Oh no! Vacancies are up!

If you’re a regular follower of The Real Estate Guys, you know we like to see the opportunity in every problem.  This is the time of year when all the reports on the previous year – as well as the the predictions for the New Year – are all over the airwaves and internet.

One that caught our eye is from the Wall Street Journal on January 7th:  U.S. Now a Renters’ Market – With Apartment Vacancy Rates at 30 Year High, Landlords Cut Prices 3% in 2009.

Oh no!

If you’re a landlord competing for tenants and trying to eke out positive cash flow, this is bad news.  The problem, as the article (and common sense) details, is a lousy US job market.  People are “clustering” (moving in with friends and family), so even though the people are still out there, the demand for rental units is down.

Stop right there.  Have you ever clustered?  There’s nothing more fun (not!) than moving back home with mom and dad – or sharing a bathroom with a roommate.  As soon as things get better, what is the FIRST thing you want to do?  Get a place of your own!  Hold that thought.

Now, let’s go down memory lane.  Do you remember when every 3rd person you met was a real estate investor?  Folks with no experience and very little real estate education rushed in to buy real estate to make a quick buck – or in some cases, a quick tens of thousands of bucks – as the flood of money pouring into real estate created hyper-appreciation.  Ahhh….those were the days!

But now those days are over.  Lots of those rookie owners are now facing not only their first, but undoubtedly the worst, real estate correction in their lifetimes.  While some have already been wiped out, many others are still struggling to hold on.  But they don’t want to be real estate investors any more.  In fact, they never really were real estate investors.  They were mutual fund investors (i.e., hands-off-just-send-me-the-statements-showing-my-net-worth-growing investors) who ended up in real estate because it was the hot commodity at the time.

In other words, they are what true real estate investors affectionately call “Don’t Wanters”.  Maybe you have some properties you don’t want,  so you’re a Don’t Wanter.  But, we’re not talking about having a problem property (that’s just part of the game), as much as we’re talking about people who are leaving real estate investment never to return.  They don’t have the heart to stick it out during the tough times.  Maybe we should call them Quitters (not in a bad way – real estate investing isn’t for everyone).

This is where the true blue investors have opportunity.

How much effort is going into job creation in the US right now?  We know that’s a loaded question.  But we didn’t say how much effective effort is being put out.  Just how much effort?  There’s no question that it’s a top political priority.  If this current group doesn’t fix it soon, a new team will get a chance.  But sooner or later someone is going to fix the problem.  If you don’t believe that, then it’s time to move somewhere else (how’s your Chinese?).

Meanwhile, people struggle. They cluster. They hunker down and watch expenses.  They save when they can. And they dream longingly about the day they can get out on their own.

What about builders?  Are they cranking out new rental units?  Heck no!  The credit crunch and economic uncertainly have put the kibosh on that.  And in certain markets, there simply isn’t any room to build anything new even if someone wanted to.  Markets like San Jose and San Francisco California.

Hmmmm.  Arent’ those two of the three markets the Wall Street Journal article said led the decline in rental rates?  (Yes, they are – as you’ll see when you read the article).

Do you see the picture yet?

Amateur investors with rental properties in markets “that had brisk growth until the recession” (again, quoting the Wall Street Journal) – whose properties are now experiencing declines in income.  Those declines might be temporary, but when you want out, you don’t think long term. You just want out.

Might the Quitters be interested in selling?  Since income properties are valued by the income they produce (more income equals more value and vice versa), those properties are worth less (not to be confused with “worthless”) now.  That is, they’re on sale.

Meanwhile, potential tenants are clustered on the sidelines waiting for economic recovery to give them the jobs they need to move out.  And with few new units coming on line, they will be competing for the available units – which seem to be abundant now (hence the price declines).  But again, the population didn’t substantially decrease – so at its core, the demand is still there.  But without jobs, people are…well, let’s say “enjoying each others company” more often.

Conclusion?  Now might be a great time to strategically acquire rental properties from don’t wanters in markets with good prospects for recovery, but poor prospects for an increase in supply. Because when you combine growing demand with capacity to pay (jobs) with limited capacity to increase the supply, you have a formula for increasing cash flow and value.  But if you wait until all that happens, you’ve missed it.

As Wayne Gretsky once said, you have to “skate to where the puck is going, not to where it is.”

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