Put all your eggs in one basket … then diversify

The blessing and curse of real estate is that trends develop slowly. 

This makes them easy to catch, but also easy to miss … unless you make it a priority to pay consistent attention.

We scour the news daily.  We’re always looking for opportunities, lessons, and trends.  But they’re not always obvious.  In fact, they usually aren’t.

So it’s not answers we’re looking for.  It’s better questions.  The clues in the news simply capture our attention so we can dig deeper.

And because real estate trends move slowly, there’s often plenty of time to investigate … and then move into position to take effective action.

This recent headline reminds us of the process, and some great lessons for real estate investors …

Salt Lake City Tops U.S. In Diversity of Jobs; Las Vegas is Last 
– Bloomberg 2/15/19

Now Salt Lake City isn’t necessarily a market normally associated with diversity, but according to this report, it’s tops for diverse job opportunities.

Of course, jobs are uber important to real estate investors.  After all, jobs are the best way for tenants to get the money to pay rent.

Plus, any market with abundant jobs is going to attract more people … adding to the demand for rental properties.

Perhaps even more importantly … a diverse selection of job types is probably a good indication an area has multiple economic drivers.

Economic diversity is a very important component of stability and resilience.

This should be obvious, but it’s amazing how many investors rush into markets chasing a trend driven by only one big story.

Of course, if that one big story changes for whatever reason, then so does the trend in the market.

Consider how things worked out for real estate investors who rushed in for the oil boom in North Dakota’s Bakken or the Amazon HQ2 boom in New York.

Time will tell, but we’re guessing while some Opportunity Zones will be fantastic successes … some will end up being big busts too.

One story usually isn’t enough.  And there’s no need to move too fast when it comes to catching an uptrend in a real estate market.

Sure, when you take a measured approach, you might miss out on quick gains gleaned from front-running the fast-to-act speculators.

But if you view real estate as a long-term investment, then you’re looking for long-term trends.  Best to let the trend strengthen before getting in too deep.

Besides, there’s plenty to do while you’re watching the trend develop.

Consider our approach to Salt Lake City … since this is the focal point of the headline we’re talking about today.

Salt Lake City popped up on our radar a few years back and we started watching.  The more we saw, the better it looked.

In 2017, Salt Lake City appeared in a report of metros with a low percentage of rent burdened population.

In a related commentary about why we think this metric matters, we pointed out …

“… markets with increasing affordability, and stable rents and occupancies, should probably end up on a short list of markets to pay a visit to.”

We suggested to …

“Look for metros which are affordable locally based on a low percentage of rent burdened population, with increasing affordability … and also affordable nationally when compared to the average rents of other metros.”

Markets that looked interesting based on this metric were Kansas City … along with Oklahoma City, Cincinnati, Louisville, and Salt Lake City.

Since then, and perhaps to no surprise, we’ve built relationships with boots-on-the-ground teams in both Kansas City and Salt Lake City.

Sometimes it takes time to identify and study a market, then get to know the right people … rather than just jumping into a “good” deal in a “hot” market.

Sure, when the market ends up being great, you’ll always wish you moved faster …

… so it’s wise to get good at seeing opportunity, doing your homework, and building relationships sooner.

But again … the blessing of real estate is it moves slowly.  So you don’t have to be a racehorse to win the real estate investing derby.

Nonetheless, you do need to move.  You can’t win or finish a race if you’re still standing at the starting gate.

So when you see a positive market metric, be quick to start the process of exploration … but cautious about leaping into a deal before you look.

And as you explore a market’s potential, whether you’re just starting out or already have a sizable portfolio, consider how to use diversification as a tool for building resilient wealth.

There are several ways to diversify …

Choose economically diverse economies to reduce your exposure to any one industry or sector of the economy.

Invest in multiple units when you can.  More doors provide multiple streams of income and less dependency on any one tenant.

Invest in multiple markets.  Even diverse individual economies can suffer setbacks, so being in more than one market can help mitigate the risk.

Syndicate or invest in syndications to become even more diverse faster.

Syndication pools your money with others’ … and provides scale you might not have on your own … so you can own more units, in more places, with professional management.

The bottom line is real estate is a great “basket” to put all your eggs in … while also providing the ability to create resilient wealth through strategic diversification. 

Until next time … good investing!


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Tracking trends and making smart moves …

The winds of change are swirling like a tornado … even if they’re outside your personal horizon at the moment.

