How to find thirsty horses
Earlier this year, I had the chance to chat with Scott Smith at the podcast, Real Estate Nerds where we delved into the dynamic market trends influencing real estate investment. I was able to uncover and demystify the nuances of current trends to help identify investment opportunities for his listeners. Naturally, I had to share the wealth of information on the Reformation Asset Management Blog. For those of you who are interested in an audio format, you can tune in by clicking this link, but for everyone else, here is a brief recap what Scott Smith and I discussed:
1) The market operates within its own cycle and is subject to the influence of macro events, like the lending crisis of 2008. While credit availability has become slightly more expensive, it remains intact for now, but evaluating how credit impacts investments is still crucial. This is where understanding your loan constant comes into play.
2) The interest rates of residential real estate put in place by the Federal Reserve are largely responsible for the substantial rise in the affordability of housing. However, it’s important to note that this impact is short term. When examining the yield curve, the impact diminishes significantly for periods beyond 20 years. Consequently, most commercial loans have maintained rates similar to those of the previous year. Establishing a good relationship with a commercial bank can open up opportunities for favorable loan terms.
3) While the office and retail segments may face challenges in certain markets due to significant vacancy rates after 2020, the multifamily sector remains promising. But, each city and state’s real estate market varies depending on location and circumstantial growth phases.
4) When seeking investment opportunities, factors such as job growth and wage growth play a crucial role. Markets with high-paying job opportunities tend to attract potential investors. For example, Meta, Google, and Apple all have plans to establish offices in Durham or the surrounding areas, leading to an increase both in housing demand, and prices. When I talked about markets varying from each individual city and state? This is an example of local trends that will have an outsized impact.
5) When addressing challenges within the market, it’s important to have a strategy in place. Builders are behaving cautiously and the risk feels higher for first time buyers. But, if we have learned from our past, there are ways investors, buyers, and sellers have all succeeded in similar times prior to this one. Strategies like offering incentives such as two-one buy-downs can make homeownership more accessible. Additionally, identifying properties with hidden upsides, such as opportunities for adding units or amenities, can significantly increase their value.
So, what is one to do? The old adage is that “you can lead a horse to water, but you can’t make them drink..” I like to add a third sentence that says “so you want to work with thirsty horses”. What I mean by that in this instance is there are always going to be people that have to sell. Whether it is due to a job change, or relocation, a life change, death, divorce, childbirth, or an economic imperative such as a loan coming due or an interest rate adjustment, there will always be people that need to sell.