In today’s episode of the Actively Passive Investing Show, Travis Watts discusses the importance of outperforming single-family and multifamily asset classes. He breaks down why each is becoming extremely competitive, and what that means for someone entering the market. Travis is also talking about our current affordability crisis and his predictions moving forward.
Click here to know more about our sponsors:
TRANSCRIPTION
Travis Watts: Hello, Best Ever listeners. Thanks so much for tuning in to another episode of The actively Passive Show. I’m your host, Travis Watts. I’ve got a very exciting episode today. This actually came from a 60-second questions, short segments that we do on The Actively Passive Show; you may have seen on social media or Facebook or YouTube. So if you guys have any questions, to that point, that you want to ask, I do my best to try to answer them in 60 seconds or less. So you can email me, travis@ashcroftcapital.com; or you can just sync up with me on social media and just send your question. I’m happy to incorporate that.
Today on the show is, How Does the Single-Family Housing Market Impact Multifamily Apartments? We’re going to dive in. As many of you know, I’ve spent six years in single-family real estate, doing flips, vacation rentals, buy-and-hold, house hacking, and then I’ve spent the last six years in multifamily. So I thought it was kind of a cool perspective to kind of give you both sides of the coin, point out some things that I see, talk about the trends and what’s happening, and most importantly, I should say, just relate that to how these two asset classes correlate.
So it’s no secret that single-family and multifamily are on fire right now. They’re both, in my opinion, outperforming asset classes; rents are on the rise, home prices are certainly on the rise… So what does this mean and what’s actually happening? That’s what we’re going to dive into.
In nearly every market across the United States, single-family home prices are reaching unprecedented price points, all-time highs; it is the fastest expansion that we’ve seen in decades. According to realtor.com, the average home price is up about $33,000 on a national average. And that’s showing a $63,000 increase since the onset of the pandemic back in March of 2020. And I don’t know if you guys are familiar or if you know about this or read about this in the news, but Blackstone has recently acquired a single-family rental firm called Home Partners of America. They paid $6 billion, they own approximately 17,000 single-family homes and counting. So Blackstone’s not only known for following trends and hopping on that bandwagon, but for acting basically as a catalyst for initiating them on a very large scale. A lot of people look to what Blackstone’s doing and they mimic or they follow the train, so to speak.
For those of you that remember from the Great Recession, 2008/2009, Blackstone had a company called Innovation Homes—I don’t know if that’s a company that they still own, but basically, they started snatching up single-family homes during that time, renovating them, and they made huge profits during that time.
So this key point is significant into what’s happening in the market right now. When you have got big institutions entering the market, buying up single-family homes, that’s obviously going to make a huge impact to the average Joe who’s looking for a single-family home to live in. You’re now competing against the big dogs. And this is also huge for the quote unquote, “alternative investment space” such as multifamily apartments. As I’m sure this comes to no surprise, Blackstone has a lot of multifamily assets as well in their portfolio.
The bottom line is, yes, absolutely, the single-family housing market does affect the multifamily housing market. In this case, for the better. As the single-family market is increasing in price, remains very hot, is getting outbid, the multifamily market is benefiting in a number of ways.
So let’s dive into those benefits of investing in multifamily now, what trends are on the horizon, and kind of where I see that heading.
So first, I just want to talk about the trend of single-family as we discussed; it’s on fire, it’s very hot, lots of buyers, people are overbidding for properties. But it may come to a surprise to know that this data perhaps is a little bit misleading, in that yes, the single-family market is hot, but there’s actually less people purchasing single-family homes right now. And it really comes down to this – this is kind of the gridlock that we’re seeing in the single-family space right now… If you or I decide we’re selling our home because equity happened and all of a sudden we’re going to get this big payout, the problem is for most people, they’re going to have to buy back into that exact same market. So after you factor in your closing cost and your move expenses, and then more closing costs to purchase another home, and then those renovation costs, you might be looking at more or less a breakeven or just a slight margin, and you’re also going to probably be paying market price or above for the property that you’re moving into.
Now, couple that with the fact that you’re competing now against institutions buying up single-family homes like Blackstone; so your options are becoming even more limited on what you can move into. My sister, for example, is actually in this position. She sold her home and got a great little equity pop, and then she just assumed she would find a place and go move into it. But guess what? She can’t find a place, so she’s now having to rent, which means she’s going to have to now move twice; once into a rental, probably break a lease, and then overpay or pay top dollar for a home here in the near future and move again.