That’s why we stay up on the lookout perch … watching for clues in the news and shouting out what we see … so you have time to make smart moves.

A couple of things popped up that we think are noteworthy for real estate investors …

Private Equity is Moving in on Single-Family Rentals – NREI Online 2/4/19

“In the past, individual investors owned more than 80 percent of single-family rentals. Since then, the number has fallen significantly.”

“…individual landlords have been increasingly marginalized by big institutional investors.”

“When banks started to foreclose on mortgages, institutional investors swooped in, leaving individual landlords with new, outsized competition.

If you’re an active Main Street individual investor, you know inventory is hard to find in major markets … and it’s even harder to make the numbers work.

Of course, the article’s author runs a crowdfunding platform, so his implied solution is to join the crowd and invest in a bigger deal.

While we agree with the premise of going bigger, crowdfunding is only a solution for small-time passive investors because of government imposed limits.

So if you’re passive and want to go bigger, you need a better answer.  More on that in a moment.

But if you’re an active investor, then what?

Starting your own crowdfunding platform is a heavy lift.  You need tech, special licensing, and a crowd.  None are cheap or easy.

So how can an active Main Street investor compete, when the big boys are marginalizing the little guy?

You’ll need to find a way to go big and invest outside the box.

For us, that comes in two forms …

First, perhaps the best way for an active Main Street real estate investor to go big is to syndicate private capital.

It’s like crowdfunding … without the crowd or tech.  It’s still work, but doable for a Main Street individual.  In fact, we know MANY are doing it.

And for passive investors who need in on bigger deals without arbitrary limits, and want to be more than just a face in a crowd or number on a spreadsheet …

…. investing in syndicated private placements opens a world of opportunity.

So the synergy between active and passive Main Street investors should be obvious.  That’s why it works.

When it comes to investing outside the box …

… it’s REALLY important to pay attention to developing trends … and then paddle quickly and get in position to catch a wave.

For example, there’s a huge demographic wave known as the baby boomers.

You’ve probably heard of it. 😉

Boomers are getting old.  So real estate niches that cater to seniors is a hot sector … in both residential and commercial.

If you’re a passive investor, you can invest in a senior housing REIT, a crowdfunded big box project, or a privately syndicated residential facility.

They each have pros and cons.

But right now, margins on residential facilities are pretty fat.  That’s because the big boys are playing at the big box level … for now.

When we speak at Gene Guarino’s Residential Assisted Living Academy training, we point out … big money won’t ignore fat profits forever.

Big money’s already moving aggressively into single-family homes … bidding prices up and squeezing out late-to-the party individual investors.

Those who saw the big boys coming and paddled into place early are riding a nice equity wave.

This could easily happen with residential assisted living.  So it’s a bit of a land grab right now.  The good news is there’s .

That’s just one way to invest outside the box.

Another is to pay attention to economic trends and migration patterns.

Think about it …

As big players gobble up inventory in major markets, smaller investors … and eventually big money … will migrate outside the box into secondary markets.

For example, though Dallas is still a solid single-family market … deals are few and far between.

It wasn’t always that way.  When we started going to Dallas 10 years ago, it was the front end of a real estate boom that’s been GREAT for early adopters.

Today, markets like Kansas CitySalt Lake City and Cleveland are on our radar … each for a different reason, but they’re variations on a theme.

These markets have affordable price points with strong cash flows for investors.

They’re also attractive to Millennials (another important demographic to watch) who’ve been priced out of primary markets.

But it’s not just the young and cash-strapped who move for financial reasons.

There’s another important economic trend we’re watching closely, and it’s alluded to in this Washington Examiner article …

Cuomo’s woe: More taxation means more out-migration

Caution:  This is an opinion piece and you may not agree.

But the point is high-earners are leaving New York to escape high taxes they can no longer deduct from their federal tax bill.

This Bloomberg article elaborates …

Cuomo Blames Trump Tax Plan for Reduced New York Tax Collections

“Governor says wealthy New Yorkers are giving up residences …”

“…leaving for second homes in Florida and other states …” 

Once again, these trends are easy to see coming, watch develop, and then act on … BEFORE they pick up a lot of steam.

We’ve been excited about Florida for some time … and this whole tax thing just makes it better … especially for nicer properties.

So here’s the point …

We got a HUGE wake-up call in 2008 … and it wasn’t any fun.  But those lessons help us see trends and opportunities early instead of late.

