JF2592_ Renter Nation _ Actively Passive Investing Show 62

JF2592: Renter Nation | Actively Passive Investing Show 62

In today’s episode of the Actively Passive Investing Show, Travis discusses the current housing and affordable rent shortage we’re currently experiencing in the U.S. We dive into the imbalance we’ve been seeing in the market and how the pandemic had an impact on that, the future of renting, and Travis’ best advice for property owners based on these trends.

 

 

 

 

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TRANSCRIPTION

Travis Watts: Hello, everybody and welcome to the Actively passive Show. I’m your host, Travis Watts. Thank you so much for tuning in to yet another great episode. This episode is called Renter Nation. I titled it Renter Nation, because what we’re talking about is homeownership is becoming less affordable, I think we all know that, and many would-be homebuyers are right now on the sidelines waiting for either prices to adjust and/or come down.

Unfortunately, with commodity prices rising and with wages increasing and with inflation at the highest points we’ve seen in several decades, many renters are becoming long-term renters, and that may potentially be for life. America has become a nation of renters. In fact, the number of households that are renters is up from 31.2% in 2006 to 36.6% in 2016 according to the Pew Research Center, who basically did an analysis of the US Census Bureau Estimates of Housing Inventory. And these numbers continue to grow and expand here through 2021.

Meanwhile, the average home price continues to rise, and has been for many years now. And with so many people unable to buy, especially over 2020 and 2021, rental demand has increased. And what we’re starting to see now his rents are catching up and they’re rising rapidly.

I’ll share with you guys a real-life example. I’m invested in an apartment deal – it’s a real estate syndication in Boise, Idaho, and for years, there’s been a lot of people moving to Boise, Idaho. But since the pandemic, and more specifically over the last 12 months, Boise, Idaho is now leading the nation in the fastest rent growth, up nearly 33% over the past 12 months.

Another example of an extreme market would be Spokane, Washington, just behind Boise, Idaho. Spokane has had a 29% rise in rents over the past 12 months. And just to kind of zoom out and put all that in perspective, the nationwide average for rent increases right now is hovering around 10% over the past 12 months. As we’ve discussed in previous episodes, there’s a very large demand right now from institutional buyers in the single-family space, companies like Blackstone and iBuyers. In case you didn’t catch the last couple of episodes, Blackstone acquired a company called Home Partners of America; they own about 17,000 single-family homes nationwide. That acquisition was valued around $6 billion.

And here’s why I like to share a few facts about Blackstone – they’re known for setting trends in the industry, especially in the institutional space. So unfortunately – or fortunately, depending on what side of the coin you’re on – this may be just the beginning of institutions and institutional buyers entering heavily into the single-family market, thus making single-family homes more expensive.

And to quickly define iBuyers, I would recommend doing your own research and just run a quick Google search, but basically, iBuyers are companies that are willing to make you or I a full cash offer with no contingencies as far as repairs or warranties or upgrades for your home. And then what they do is they go in and they do a light renovation and put it back on the market. And they’re eliminating the middleman, so to speak, of realtors and realtor commissions, and lowering closing costs and things like that. There’s a lot of companies right now in the sector that are trying to gain rapid market share. Just like we’ve experienced in the past with companies like Amazon, they may do certain things where they’re operating at a loss in the beginning, in order to get market share, like what Amazon did with their Kindle devices. They were actually selling them below the cost of manufacturing them in order to get more customers hooked on their software, their programs, their audiobooks, so that they would gain market dominance long-term, and they could slowly but surely rise the prices to the market level.

So all this to suggest that the single-family market in the United States has a very low inventory, a very high demand, both from Main Street and Wall Street investors and buyers, and right now is experiencing all-time record highs. And a good portion of Americans that would be otherwise homeowners are unfortunately being priced out of the market.

Break: [05:28] to [07:29]

Travis Watts: So let’s talk a little bit about this housing shortage. How did we get here, and why do we have this supply and demand imbalance in the first place?

