By Adiel Gorel

Many investors are asking, now that interest rates have gone up by 2% relatively quickly, and home prices are up significantly from a couple of years ago, whether buying single-family rental investments is still something to consider. 

The main point, at the heart of the matter, is that we can get a 30-year FIXED rate loan when buying single-family homes (technically 1-4 residential units) in the United States. This point is so dominant, it supersedes any other consideration. Surprisingly few investors seriously take this dominant factor into consideration. 

For some who have read other materials I have written, the following is a bit of a repetition, but it’s well worth understanding this point fully. The 30-year fixed-rate loan does not usually get its due as an amazing financial tool that should be utilized by any savvy investor who can get it. For many foreigners, it is incomprehensible that in the US we can get a loan that will never keep up with the cost of living for 30 years. During that period, essentially everything else DOES keep up with the cost of living, including rents. Only the mortgage payment and balance (which also gets chipped down by amortization) do not keep up with inflation. 

You can talk to many borrowers who have taken 30-year fixed-rate loans and after, say, 14 years, realized that although there are 16 years remaining to pay off the loan, the loan balance AND the payment seem very low relative to marketplace rents and prices. The remaining 16 years are almost meaningless since in many cases (statistically and historically) the loan balance will be a small fraction of the home price and not very “meaningful.” Just to get some perspective, most other countries on Earth have loans that constantly adjust based on inflation. Both the payment and the balance track inflation all the time—usually with no yearly or lifetime caps as adjustable loans have in the US. 

The power and positive effect on one’s financial future gets magnified when you consider that in 2022, we are still in a period in which interest rates are very low. While investors cannot get the same favorable rates as homeowners, it is nevertheless quite common nowadays to see investors getting a rate of between 5.75% and 6.25% on single-family home investment properties. From a historical perspective, these are very low rates. Most experts think that, in the future, mortgage rates will rise further. From a historical perspective, even 7.5% is considered a relatively low rate.These days, you can “turbo boost” the great power of the never-changing 30-year fixed-rate loan by locking in these still-low rates, which will never change. If in the following year's interest rates indeed go up, you will feel quite good about having locked under-6% rates forever. 

Once you have gotten your fixed-rate loans, two inexorable forces start operating incessantly: inflation erodes your loan (both the payment and the remaining balance), and the tenant occupying your SFH pays rent, which goes in part towards paying down the loan principal every month. These two forces create a powerful financial future for you. 

Many of us have been “spoiled” during the COVID Pandemic that started in 2020. The Fed lowered rates to the very lowest point in the history of the US. Homeowners could get loans at 2.75%, and even a bit less. Investors could get loans at 3.5%, 3.75% or 4%. Happy times. Recently, rates rose quite quickly. Homeowners now get loans at 5% or slightly more. Investors get loans at about 6%, depending on credit. It feels like the sky is falling, but it’s important to retain the historical perspective. These rates are still historically very low. Recall also that currently, inflation is at 8.5%. Inflation is your “best friend” when you have a fixed-rate loan since it constantly erodes the true value of your payment and remaining loan balance. Getting a 6% FIXED rate loan when inflation is over 8% is quite favorable. 

The 30-year fixed-rate loan is so meaningful in changing your future that it works well over the long term, almost regardless of the interest rate. Obviously, the lower the rate, the better. However, by way of an example, when I began investing in the 1980s, interest rates on mortgages were at 14%. Every single investment home I bought back then (and I always made the minimum possible down payment) started out with a negative cash flow. Nevertheless, it was clear to me that since the loan was FIXED, the payment would remain the same, but everything else would keep up with inflation. That meant, to me, that within a couple of years, the negative cash flow would turn into break-even, and a couple of years after that, it was likely to turn into a positive cash flow. A couple of years after that, the cash flow was likely to be a stronger positive, etc. 

Those notions came to fruition exactly as I had seen them. I started celebrating every time one of my homes got to “break-even.” I knew that from then on, the cash flow would be even more positive, on average, as the years would go by. Even with a 14% interest rate, the system worked. Those homes changed my financial life enormously. 

Of course, when rates went down, I refinanced. First, I refinanced down to 12%, then came the magic “single-digit” time, when I refinanced to 9.95% and was ecstatic about it. 

I have thousands of investors’ success stories that I hear all the time. One small example is the Silicon Valley engineer who bought 16 homes, then 13 years later saw his loan balances were under 30% of the home values, despite there being 17 years still remaining on the life of the 30-year loan. He sold 4 of the homes, paid his taxes, and used the proceeds to pay off the small remaining 12 loans, retiring on the strength of 12 free and clear homes. Many of these success stories, including his, are from people who started buying when rates for investors were between 7.75% and 8.25%. 