One other challenge too for single-family home buyers right now is lending. Obviously, lenders and banks want to remain conservative; we all remember what happened leading up to the Great Recession with what lending practices were happening, where loans were given out, they were calling them NINJA loans; no income, no job loans, basically. And then the implosion of the housing market and banks lost a ton of money as these properties went to foreclosure and they weren’t able to recoup their investment.
So as they’re looking at this landscape and they’re seeing single-family just skyrocket, much like it did in 2006 and 2007, they’re pulling back a little bit and saying, “We’re going to lend based on an appraisal value, not based off of the purchase price that you intend on paying or that someone thinks they can get.” So what we’re seeing right now, is a lot of cash buyers in the market. So folks that maybe were in New York or New Jersey or California, in these high tax states, where they maybe had these million-dollar homes just for an example, and then they sell out and then they’re coming down to Florida and to Texas where housing is a little more affordable, and they’ve got the cash to go outbid the average Joe who’s looking to finance their property or has contingencies, like “I’ll buy your property except I have to sell mine first.” These offers a lot of times aren’t even being considered in today’s market.
Travis Watts: You’ve probably read in recent headlines that banks like Wells Fargo, for example, are doing away with their HELOC program, their home equity line of credit. This is big news! They’re basically not willing to go into the speculation zone along with so many buyers right now. They’re kind of pulling back; maybe they’re going to require perhaps more of a downpayment, things like this. And again, it gets back to, what does this home really appraise for? What is the build cost of this home? What is the true market value, not just that ‘Sally and Joe think that they can get $300,000 more, just because.’ That situation might work for a cash buyer, but it’s not going to work for the banks.
So real quick, just circling back to the gridlock situation… So if you’re in a situation where you’re needing to finance, you need a mortgage, you need a loan and/or you need to sell the home that you’re in, it’s very competitive; there’s cash offers happening, there’s people waiving contingencies, like “I don’t even need an inspection period,” or, “I’ll put $50,000 down hard money on day one, and even if I back out of the deal, I lose the money.” There’s people right now willing to make these gamble’s, and it’s absolutely ludicrous in my mind. Obviously, every market’s a bit different, so I’m generalizing here and I’m speaking a lot to where my wife and I live in the market that we’re in, too. My wife and I are out in Florida, where there’s a huge influx of people moving here.
Alright, so that’s kind of the current status of the single-family housing market. I want to talk a little bit about the multifamily sector. As many of you know, I’m a full-time limited partner investor, I invest in multifamily syndications with a lot of different operators, and I’m investing in Texas, Florida, Georgia, the Carolinas, Arizona… Basically, when you look at the stats and the facts, where are people moving to, why are they moving there, the tax benefits to the states, where employers are relocating to… That’s why I’m in the markets that I’m in. And I’m a huge fan of Class B properties. And when I say Class B, I’m talking about a 1980s-, 1990s-, early 2000s-built buildings, something that’s older, more mature, but it’s usually fully stabilized, fully occupied, collections are high, so you’re perhaps taking a little bit less risk. And then I’m a big fan of the value-add business plan that we talk about all the time on the show, where you’re taking an apartment building like that and you’re simply making it better; you’re renovating the clubhouse, you’re renovating the units, you’re adding amenities for the residents that are desired. For example, maybe there’s an old tennis court that’s not being utilized, or a racquetball court or something – you’re going to take that and convert it to something that is going to be used… Maybe a outdoor workout facility with some barbecue areas and picnic benches and a running track around the perimeter, things like this. You’ve just got to know your market, you’ve got to know your tenant base, listen to your residents and their feedback, and you’re just basically putting in place what’s needed. A lot of these properties don’t even have covered car parking, for example. So that’s something that you can charge a premium for, that adds value to the residents that maybe have a newer car or just don’t want hail damage or sun damage.
In any case, that’s what I invest in mostly, and that’s what I’m referring to when I’m talking about the multifamily sector. And throughout COVID I did an episode— it was one or two episodes ago, where I shared my portfolio performance throughout the pandemic, specifically 2020. And quite frankly, it performed well; to me personally, above my own expectations, given the pandemic and the uncertainty and all the fear in the markets and looking at what the stock market did in March of 2020. If you’re interested in diving deeper into those numbers or learning more about how that works, then check out the previous episode.
What this all boils down to, you guys is we’re in a crisis right now, that’s a very unique crisis. It’s an affordability crisis. So the demand for workforce housing, the demand to find a two-bedroom, two-bath apartment that rents for $1,100 or $1,200 per month – this is what’s demanded, this is what’s needing. So to the point of, why is multifamily performing so well? Well, a lot of people are just quite simply getting priced out of buying single-family homes. Naturally so, with institutions and lack of supply and all the rest, a lot of people are having to make major compromises and say, “Well, if I’m going to own a home, I guess it’s going to be this one. It’s not exactly what I want, but I guess I’ll over bid for it and hope that I get it.”