The key is to pay close attention to clues in the news …

 … then get around REALLY smart people who can help you understand what you’re seeing … so you can act decisively.

Because if all you are is aware, but you don’t act … you might as well watch game shows.

But when you see a trend and have the right relationships, you can identity opportunities and take effective action quickly.

Everyone’s smart in hindsight.  But can you see the future?

Until next time … good investing!


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


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Single-Family Update and Hot Market Spotlight

We taped this episode of The Real Estate Guys™ show at the Single Family Rental Investment Forum in Scottsdale, Arizona.

This is our second year at the event, and while it features many big institutional investors, we’ve also spoken to a number of mom-and-pop investors who are looking at the big picture for single-family investing.

That’s a great thing to do…it means you get a look at what your competition’s doing so you can jump into market niches before they do.

In this show, we talk to a guest who has found a market niche and perfected the process for investing in single-family homes there.

Learn all about this hot market … and get an update on the state of single-family rentals. You’ll hear from:

  • Your singular host, Robert Helms
  • His singled-out co-host, Russell Gray
  • Single-family expert Patrick Grace

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Kansas City, Missouri, market drivers

We always say live where you want, but invest where the numbers make sense.

Well, our guest today happens to live and work in the same market. He has spent so much time with his boots on the ground … 20 years! … that he has his market down cold.

Our guest is syndicator and investor Patrick Grace, and his market is Kansas City, Missouri.

Pat works exclusively on the Missouri side … but there is a Kansas City, Kansas, right across the river, in case you were curious.

We asked Pat to give us a market spotlight, so let’s start with the basics. Why does Kansas City make sense?

  • The cost of living is low. Housing, groceries, and basic necessities are affordable for residents.
  • It’s a low-risk market. KC doesn’t go through big ups and downs.
  • It’s a booming metro area. KC is centrally located in the U.S., making it a transportation hub for trucks, trains, and boats. Both the Missouri River and the nation’s second-largest railroad pass through KC.
  • It’s packed with thriving educational institutions. Pat says there are almost 47 four-year colleges within 30 to 40 miles of the KC metro area. Many college grads come to the area for school, then stay to work and live.
  • It’s business-friendly. Not only because of its great location and low cost of living, but also because of labor availability.

Are there any weaknesses to KC? Pat says most jobs are fairly low-wage, which makes sense, based on the city’s cost of living and economic base. That’s actually a good thing for single-family rental investors … it means people stay renters.

Kansas City single-family rental profile

Pat is a syndicator in Kansas City. He currently owns and/or manages over 700 single-family homes in the market.

His focus … his niche … is finding distressed properties or properties on auction and bringing them back to life.

His business is a vertically integrated, one-stop-shop for investors. He has an in-house real estate company for finding homes along with construction and property management businesses.

Investors can invest in anywhere from 1 to 100 homes, and Pat’s team handles the entire process … from finding the property, to fixing and renting it.

Properties in Pat’s portfolio usually fit a standard profile … 2-bedroom, 2-bath homes with 3-car garages, sold for $130-150 thousand.

Investors usually put down 20 to 25 percent of the sale price, for which they have a variety of loan options, including Fanny Mae, IRA funds, 1031 exchanges, and private loans.

“Renters are plentiful,” Pat says. And rents are reasonable for both renters and investors seeking cashflow. The sweet spot, Pat says, is between $800 and $1,500 per month.

What about the tenant-landlord law? “Missouri is favorable to landlords,” he says.

Landlords can get in front of a judge within a month and get non-paying tenants out within 30 days of the court date, typically … although usually, it doesn’t come to that.

And occupancy is high. “Our portfolio is 97 percent occupied,” Pat notes. He says he gets a pile of rental applications every day, which means he can be selective about screening and vetting tenants.

The turnkey rental model

Pat’s business functions on a turnkey rental model. In fact, he says, 90 percent of his investors live outside of Kansas City, simply because Pat and his team are so good at handling every component of the buy-rehab-rent-manage process.

Investors don’t have to use all of Pat’s services, but most choose to once they buy one (or more) of the properties within his portfolio.

Most investors come in after Pat has found, rehabbed, and rented the property, but some like to get involved earlier. That’s the “skinny cow” rental model.

In those cases, investors are involved from the beginning. They know exactly how much the property costs and have a say in rehab and construction. They still work with Pat’s vetted crews and companies, but they get to see the process from beginning to end and have a say in tenant placement.

This allows investors to get some education on the process.