Many investors are also taken aback by the price increases that took place during the Pandemic. They feel they are being hit by high prices AND higher interest rates. 

One very important thing to remember is that while I am writing this (May 2022), inflation is at 8.5%. 

Some people are concerned about starting out with only a break-even, or a very slight positive cash flow when making 20% down payments. They have gotten accustomed to starting out with a healthy positive cash flow, even with a mere 20% down payment, during the super-low rates era. However, the INITIAL cash flow is just that: initial! 

As time goes by, the mortgage payments remain the same. However, rents rise, on average, with inflation. These days there is a huge demand to rent single-family homes in the suburbs, with a yard and room for a home office. There is more demand than supply in the rental space, and rents are going up quite furiously across the nation. Even if rents only rise with inflation, inflation these days is quite high. Either way, the cash flow gets better and keeps getting better as the years go by, while you build equity in the home, changing your future. I look at these investments as long-term. They will very likely change your future, but they need 10, 12, or 14 years to get to the desired result. In the beginning, the “cash flow” that has the most meaning is your own income: the income from your W-2 job, or your small business, in addition to what your spouse may earn as well. THAT is what pays for your food, transportation, utilities, and kids’ expenses at the present. In the future, when the rental homes can get you to retire powerfully, the equation flips, and then the rental homes will provide the very meaningful “cash flow” you can retire on, as I describe in the example above. 

The mistake many new investors make is thinking that they MUST have immediate large positive cash flow at the outset, despite not really needing it, since they generate sufficient “cash flow” in their jobs. This thinking may create a situation whereby an investor never gets started. Possibly a book the investor had read might have put the idea in their head that initial cash flow is the primary thing to look for. Ten years later, I see people expressing great regret at never having started due to these notions. Some people resort to buying inferior properties in inferior locations, seeking a “better initial cash flow.” Buying bad properties usually doesn’t end up that well. 

Today, as in any time I have seen, is an excellent time to acquire single-family rental homes, finance them with the astounding 30-year fixed-rate loan, and then let time pass while inflation does its thing. We will talk about it in more detail at our upcoming quarterly event, complete with a Q&A. 

 

© 2022 Adiel Gorel 

Why the Limit of 10 Fannie Mae Loans Does Not Matter          
Everyone who is familiar with me and the work I do knows that I have personally bought hundreds of homes by way of investments for myself. However, there is one question I get a lot from my clients and those who attend our real estate seminars. Can we get more than ten loans? If so, how? These questions are of course related to the Qualified Mortgages or Fannie Mae loans as we colloquially call them.

 

Buy more, I tell them.

 

I always advise our clients to buy more homes – 5, 10, 50 or 100 – as many as they possibly can. Because the more homes they buy, the greater passive income they generate and the more their wealth grows. I give the example of myself as someone who bought many, many homes as part of my own investment portfolio. So how did you manage to buy so many homes when one individual can get only 10 loans,” they ask me.
Now there is no doubt that the 30-year fixed rate loan is a gift that no one can or should refuse to take. However, the ceiling of just 10 loans for each individual – which includes the homes one stays in, by the way – is a bit of a dampener, isn't it? You could say that it is. So what are your options?

 

How to get more than ten loans.

 

The first thing to remember is that it is ten loans per individual, so married couples can get up to 20 loans between them. If both spouses are earning, they are seen as a bankable risk and financial institutions can advance up to 20 loans. So that right there is one family’s increased capacity to create future wealth for itself.
And then there are the non-QM loans or the non-qualified mortgage loans. Sure, the terms of those loans may not be as favorable as the Fannie Mae loans but these are good loans to take. It is, in fact, possible to get these loans that are repayable over a 30-year period and at a fixed rate! The rate may be a little higher but this is still a great option! Watch this episode to know why I think the ten loan limit is irrelevant, and creating retirement riches is within everyone’s reach. 

In a blog on RentCafe, by Nadia Balint, from April 2018, this is some of the information shared:

“The U.S. housing market has gone through nothing short of a transformation in the last decade. The number of people renting their abode has increased significantly, in some cities surpassing the number of homeowners. The housing market quickly responded to this shift by adding millions of rental units in just a few years, with many U.S. cities witnessing a frenzy of apartment construction.