There was a recent study about millennial homeowners, and it’s something crazy like 60% of millennial homebuyers regret making their purchase. This was before the onset of the pandemic. So I don’t even want to know what those stats are now. So something to consider, something I’ve talked about before on the show was my wife and I, quite frankly, we choose to rent out of lifestyle. So we’re renting in that Class A sector, kind of that more luxury and higher-end rentals, where you have gyms and you have pools and you have community events, and you have walking trails and bike parks and great amenities, and everything that you really need, at least for us to live our lifestyle. I’m not suggesting anybody else take that path, but for us – we choose to rent where we live and then we invest our money into multifamily apartments. Not usually the one that we’re living in, but just in the Class B sector. So kind of an interesting approach. If you crunch the numbers, you’ll probably see why that makes so much sense.
So let’s talk a little bit about the data surrounding multifamily apartments. So if we look at Yardi Matrix’s survey from June of 2021 – at least that’s the last date that I was able to find when I was putting this episode together – they show a 6.3% increase in asking rents year after year, and that’s the largest year over year national increase in the history of them putting together this data. So this is obviously a big reason why so many institutions and Main Street investors like myself are interested in the multifamily space.
On the single-family side, you have the high purchase price, but in the multifamily space, you have rents increasing, and at the end of the day, when you’re investing in multifamily assets, it’s about increasing your net operating income. So there’s really two things you do on these properties, or the general partners do when you’re in a syndication, like what I invest in. They are buying a property, they are trying to cut expenses, where applicable – do things more efficiently, maybe that’s putting in LED lighting, maybe that’s contracting new landscaping crews… There’s a lot of different things, we can make a full episode on how to cut the budget. And then you’re trying to increase rents simultaneously, you’re trying to add things on the property, maybe a profit-sharing model with a cable TV service where all the residents are paying 50 bucks a month, and then you, the owner of the property, is getting a kickback of that, 10-20 percent, etc.
NOI is the name of the game, Net Operating Income, and boosting that up. So that’s basically what your purchase price is going to be based on. So people are looking at these multifamily assets – buyers are – as a business basically. So if you have a multifamily community that’s pumping out a million dollars per year in cash flow, that’s the basis of how you’re going to make an offer in a valuation of the asset. You’re going to say, “If I get a million bucks a year, I’d be willing to pay $15 million for that property.”
Alright, so that’s multifamily, in a nutshell, a little bit of the data, and yes, it’s on fire as well, just like single-family, but in its own way. So I want to dive in real quick to this trend, and where I see things going. And again, I don’t have a crystal ball, I’m not a fortune teller, I’m not an economist, but I am an investor and I’m somebody who tunes into news and headlines and articles and blogs on a weekly basis, and this is where all my money is, so obviously, I have a vested interest in understanding what’s going on and what I see moving forward. So for what it’s worth, I’ll give you a couple bullet points.
So I think, first of all, that the single-family frenzy, so to speak, right now is going to continue, unfortunately or fortunately, depending on where you stand with this, for the next 12-18 months, let’s say. I think there’s still going to remain very low-interest rates, which is very appealing for buying homes, there’s still going to be a lot of cash offers happening. There’s still a lot of migration trend happening, with people moving from high tax states to low tax states, baby boomers retiring, wanting to be in warmer climates… Again, the Carolinas, the Georgia, Florida, Texas, Arizona, this is where a lot of people are going and a lot of businesses. So I see that all continuing. I see a lot of competition, I still see low inventory, because of the gridlock that I talked about, which is people, even if they could sell their home, what are you going to do now? Buy back in the same market? …and it’s pretty much awash.
So I think after 12-18 months, somewhere in this timeframe, I see—I don’t want to call it a correction, because some people might confuse that with a market correction like 2008. That’s not what I’m saying. I’m saying it’ll simmer down, it’ll normalize back to the point where people can enter the housing market when they’re getting a loan and getting a mortgage and some of this outbidding is going to die down etc. Maybe interest rates start ticking up a little bit since we’re seeing that inflation and the Fed has already kind of justified that. That may be happening sooner than later.
