In a piece called Positioning for a Housing Recovery PIMCO says that the risks to housing have been overstated and while prices may continue to fall there are opportunities in the mispricing of that risk. They believe that the risk of the 11 million underwater home loans all becoming delinquent and going into foreclosure is much lower than most think. They also point out that the record low interest rates have created housing demand from large institutions (Like PIMCO, and individual investors too) searching for positive returns.
One of the opportunities they list is in apartment building investment, either through equity (owning) or debt (loaning). However they pass over multifamily in favor of REOs-to-rentals and distressed housing debt. It’s ironic that they would favor buying large numbers of single family homes to rent because the logistical nightmare of the scattered homes is what drives most real estate investors to apartments and other commercial real estate. The convenience of having 10, 20, even 200 units or more at one location on a single property on top of the economies of scale available make owning multifamily a much better investment.
While they do acknowledge the challenge of REOs-to-Rentals:
However, investors must be mindful of the operational complexity and illiquidity of a single-family rental portfolio. Managing a nationally diversified portfolio of rental properties presents unique challenges of surveillance and scaling, and procedures for maintenance and leasing must be designed to help protect earnings.
… Somehow that doesn’t lead them to picking multifamily investment. Are you a real estate investor who started out in single family properties and moved on to apartment buildings? We would love to hear your story-
There have been a number of reports recently claiming that renting is more expensive than buying a house. This is a great thing as everyone involved in selling, building and financing houses would tell you, especially if it were true. Unfortunately it is not for a variety of reasons, one of them being that owning the home you live in just isn’t that good of an investment, but we’ll get to that in a moment.
The first hurdle is the challenge of amassing the 20% down payment. On the average US home price of $242,300 the downpayment would be $48,460. That is essentially one whole year’s worth of the US median income of $51,413, so the question is how long would it take someone to save that much? This question is nearly always ignored in these comparisons. But say we all have a rich relative who leaves us the downpayment in their will, it’s all good after that right?
Some of these type of reports simply compare the average local rent to the mortgage payment for the area’s average home and therefore can be discounted out of hand. Others include taxes and insurance which is slightly better but they are still missing a very big piece of the cost of owning and operating a home; repairs and maintenance. Continue reading Rent Vs. Buy And The Great Myth of Homeownership as an ‘Investment’
Mark Hanson of MHanson Advisors, researchers and strategists focused on North American and Australian real estate and finance markets, has a very good piece out questioning the recent calls of a housing bottom. His research shows that 20-30 million current homeowners (half the market) either cannot sell and net enough for a downpayment on another house or could not qualify for a new mortgage if they did have a downpayment.
He also charts that out in relation to the over all supply:
Here’s Mark’s breakout of the zombies:
1) “Effective” Negative Equity – 25 million borrowers / houses. These borrowers are dead to the housing market, as they don’t have the equity to pay a Realtor 6% to sell and put 20% down on a new house. They were once the most active participants, the repeat buyers. Now they are “zombie homeowners”.
Research out from CBRE Econometric Advisors shows that the typical risk-free benchmark rate, the 10 year Treasury, does not accurately reflect the cost of capital risks in asset pricing for commercial real estate. The whole yield curve or ‘term structure’ should be used instead. Highlights from their report:
Our research shows that it is not a single risk-free rate that drives asset pricing, but rather the entire term structure of interest rates (also referred to as the shape of the yield curve; we use these terms interchangeably). This term structure effect is so strong that relying upon a single benchmark rate in one’s analysis (as is typically done by analysts and investors) is inappropriate. We will demonstrate this below, using our empirical model of cap rates.
Mike in Milwaukee, WI, that is a great question. Answer: $3,000- 5,000/unit/year. How’s that for an accurate but relatively useless answer? The real question is what is the annual expense per unit of the property you are looking at? If you are a large institutional investor like a REIT looking at national or regional averages like those published in the NAA Annual Survey (See the included charts for results from the 2011 survey) can give you an indication but you can bet the institutional players know their own costs to the penny.
In most larger metros there are also companies who collect and publish apartment surveys showing the areas average rents, occupancy, expenses, etc. One thing to make sure of is that the survey is based on properties similar to yours. There are a number of national companies doing multifamily research but they tend to focus on institutional sized properties 100 units and up so their numbers wouldn’t be comparable for a smaller property. For instance the average property in the NAA survey has about 250 units.
Bill ‘The Bond King’ Gross, founder of PIMCO says that the long run of stocks outperforming the overall economy is done and that the only policy option left for the ‘advanced’ economies in the world is inflating their way out of debt. Since Inflation = Higher Interest Rates and rising rates reduces the value of existing bonds issued at lower (currently near zero) rates, they don’t look to good as a long term investment either. See his letter here PIMCO Investment Outlook
So what’s a saver or investor to do, especially those nearing or at retirement? Chase yields in emerging market bonds? Who would you trust for information about those issues? Have those economies really decoupled from the US and Europe? Where could you find a decent stream of income with inflation protection build in and appreciation potential on top of that?
Apartment building investments. As we’ve laid out previously apartment owners can benefit from even small increases in rents, have demographics and social trends on their side and new supply has been quite limited over the last decade (see here, here and here for the details). Does the prospect of high single digit current income with inflation protection and even appreciation potential warm your retirement spreadsheet?
In this example, raising rents $25 or about 3% increases the value and owner’s equity $190,000 or almost 12% plus the income goes up more than 9%. That is the power of apartment building investment. Notice that in this example that the building is nearly full, if we were to buy a building that had more vacancies we could have paid a lower price based on the lower Net Operating Income and we would have the opportunity to create even more value by improving the management to bring in more renters. That is why we like apartments.
When I talk about investing in apartments I am not talking about being in the landlord business, I am talking about being in the property owning business and one of the expenses we gladly pay is for professional property management. We’re not in the tenants, toilets and trash business; we hire the pros to handle that and our job is to manage the managers…. And reap the rewards. Find out how we invest in apartments and how you can too by contacting me at firstname.lastname@example.org.