The most interesting part of this transformation, however, was the fact that the rental market expanded even faster horizontally than it did vertically. For the better part of the decade ending in 2016, single-family homes for rent were the fastest growing type of rental in the U.S., outpacing the formidable apartment boom seen throughout the country.

According to U.S. Census estimates, the number of single-family rentals (SFR) in the U.S. grew by 31% in the ten year period immediately following the housing crisis (2007 to 2016), while multifamily rentals (MFR) grew by 14%. In net numbers, single-family rentals in the U.S. increased by 3.6 million units in ten years, more than rental apartments, which increased by 3.2 million units. As of 2016, the U.S. Census counted a total of over 15 million single-family homes for rent in the United States and a total of over 26 million apartments for rent.”

Oklahoma City leads the 10 Top Metros with the largest share of Single Family Home Rentals:

his is very likely helped by the tendency of many Millennials to rent instead of buy. Millennials have not been valuing home ownership as much as previous generations. Many of them value flexibility and the ability to move. Nevertheless, many Millennials are getting into the family-formation phase of their lives, and thus prefer single-family homes with a yard for the kids, dog etc.

All this dovetails perfectly into our investment philosophy: buy single-family homes in good areas in good large metropolitan areas, finance them with 30-year fixed rate loans (which never keep up with inflation) whenever possible, and hold. That will vastly change and improve your financial future.

We will discuss this and a lot more at our ICG Quarterly 1-Day Expo on Saturday 5/19/2018 near the San Francisco Airport. I will be teaching and holding extensive Q & A sessions. We will have expert speakers on Asset Protection, 1031 Exchanges, and Financial Planning overall. There will be lenders present, 5-star networking, and presentations from market teams from the most relevant markets in the U.S. You can attend free, with a guest by emailing us at info@icgre.com, and mentioning this blog. Looking forward to seeing you!

#real estate, #real estate investing, #interest rates, #single-family homes, #rentals, #retirement, #college costs, #wealth

Interest rates are rising. In the past year mortgage rates went up by over 0.5%. Homeowner mortgage rates are now about 4.4%; investor rates are always higher, and are currently at about 5.25%. Historically, these are still very low rates. Even in the past 20 years, which saw some of the lowest interest rates in nearly a century, the average rate is about 6%; based on the past 7% and even 7.5% are considered low.

In the 1980’s there were periods where interest rates were over 14%. For many years, rates were in the “double digits.” There was a lot of joy when rates finally got down to a “single digit.” I recall everyone running to refinance to get the amazing new rate of 9.95%!

The single-family home investor

For the single-family home investor, given their ability to get a 30-year fixed rate loan, which miraculously never keeps up with inflation, these recent changes in interest rates should mean very little. I have seen thousands of people’s lives change dramatically over the years buying good solid single- family home rentals. The trick is to hold them for a long time (leaving it be–no refinancing for debt consolidation) and let inflation erode the fixed loan to the point of ridiculousness, while natural average price appreciation happens steadily (that includes booms and busts – on average single-family home prices have appreciated at least 1.5 times the rate of inflation historically).

So why do I talk about interest rate rises potentially ruining your future? 

That has to do with human behavior. I have seen many cases recently, of investors who understood the powerful future benefit of buying single-family rentals, and as it happens, were looking during the period when rates were super low (investor rates were 4.7%). A few months later, when investor rates are now 5.3%, I have been hearing investors saying “Well, I don’t want to invest anymore, since rates went up from 4.7% to 5.3%”.

THIS is how you can ruin your financial future. Over the years, I have seen it time and time again – investors not taking action, not cementing their future by actually investing in a single-family home rental. Rather, they would find a reason not to do it – “interest rates are too high now”, “I read the economy will tank”, “it’s too late”, “I am too old” etc.

Using a minute change in interest rates as an excuse not to move forward, especially at a time when rates, even for investors, are supremely low – like today, is simply not going to let the powerful effect of rental homes change your future for the better.

Take action now to change your financial future

I have seen many such cases in the past, for example: two friends were considering investing in houses, one thought “the interest rates were too high” and didn’t do anything. The other went ahead and invested. Once he saw it was easy and profitable, he invested again, and again. Today, the financial difference between the two friends is staggering. The one who owns the rental homes, bought over 15 years ago, is retired with great ease, has sent his kids to great colleges, and is wealthy. His friend – not so much. It’s almost heartbreaking.

Don’t let these minor perturbations in interest rates ruin YOUR financial future.