Well, first and foremost, I’ll start with the pandemic, still on everyone’s minds. The pandemic was a very interesting thing that happened; a lot of people started working from home, some people decided this might be a good time to retire anyhow, and we saw a lot of shifts happening. We saw New York, New Jersey, California, these high tax states coming down to lower-tax states, whether that would be to the Carolinas, or in Georgia, or in Florida. We see a lot of inward migration into Texas, especially out of California. And just even regionally speaking, we saw a lot of shifts in the market.

So what happened is, there was affordable housing, so to speak, in these areas, but everyone’s sort of chasing at about the same time all at once and bought up what inventory there was. And real estate, at the end of the day, is really just supply and demand, so now we have a lack of inventory on the market, a lot of people still wanting to move to these places, so prices are being bid higher and higher in the process.

But here’s something pretty interesting that you may not know – we were never, as a country, building enough housing to begin with. And I’ll give you an example. There was a study done by the National Association of Realtors, and what they said is that “The US built an average of 276,000 fewer homes per year from the years 2001 to the year 2020, compared to 1968 up to the year 2000.”

In other words, if the building had kept up with the demand this whole time, we would have approximately 5.4 million additional homes, thus evening out this crazy supply and demand issue that we’re seeing. Not to forget that between the years 2001 and 2020 we had the great recession, which was really a housing crisis, and there wasn’t a lot of development happening through those years.

So I went and I did a little bit of research here recently on homeownership percentages, and to my surprise, homeownership in the US, for decades and decades now, I’m talking since at least the 1980s, has hovered around 65%. Now, there’s a lot of reasons why homeownership goes up and down, to include construction costs and labor costs, material costs, interest rates, political policy, the Federal Reserve, the administration’s that come in… For example, when I bought my first home, there was a government stimulus for first-time homebuyers where they would give you basically a tax credit to purchase a home, things like this.

So what we’re seeing here in 2020 and 2021, and looking forward to the future here is building costs have rapidly been increasing. Now, not all of this is due to the pandemic; we were seeing building cost and cost of copper and lumber, etc, up in 2018 and 2019. But it’s more rapidly gone up here in the last 12-24 months.

As I’ve mentioned many times on the show, we saw earlier this year lumber at 300% price increase compared to where it was before. But again, it was already up 94%, I think it was in 2018 or 2019, pre-pandemic. The pandemic also caused a lot of supply chain issues, so a lot of materials couldn’t get here, which is part of why we’re seeing such rapid inflation in certain supplies. There’s also a labor shortage, as I’m sure you’re aware, nationwide. For whatever reason, it’s tough to get labor right now. So again, companies have to charge more if you really want to get that product or that service right now. And also, home construction – I know at least from April, it had dropped 13% compared to the month prior in March.

And according to the National Association of Homebuyers, they’re saying basically over the last six to 12 months that “$36,000 has been added to the price of buying a single-family home.” That doesn’t just carry over to new construction of course, that is also in benefit of anybody who owns pre-existing real estate as well.

So what happens next? And where do we go from here? It’s an interesting question, and it may come as a bit of a culture shock, but what we might be seeing here in our near future is co-living again, where multiple generations and a family are living together, for example. I’m seeing this happen right now in my inner circle, with some of my friends, elderly parents that are finding it difficult to rent or keep up with inflation, so they are coming to live with their kids, potentially grandparents coming to live with parents, because assisted living is quite expensive, if you’ve never looked into that before.

And as my wife and I have traveled over the years – I’m just thinking right now on a global level – this is not abnormal. There’s a lot of countries in fact, I don’t know if I could say the majority, but when we were going through Asia, when I was working in the Middle East years ago, it’s quite normal to have grandparents, parents and kids within the same household for affordability reasons.

In my perception, there was a period of time in America where it was, “Hey, everyone should be a homeowner”, and homes were getting bigger and bigger and bigger. And it was at a time where inflation wasn’t very high either, and we didn’t have the supply and demand issues quite to this extent. This is where you may have heard the term McMansion. This is where everyone’s buying these single-family homes that are four-bedroom, five-bedroom and six-bedroom and 6,000 square foot and all this kind of stuff. But again, these were being built at a time where it was a bit more affordable.