Travis Watts: Switching over to multifamily, I suspect that rent increases will continue in the trend that I shared from the Yardi Matrix, roughly 6% a year; that’s going to depend obviously, on the market that you’re in. Some markets are doing 10-11 percent right now, and others are doing 2% or 3%. So it really just kind of depends on where we’re talking. But on a national average, I suspect that’s going to continue as well, because that’s the correlation. As assets, as real estate, in general, gets more expensive, people still want a return on investment, right? There’s not many investors out there willing to settle with a 2% return on investment.
So when you have to pay more, you’re going to charge more rent, so that you can still maintain an adequate cash flow number. So rents are usually lagging behind a little bit from what’s happening on the sale price of single-family; for example, 2008/2009, when housing quickly crashed in valuation, where a lot of markets were down 40% roughly on the purchase price of a single-family home, the rents actually stayed pretty tight for about the next 12 months or so, almost a full year. They dwindled down a little bit, concessions had to come up to incentivize people. But what’s happening in these situations? …when people are losing their single-family primary residence, what’s happening? Often they’re renting, right? So it wasn’t such a terrible thing for the multifamily space in the first place. But despite that, you have year-long leases, sometimes 18-month long leases, and so you’re still maintaining the amount of rent that you’ve been getting. So the data kind of lags behind. Over the last 12 months, we’ve seen a skyrocket and appreciation of single-family, but we’ve seen rents only go up 6%. In some markets, single-family homes have gone up 20% and 30% in value, which is just astronomical.
To that point of lagging behind, I think as a reflection of these higher purchase prices for real estate, we will see rents incrementally work themselves up to that level, whatever that means on a percentage basis. I’ll put the same timeframe on that, 12-18 months of rent increases, perhaps a little longer; we’ll go up to, say, 24 months of that. And then again, a normalizing. So what does a normal market rent look like? Usually, it kind of tracks inflation. So if we have 2% or 3% annual inflation, rents are usually going up 2% to 3% per year on average. So the fact that we’re seeing 6% right now means a lot, right? It’s double what the average is. So yes, the housing market is hot, everything’s going up, rent’s going up, prices are going up. That’s just what’s happening. We’re seeing higher than anticipated inflation in the United States, and the more money we print – it’s just astronomical with the trillions of dollars being entered in the system. A lot of that money is making its way into the real estate markets.
As multifamily investors, this is bullish for the reasons I pointed out; as prices go higher, so do rents, and at the end of the day, the net operating income on your multifamily property is what’s setting the value. So as long as rents are going up, as long as you can maintain your budgets or lessen them, you should be profitable in the end.
We mentioned some of the reasons for this – institutional buyers entering the market, ultra-low interest rates at historic lows, and very limited supply available on the market, putting people in a gridlock situation where maybe they don’t want to list their home because there’s not something that they can move into or purchase.
The last thing on single-family was the lending. So lending is tightening, it’s getting harder as homes aren’t appraising at the values that people would like to see them at from a selling standpoint. And in some cases, it’s getting a little tougher to get liquidity; credit scores have to be high, down payments have to be larger, depending on the lending institution that you’re using.
So welcome to the new America. This is just the direction that we’re heading. A lot of foreign investors are moving capital here to the United States as well, whether we’re talking multifamily or single-family, a lot of international buying, especially around where my wife and I are, and kind of the general Orlando area; we’re seeing a ton of international capital coming in, a lot of those are cash offers, too.
So with that, if you have not incorporated multifamily into your portfolio, perhaps it’s something to look into. I’ve answered the question numerous times in numerous ways, is it a good time to get involved in multifamily? Well, that’s really up to you. That’s really up to how you interpret this data. That’s up to your risk tolerance. That’s up to your goals. But for me, I’ll tell you, as a limited partner in multifamily, I’m continuing to invest. I just did two deals last week, I’ve done three or four this year in total; I hope to do five or six by year-end. So that’s my personal take on it. I’m not telling anybody what to do. Please always seek licensed financial advisors. I’m not a financial advisor, CPA, attorney, etc.
So with that, hopefully, that little quick snapshot was a nice correlation and update for everybody. If you have any questions, feel free to email me, travis@ashcroftcapital.com, or reach out on social media. I’m on LinkedIn, BiggerPockets, YouTube, Facebook, Instagram. Just reach out, always happy to be a resource for any of you guys, and feel free to share your input, whether you agree or disagree or whatever. So I’m always happy to have those conversations.
So thank you guys so much for tuning in. I’m your host, Travis Watts, for The Actively Passive Show. This has been another excellent episode… Hopefully. It was in my mind anyway… And we’ll see you next week.
Website disclaimer
This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.
The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.
No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.
Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.
Oral Disclaimer
The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.