Pat’s business model works well because he’s exploiting a niche. He says most hedge funds and bigger investment companies go after more expensive homeowner-sold, ready-to-rent properties instead of choosing the more intensive value-add option.

By working with distressed properties, Pat can force equity. And he’s learned that by choosing premium-grade materials during rehab, he can also charge premium rents to tenants. That means spending maybe $1,000 more than he could to put in quality tiling, fixtures, and appliances that draw more, and better, tenants.

And because Pat owns his own rehab and construction companies, he can use the same materials in bulk and renovate quickly and efficiently.

Tenants usually sign one- to two-year leases. Pat says his contracts have automatic lease renewal clauses along with 3 to 5 percent yearly lease escalators.

Low-entry, high-cashflow investing

What does Pat wish people knew about Kansas City?

“Kansas City is low-entry and high-cashflow, but we also have a duel-exit strategy,” Pat says. Owners can rent for cashflow or sell rehabbed properties for equity.

Pat also says he wished people knew how metropolitan KC is. It’s a big metro area with a revitalized airport, great infrastructure and transportation, including over 1,000 miles of bike lanes, and a growing number of commercial and retail facilities.

Yet despite its growth, KC remains affordable to the tenants that are Pat’s bread and butter. He says he primarily serves service workers, medical professionals, mechanics and truck drivers, warehouse and distribution center workers, and tech professionals. Most tenants work blue-collar jobs, making them reliable long-term renters.

And the growth shows no signs of stopping … millennials and college grads are flocking to KC and settling down there. KC is the perfect combination of affordability and lifestyle.

Kansas City sounds pretty great to us, but if you want even more information, check out Pat Grace’s exclusive webinar, which you can access by listening in to the podcast. He also created a market report just for our readers. Check it out here!


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.


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Kansas City Commercial & Residential Asset Management – Pat Grace

Kansas City Commercial & Residential Asset Management – Pat Grace

 

Kansas City continues to earn national recognition for its cost of living, food, and world-class attractions. And with a strong job market, rising rents, but affordable home prices, it’s a market you won’t want to miss!

Pat Grace’s team is your Kansas City boots-on-the-ground team!  

With 20+ years experience, this top-notch team is EXPERT in all things Kansas City residential real estate.

  • Turnkey Single Family Homes fully-rehabbed and stabilized with cash flowing from day one. Add to or expand your turnkey portfolio in Kansas City!
  • Turnkey Fix n’ Hold Value-Add Projects give you the chance to profit from the acquisition and rehab of properties on top of the ongoing cash flow.  The best part is Pat’s pre-trained teams do all the work for you!
  • Apartment Deal Flow lets you leverage Pat’s network of agents and brokers to source the best deals for multi-family apartment buildings.
  • Professional Management for all your Kansas City residential properties give you total peace of mind as you sit back and enjoy the cash flow!

Whether you’re just getting started or syndicating large portfolio acquisitions … Did we mention this team is experienced? 

As THE largest home buyer in Kansas City, they’ve been buying and syndicating their own portfolio of properties for years.  They know what you’re looking for because they are YOU.

To get the inside track to current Kansas City deals, contact Pat’s team today!

Fill out the form below and they’ll be in touch with info you need to get started and go bigger in Kansas City!

Reviews

Here’s what your fellow listeners are saying …

“Appreciate all the info on some of your inventory, super informative” – Rolando G.

This market metric may matter most …

“Live where you want to live, 
but invest where the numbers make sense.”

– Robert Helms

Nice quote.  But it assumes you know what numbers to look at … and whether or not they make sense.

Many times, investors focus primarily on numbers related to the PROPERTY …

… things like rent ratio, gross-rent multiplier, cap rate … and of course cash flow after debt service.

Those are all SUPER important … and you should pay attention to those.

BUT (you knew it was coming) …

Individual properties exist in local markets, which are affected by both macro and regional factors.

Macro factors are things like interest rates, tax rates, and how other markets compare to yours.  Sometimes people move to find greener pastures.

Regional factors include local taxes, landlord laws, economic drivers, supply and demand fundamentals, net migration trends, etc.

So it could be a mistake to focus solely on the property’s numbers.  The market’s numbers matter too.

If your prospective property is in an area with downward trending regional factors, you might end up … as stock traders say … catching a falling knife.

Think Detroit many years ago …

Once the RICHEST city on the planet, Detroit boasted a population of about two million people.  Strong incomes, lots of prosperity, a robust real estate market.