In fact, my wife and I actually met by being roommates in one of these homes. What had happened is, the owners went through the Great Recession with their McMansion, their kids had gone away to college, they had all these spare bedrooms, they couldn’t really sell because they would take such a hefty loss… So they started renting the bedrooms out. And my wife and I, temporarily – it must have only been about six months or so as we were transitioning in our careers, didn’t know each other – she was renting a room and I was renting a room in that household, and that’s actually how we met.

So I think everybody at the end of the day is looking for affordability, especially now with inflation being so high. That’s exactly what these homeowners were doing. They were saying, “Well, we have this, what we thought was an asset, which kind of turns out to be a liability, because we’re underwater and we owe property tax and insurance and all the rest. Why don’t we rent out the bedrooms?” They didn’t have kids that were coming to live with them, and they didn’t have an elderly parent living with them, but they had us paying their mortgage for them, basically.”

Break: [14:29] to [17:10]

Travis Watts: The bottom line, as I said, people are always going to search for affordability, they’re going to find a solution, whether that means living and co-living with family or whether that means renting out spare bedrooms or Airbnb’s or things like that with their owner-occupied home.

I also want to take a minute here in this episode to further explain something. I get this feeling that there’s still a bit of a negative stigma around being a renter versus being a homeowner. And I just want to bring a new idea out there to the table and put some numbers to it. So this is a true story – my wife and I, we owned a single-family home in Florida. This was many years ago… And we decided to sell the home and to become renters by lifestyle design, I like to call it. And let me explain why.

So this home that we owned, I had to put $175,000 down for the downpayment. And even after doing that — so now my money’s locked up in the house, right? I can’t get it back, unless I do a refinance or something years down the road, assuming the home went up in value at that point. And our payments per month were about $2,300. So when we sold, I took the $175,000 back—I really didn’t make much money on the home at all—and I put that into multifamily investments. I was investing in private placement syndications.

We rented a place in the same neighborhood for $1,700 per month. It was a little bit smaller of a place, but it was literally about a mile from our house. So that $175,000 that was invested brought in about $1,450 a month in cash flow from the multifamily investments. And our rent was $1,700. That means we were effectively living for $250 per month… Or, said another way, we were saving about $2,000 per month. So instead of locking up my $175,000 in a home and paying $2,300 a month, I took my $175,000 and put it in investments, and I paid $1,700 rent, and I had $1,450 coming in in cash flow. So the difference there is $2,300 minus $250, so about $2000 per month.

Additionally, because we did this intentionally, we were able to have flexibility—so many words here—we were able to travel, we were able to not have the worry of, “Hey, our roof needs replacement” or “Our A/C unit just went out when we least expected it.” None of these was out of pocket expenses, because we were renters, and that fell on the landlord. So all that to suggest that maybe renting could make sense for you or someone else. So I don’t want to do this episode in terms of, “If you’re a renter, you’ll never get out of the rat race” or “If you’re a homeowner, that’s where everyone wants to be.” There’s pros and cons to both and understanding the difference is what will make you an intelligent investor.

So a few takeaways here from the episode – we are currently seeing and we will likely continue to see a lot of demand for housing, both from Main Street buyers like myself or like yourself, and institutional buyers as well. Home prices are definitely on the rise in many markets in a double-digit form, forcing more people to rent versus own. We are experiencing very high inflation compared to the last several decades. There is a shortage of inventory, both in single-family homes and in affordable apartment rent.

If you are a landlord, perhaps you might consider holding on to your properties. If you are currently buying real estate, please make sure that it cash flows and that the numbers make sense. And if you do currently rent where you live, you might consider investing, like my wife and I have done for several years, where we can potentially offset our rent with cash flow from other investments.

Thank you guys, as always, so much for tuning in. I’m your host, Travis Watts. This has been another episode of The Actively Passive Show. Don’t forget to like and subscribe. We’ll see you next time.

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