.

Meanwhile, the residential assisted living home operator has an advantage …

While the big-box cuts services, the more nimble RAL operator can right-size and maintain or even improve services … and attract an unfair share of residents in a competitive market.

Big check.  And who doesn’t like big checks?

But whether or not residential assisted living is for you … (though it probably will be some day … we all get old) …

… there are still great lessons to glean about strategic sub-niche investing to find profits under the radar (at least temporarily) of the big players.

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.


Love the show?  Tell the world!  When you promote the show, you help us attract more great guests for your listening pleasure!