Slowly … for many reasons we won’t delve into now … Detroit’s regional drivers began to weaken.

So even though the numbers on a property in Detroit back then might have looked good at some point during the decline …

… the regional market trend was working against you over the long term.

And just as a rising tide lifts all boats, a receding tide lowers them.

So we think it makes a lot more sense to pick your market BEFORE you pick your property.

Our approach is to pick a market first, then build a local team, and then let the local team help find the right properties.

This way, when you’re running numbers on a specific property, it’s in the context of a market you think has a stable or rising tide.

One market metric we suspect will become increasingly important going forward is rental affordability.

That’s because the long-term trend of net “real” prosperity for working class people has been down … and that’s probably not changing any time soon.

Of course, even if we’re wrong … and we’d love to be … being in affordable markets isn’t a liability.  Again, a rising tide lifts all boats.

But if an area is NOT affordable, you may not have a healthy supply of tenants able to pay your rent …

… and you risk being on the wrong end of a price war to maintain occupancy.

Of course, determining a market’s rental “affordability” is a tad more complicated than just running a pro forma P&L on a specific property.

For example, if rents are low, is the area automatically “affordable”?  Or if rents are rising, is the area becoming less affordable?

Not necessarily.

Affordability is about the ratio between wages and incomes, how many people in an area can afford the area’s rent, and comparing one market to another.

Maybe in an area where rents are rising, wages are going up even faster.  More people start moving in to earn those higher wages, which increases the number of people who can afford the rent.

So rents could be rising, yet the area is becoming more affordable.

Like we said … it’s a little complicated.

Fortunately, there are smart people who study these things and produce fancy reports we can peruse for clues … about markets, trends, and where opportunities are.

New York University’s (NYU) Furman Center cranks out all kinds of research related to housing … including their recently released 2017 National Rental Housing Landscape report.

Page 10 of this report caught our eye because it charts 53 big city areas (“metros”) and compares “share of renter households that were rent burdened” in 2015 versus 2012.

They define “rent burdened” as those tenants paying 30% or more of their income on rent.

Obviously, when a smaller percentage of people in a region are rent burdened, it means a greater percentage can afford to pay whatever the going rent is … and absorb increases in rent or other living expenses.

This puts a little recession insulation in your income property portfolio.

So a number that “makes sense” for a market could be a low percentage of renters who are rent burdened.

Of course, it’s also wise to understand why rents are low relative to incomes.

It could be driven by falling rents (bad), rising wages (good), increases in rental stock (maybe bad), net in-migration (good), or any combination of those and other factors.

So we’re not here to suggest simply because an area is becoming more affordable, it’s automatically a great market to invest in.

But it’s a clue … and worthy of further investigation.

What’s nice about the NYU Furman report is it compares 2012 to 2015 … so you can see whether a metro is trending better or worse for this particular metric.

If a market is more affordable in 2015 than it was in 2012, it’s positive in terms of the number of people who can afford to pay the going rent.  More qualified prospective tenants is a good thing.

Of course, if affordability is driven by primarily by falling rents and rising vacancies, it’s a red flag.

But markets with increasing affordability, and stable rents and occupancies, should probably end up on a short list of markets to pay a visit to.

We’d probably further narrow the list to cities where median rents are in the middle to lower price range compared to other markets …

… because if there’s macro-pressure on renters … say rising expenses in food, energy, healthcare, taxes, or interest … they may move to more affordable areas to find some budget relief.

In tough times, people don’t typically move to more expensive areas. They look for places that are more affordable compared to where they are.

Again, it’s EASY to invest in a rising tide.  But it’s always smart to be ready for if (when) the tide goes out.

All things being equal, a market with rents to the mid-to-low range on a national scale is probably safer when sailing into uncertain economic seas.

So have some fun in the report … toggling between page 6 (median rent by metro) and page 10 (share of rent burdened households).

Look for metros which are affordable locally based on a low percentage of rent burdened population, with increasing affordability from 2012 to 2015 …

… and also affordable nationally when compared to the average rents of other metros.

Kansas City is best for lowest population of rent burdened, with a solid improvement from 2012 to 2015 … and it’s more affordable nationally than two-thirds of the list.

Oklahoma City, Cincinnati, Louisville, and Salt Lake City all also look pretty strong based on these metrics.

Again, this isn’t a final conclusion about great housing markets.  But it’s one set of numbers to consider when looking for markets to investigate.

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.