We will discuss this and a lot more at our ICG Quarterly 1-Day Expo on Saturday 5/19/2018 near the San Francisco Airport. I will be teaching and holding extensive Q & A sessions. We will have expert speakers on Asset Protection, 1031 Exchanges, Financial Planning overall, as well as lenders, 5-star networking, and market teams from the most relevant markets in the U.S. You can attend free (or with a guest), by emailing us at info@icgre.com, and mentioning this blog. Be sure to give us your name and the name of your guest. Looking forward to seeing you.

In an article published in the San Francisco Chronicle from February 7th by Christopher Rugaber (AP Economics Writer), called  “Why Investors’ Fear of High Inflation is Probably Overblown,” Mr. Rugaber explains inflation by going into the pros and cons of higher and lower inflation.  He provides an overall concise glimpse of the situation as it is currently.  The Fed’s dilemma with increasing taxes in the face of strong employment and rising wages is certain to bring inflation to the economy. However, he also discusses how inflation assists borrowers.

ICG Educates Investors

Of course, at ICG, we constantly talk about how inflation erodes the 30-year fixed-rate loan. This, in turn, becomes the borrower’s ally in reducing the real buying power of the loans fixed dollar amount. We will talk about this and many other important topics during our ICG Quarterly 1-Day Expo near SFO on Saturday 3/3/2018.

Topics to be covered

Our expert speakers will cover topics including the new tax law and how it pertains to real estate investors, how to buy rental homes out of a self-directed IRA, and how to use insurance as the first line of defense of protecting your assets.  There will also be lenders available to discuss what they have available and what you can expect over the next several months. Property management, legal expertise, and one-on-one’s can be found as well. And as always, we offer a lot of question and answer time.  Market teams from the most relevant metro areas in the US will be present. Everyone mentioning this blog will receive free entry. Please email us that you read this at info@icgre.com.

We have discussed, in a previous article, why investing in Single Family Homes is a superior investment, especially for the busy professional (which most of us are).
We discussed the benefits of buying single-family homes using the unique 30-year fixed rate financing available ONLY in the United States (foreigners are amazed that we can get loans where nothing keeps up with inflation for as long as 30 years, meaning inflation keeps eroding the real value of our debt while the tenant is gradually paying it off for us). The 30-year fixed-rate mortgage is only available on 1-4 residential units, making single-family home rental investments even more attractive.
We also discussed how owning a portfolio of single-family rental homes can change everyone’s financial future. It can facilitate sending your kids to a great university, it can retire you sooner and more powerfully, and overall it can create a financial safety net for your future.
Single-family homes are easier to manage than other property and are usually occupied by families with kids, who go to local schools and serve as an anchor of stability to keep the family renting for a longer time. Single Family Homes are also possibly the most liquid real estate since when you put it up for sale your potential buyer pool is essentially everyone in the marketplace. It is still considered the “American Dream”, a dream which is attainable in many markets in the United States.
Where should we buy our single-family home rentals? To begin with, we can focus on large metropolitan areas. Large metropolitan areas are usually comprised of a number of cities (for example the Phoenix metro area includes cities such as Chandler, Mesa, Gilbert, Scottsdale, Avondale, Peoria, Glendale, and others). A large metropolitan area usually has good economic and employment diversity and a large pool of industries and employers. This is likely to create employment opportunities and economic stability. A large metro area also is likely to have a diversity of education, culture, culinary and many other facets of life, which can be attractive to a larger pool of residents and create a stable place in which to live.
Next, it is always instructive to study the demographic trends in the United States. Even before we had the World Wide Web and search engines to facilitate research, demographic information was available through multiple sources, including the US Census. It is evident that as far as overall demographic movements, the Sun Belt States are the states which usually experience net growth in population on an ongoing basis (those states in the sunny, southern part of the US, such as Nevada, Arizona, Texas, Oklahoma, Utah, Colorado, Florida, and other southern states.) Not all Sunbelt states keep growing on a net basis, but many of the big ones do, and that would be one criterion on which to base our geographic choice.
We will continue on “Where to Buy Rental Homes” in part 2 of 4 of this article. We will also discuss these subjects and much more during our ICG Quarterly 1-Day Expo on Saturday, December 2nd, 2017 near SFO. We will have experts discuss Asset Protection, Tax planning for year-end, 1031 Exchanges, special loans for investors (including foreign investors and investors who own over 10 properties), and a lot more. To register, please email us at info@icgre.com and mention this blog. You can attend for free with a guest.

In an article in the Wall Street Journal from January 3rd 2017 by Chris Kirkman (yes it’s from over a month ago but this is an important and relevant trend which is intensifying as time passes), we learn that buildable lots for developers are becoming scarce. One tactic builders are reverting to is buying whole subdivisions that were abandoned during the crash and which were never fully completed. While there is a lot of remedial work to be done, it is still a better deal in many cases to fix up the existing unfinished subdivision, than to start the zoning and approval processes from scratch.

The relevance to us as real estate investors is that as buildable lots become more scarce, undoubtedly their cost increases. This reliably raises the price for finished new homes and creates comparable sales which usually push the median market prices higher.

Given the fact that interest rates are still low (historically they are very low, Trump-bump notwithstanding), and since 3.5%-down FHA loans are still widely available to homeowners buying at the price ranges we are interested in ($100K-$200K), the writing is on the wall: home prices in many cities (certainly the key cities we look at as investors), are likely to keep appreciating in the near future (possibly 1-2 years).

This points to a potential window in which to ‘stock up” on quality investment Single Family homes: with low interest rates (don’t forget to get a 30-year fixed-rate loan if you can), an upwards price trajectory (if only due to the scarcity of buildable lots), still-available low-down FHA loans and still-affordable prices in many key metropolitan areas, investors are enjoying a ‘sweet window” in which to buy, finance their purchases well, and then rent and hold.

We will be talking about this and many other points, including entity formation and asset protection, investing in real estate form one’s self-directed IRA, the types of loans available to investors, which markets stand out and why, and a whole lot of expert information.  Q&As and networking are always in abundance, at our Quarterly 1-Day Expo near the San Francisco Airport on March 4th. Anyone mentioning this blog entry can attend for free – please email us at info@icgre.com to register. Just tell us in the subject line, “Read your blog,” and your information in the body of the email.

The full WSJ article is presented here:

With Lots in Short Supply, Builders Revive Abandoned Projects

Developers and investors are starting to resurrect subdivisions that were left half-finished after the housing collapse

By 
CHRIS KIRKHAM
Updated Jan. 3, 2017 6:25 p.m. ET
When real-estate fund manager Drapac Capital Partners visited the Cameron Springs subdivision in Cobb County, Ga., in 2012, the landscaping was dead and weeds had sprouted through the cracked tennis courts. Discarded tools littered empty lots where construction workers had walked off the job in the late 2000s with only a fraction of the homes completed.
Drapac saw value in those abandoned lots. It bought the 101 remaining lots in the neighborhood for a total of $375,000 and spent about $550,000 finishing half-built lots and upgrading the pool and clubhouse, betting home builders someday would return to the area.
As the nation’s supply of buildable construction lots shriveled, interest in the property picked up. Drapac received 12 bids last summer for the neighborhood, eventually selling it to national builder D.R. Horton Inc. for $6 million.
“I think they’re all panicking,” said Sebastian Drapac, chief operating officer of Drapac Capital Partners, an Australian firm that has purchased more than 25,000 lots in abandoned developments across the U.S. since 2011. “They’re trying to get lot positions wherever they can.”
The housing market’s boom and bust last decade left the U.S. with a surplus of vacant lots and half-built subdivisions many thought would never be revived. But tighter lending standards since the housing collapse last decade have made it difficult for smaller operators to develop land into buildable lots—the crucial raw material for new home construction—leaving builders to compete over a dwindling supply.
Now, builders and investors are starting to resurrect those half-finished subdivisions that were given up for dead after the collapse.
Nearly two-thirds of home builders reported a low or very low supply of available lots in their markets, according to a survey last year by the National Association of Home Builders, the highest reading since the group started tracking the issue in 1997.
Converting land into buildable lots requires developers to clear and grade the property, get approvals from local planning officials and install needed utilities such as gas and water.
Overall, the supply of vacant developed lots has decreased by more than 20% across more than 80 major U.S. markets since 2011, according to data from housing research firm Metrostudy. In markets such as Nashville, Tenn., and Charlotte, N.C., the inventory of vacant lots has declined by more than 40% over the past five years.
The shortages have pushed median single-family-home lot prices to a record high of $45,000 last year, surpassing the previous peak of $43,000 in 2006, according to census data analyzed by NAHB.
Developers and investors have been sprucing up unfinished community centers, reviving underfunded homeowners’ associations and adding amenities such as walking trails, lakes and bocce courts in an effort to revive the image of moribund developments and attract new buyers.
In some cases, they change the name of the development to shed prior stigmas.
Drapac Capital Partners replaced a sign out front of a struggling suburban Atlanta neighborhood that read “Brightwood – Established 2007.” They tweaked the name to read “Brightwood on the Lake, Est. 2016,” after clearing trees and opening up the neighborhood’s access to an adjoining pond.
Steve Brock just sold land for about 300 homes in a master-planned development called Stonoview outside of Charleston, S.C., to Lennar Corp. for $19 million. The project had been abandoned during the downturn, and Mr. Brock acquired three tracts around the property in 2013 for $7 million, and spent around $5 million over three years developing many of the lots, installing a 10-slip boat dock and drawing plans for a lighthouse and walking trails. Mr. Brock and another builder will build homes on 71 other lots in the area now worth $9.4 million, he said.
“We could sell it to them for close to retail prices, and they have the runway of land and lots immediately,” said Mr. Brock, founder and president of Brock Built. As a smaller builder and developer with a higher cost of capital, he said he could never pay as much as Lennar did for such a project and still turn a profit.
In Maricopa, Ariz., 35 miles south of Phoenix, Fulton Homes is building swimming pools and reviving parks in a project called Glennwilde that had been largely abandoned by developers for seven years.
Dennis Webb, Fulton’s vice president of operations, said prices for such deals are generally lower because of the needed improvements. And because such neighborhoods have already been laid out and approved, “We can get going pretty quickly,” Mr. Webb said. “We don’t have to wait a year and a half to develop the plans.”
In a Wall Street Journal article from 1/6/2017 by Chris Kirkham, titled “ Millennials Fuel House Rental Boom”, the phenomenon of rent vs. own is discussed.  Millennials in particular but also other demographic groups have started leaning more towards renting as opposed to owning houses.
This is not really new. There has always been a sizable group preferring renting to owning. Some of the many reasons include flexibility to move at will (especially for jobs), less hassle of maintenance, possibly lower monthly expenses (depending on geography), not having to qualify for an ever-more-difficult-to-obtain loan, not having the perceived “burden” of a mortgage, and other reasons.
As real estate investors, we love having 30-year fixed mortgages, especially at today’s low rates (Trump bump notwithstanding), and the phenomenon of an ever-increasing rental demand only bodes well for us as real estate investors.  This is a very “sweet” window in which many factors co-exist that is favorable: low (still) interest rates, 30-year fixed loans still available, strong rental demand and low prices in several key markets. This year – 2017 should be a banner year for the savvy investor.
We will discuss this and many other issues at our quarterly 1-Day Expo on Saturday, March 4, 2017, near the San Francisco Airport.  Mention this blog and you can attend for free, with guests. Please contact us at info@icgre.com or call 415-927-7504 to reserve your seats. If you are reaching out via email, in the subject line say, “Read your article on AdielGorel.com blog” and in the body, give your first and last name, and email so we can confirm.  Please also list any guests you would like to bring.
Enclosed is the WSJ article:

Developers Build on Home Rental Success With Whole Communities

Property firms see continued demand for single-family homes from millennials, aging boomers who don’t want to buy

By 
CHRIS KIRKHAM
Updated Jan. 6, 2017 9:38 a.m. ET
Property developers are pouncing on sustained demand for stand-alone home rentals by taking a big step: Building entire single-family neighborhoods designed for renters.
When the housing market crashed, investors took advantage by buying low-price homes in foreclosure in order to rent them out to tenants. That demand has proven brisk.
The new rental communities look identical to for-sale projects, with pools, fitness centers and walking trails. But they are operated like apartment complexes, with management handling maintenance, lawn care and leasing.
Developers cite growing demand from younger millennials and aging baby boomers who want the additional space and traditional setting of a new single-family neighborhood—without the long-term commitment.
“It used to be that if you were an adult and didn’t own your own home, you were kind of a bum,” said George Casey, a former home builder who is chief executive of Stockbridge Associates, an industry consulting firm. That stigma has now “been blown into a million pieces,” he said.
The number of renter households increased by 9 million between 2005 and 2015, marking the largest increase over any 10-year period on record, according to the Harvard Joint Center for Housing Studies. In all, about 5% of all new single-family construction was built for rent in 2016, up from a historical average of less than 3%. Experts say that could expand in coming years if homeownership remains depressed and as older Americans consider downsizing.
Developers building single-family communities for rent said they are transforming what began as a distressed-asset play into a completely new market somewhere between apartment living and homeownership.
“We basically looked at the institutional market and said ‘Would Blackstone, would all of these people be pumping tens of billions of dollars into this space if it wasn’t a good opportunity?’” said Mark Wolf, chief executive of AHV Communities, a California-based single-family rental developer that operates around San Antonio and Austin, Texas, and is looking to expand to North Carolina. “Then we said ‘Looking at what they do, how can we do it better?’”
Amenities packages and proximity to quality school districts are crucial to the business model. By offering perks similar to higher-end apartment complexes, the goal is to attract young families who want good schools but may struggle to buy in certain districts because of insufficient savings or high levels of student debt.

The model doesn’t work in all markets. In areas such as California, for example, where land is expensive, developers would likely have to charge rents that would be too high to justify the cost of construction. Markets such as Arizona, Texas and North Carolina make more sense because land is plentiful and demand is high.
“It’s about figuring out what places have the growth, but also have the highest rents possible for the lowest price of the home,” said Shaun McCutcheon, a senior manager who studies the single-family rental market at Meyers Research, a housing consultancy.

National home builder Lennar Corp. has tried the model in one of its master-planned communities outside Reno, Nev. RSI Communities, a home builder in California and Texas, is testing out two fully leased new communities outside San Antonio and is considering expanding the model to other markets.

John Bohnen, RSI’s chief operating officer, said the for-rent approach allows the company to build homes at a faster and more efficient pace than its traditional for-sale operation. That is because builders don’t have to wait to start construction until a sale is completed, giving construction crews that are in high demand more certainty about the number of homes they will build in a given time-frame, thus providing more of a guaranteed pay schedule.

And by exposing tenants to their homes, Mr. Bohnen believes the company could eventually generate demand on the for-sale side.

Matt Blank was a former hedge-fund investor who moved to Phoenix in 2011 to start snapping up distressed properties. He was soon crowded out when major investors like Blackstone Group LP entered the market and prices shot up. He instead turned his attention to buying empty lots and building affordable homes that adults could rent.

His company, BB Living, has since built about 350 rental homes across the Phoenix area, some in stand-alone communities and others alongside owner-occupied homes in large master plans. All six projects he has completed initially sparked controversy from neighbors worried their property values could be impacted by inadequately maintained rentals. But he said he got buy-in after assuring them the properties would be professionally managed and look no different from the surroundings.

“This is a new concept that hasn’t really been done before,” Mr. Blank said. “Once you get around that first hurdle, the pitchforks come down quite a bit.”
Write to Chris Kirkham at chris.kirkham@wsj.com
As you know we always preach the gospel of buying single-family homes, renting them, financing them with 30-year fixed-rate loans and then just holding them long term. We have discussed the benefits of having a 30-year loan which never keeps up with the cost of living (while everything else does!) Thus your loan gets constantly eroded by inflation (and don’t let anyone tell you the United States will have no or negative inflation in the face of the massive fixed debt it is on the hook for), while the tenant makes the payments for you (of course the RENT does change with inflation which makes it all the sweeter).

In the past month, I got a call from a financial planner handling the affairs of one of my investors. He had purchased nine single-family homes in Phoenix in the mid-’90s. It turns out he did not even live in the United States anymore, hence the financial planner handling his affairs in the U.S. They decided it was time to sell the homes in light of the 2012-2015 run-up in values that Phoenix has experienced in the aftermath of the recession.

Needless to say, his mortgages, while still not completely paid off (they are 30-year loans after all), are essentially as good as paid off after over 20 years. They never kept up with the cost of living and the principal payments whittled them down pretty low – very funny numbers considering the 20+ year inflation which the loan never kept up with.

A few quick CMAs (Comparative Market Analysis) by one of our Phoenix brokers revealed that after selling the nine homes, the investor would NET (after-sales expenses and closing), about $1.7M. Considering he bought the homes for an average of $80K each and using 10% down payments (those were the financing terms back in the mid ’90s), his overall return on investment is not only staggering, but the $1.7M is a real, tangible, powerful enhancement for the rest of his life (he is now in his mid 60’s).

As much as this is a satisfying long term result, I know the investor could have easily bought way more than nine homes. Loans were plentiful back then (no up-to-10 limits) and he had the capacity to easily buy three times as many homes. Nevertheless, even with this investment, he has created a powerful effect on his financial future. Alternatively, he could have just kept the homes and have the net rent from all nine homes contribute to his retirement income.

During our next 1-Day Expo (tomorrow near SFO – see www.icgre.com for details and if you mention this blog entry, you are invited at no cost – just email us at info@icgre.com with the attendees’ names), we will discuss new loans available to investors who own over 10 homes as well. Loans are now also available to foreigners again, and of course, if you own less than 10 homes there are conventional investor loans available to you from most banks.
In a Wall Street Journal article from August 19th by Josh Mitchell, it is reported that housing starts are sharply up for the year and have seen a strong uptick in July. Housing starts bode well for a general housing recovery. We have already begun to go back to our old buying style of buying new homes from developers in Oklahoma City.
I am relatively sure in the coming months we will be seeing more attractive opportunities in buying brand new products in other markets as well. It took a long time for the builders to be able to put out a competitive product for real estate investors, as they played a serious “second fiddle” to existing homes, which were priced well below what they could offer.
We are pleased to see the trend as it was always our opinion that a prudent and safe real estate investment certainly includes brand-new homes with a builder’s warranty, with a fixed-rate 30-year loan paid off by the tenant and eroded steadily by inflation (as it is not pegged to the cost of living). This mode of real estate investment serves as the foundation of building a solid financial future and achieving long-term life goals of a solid retirement and sending our kids to college.
Builders have the ability to offer the buyers many “goodies” at a cost to them- that is much lower than the retail cost (an example might be a covered patio which costs $6K but only costs the builder $2K to build). This can create an attractive package for the investor.
We will have builders and new properties available at our upcoming 1-Day Real Estate Expo near SFO on Saturday, September 13th. I am looking forward to seeing you.
I am enclosing the full WSJ article for convenience:
U.S. Housing Starts Up Sharply in July – Renewed Strength in Housing Market Could Boost Economy
By Josh Mitchell
Updated Aug. 19, 2014 11:03 a.m. ET
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WASHINGTON—Home construction surged in July, a sign that renewed strength in the housing market could boost the economy in coming months.

Housing starts climbed almost 16% last month to an annual rate of 1.093 million units, the Commerce Department said Tuesday. That marked the highest level of construction since November, driven by a pronounced rise in new apartments.

Home construction rose 22% in the year through July, and a rise in applications for building permits last month suggests further gains this year. That could ease concerns at the Federal Reserve of a weak housing sector weighing on economic growth this year.

”With housing starts up 22% over the last year, the Fed’s concern about a ‘slow’ recovery in the housing market looks misplaced to us,” Economist John Ryding of RDQ Economics said in a note to clients. But details within Tuesday’s report raised questions about whether the construction gains will be sustained. Last month’s rise appeared to be due partly to a rebound in construction in the South after rainy weather caused delays earlier this summer.
Such rebounds are typically temporary. Also, the bulk of the increase was due to surging apartment construction, a volatile category that can mask underlying strength in the market. And it’s unclear whether the housing market will be able to maintain momentum if mortgages rates rise, as many economists expect them to as the Federal Reserve moves toward raising its benchmark short-term interest rates from near zero.
Amid the prospect of higher costs and weak income growth, Fannie Mae’s economics group downgraded its forecast for home sales and construction on Monday. It now expects construction of 1.43 million single-family units this year and next combined, down from an earlier forecast of 1.61 million units.
A measure of affordability, which takes into account interest rates, home prices and median household income, hit its lowest level in six years in June. That reflects a run-up in home prices.
Interest rates have fallen back to year-ago levels in recent weeks after rising late last year. The average rate on a conventional 30-year mortgage stood at 4.12% last week, down from 4.53% in the first week of the year, according to Freddie Mac.
But overall the report boosted hopes of a stronger housing recovery. In July, applications for building permits, a construction bellwether, climbed 8.1% to a 1.052 million rate. That suggests construction could pick up further in coming months. Sales of previously owned homes have picked up in recent months, buoyed by historically low interest rates, mild weather, and stronger job growth in the U.S. But sales of new homes have moved sideways. The latest pickup in home construction could signal builders are gaining confidence that overall sales will rise as the broader economy gains momentum.
From a year ago, home construction was up 21.7%. The home-construction market has steadily recovered from the depths of the recession but has yet to regain its strength from the levels that preceded the boom years in the 2000s.
At the height of the housing boom in 2005, just over 2 million homes were built. After the crash, housing starts fell to 554,000 in 2009, during the recession. Tuesday’s report showed that starts on single-family homes, which reflects the bulk of the market, climbed 8.3% in July from June.
Construction of multifamily units—mostly condominiums and apartments–rose 33% to a pace of 423,000 units, the highest level since January 2006. That category is more volatile. Other recent signs point to a strengthening housing sector.
A measure of home builder optimism rose two points to a reading of 55 this month, the National Association of Home Builders said Monday. Existing-home sales rose in June to the highest level since October, the National Association of Realtors said last month. The trade group is expected to release July’s data Thursday.
Write to Josh Mitchell at joshua.mitchell@wsj.com
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