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If you were to ask 5 different real estate brokers in your area how the real estate market is fairing, you’re most likely to get 5 different answers. The reason is, there is a great deal of confusion and uncertainty right now in the real estate market. How many homes or apartment buildings are in foreclosure or about to go into foreclosure seems to be a well-guarded secret, or nobody has a good tracking method. Add to that the growing number of investment properties that have been taken off the market for sale and are being rented until the market improves and you can see why the accurate supply figures on unsold apartment buildings and homes is skewed.
Key Factors to Keep Your Eye On
First, even though it has nothing to do with property management it has everything to do with the real estate market, and that is the challenge of borrowing money, a.k.a. qualifying for a loan. The standards for qualifying are stricter than they’ve been for many years, and only those with top credit scores and healthy down payments are able to qualify for the lowest rates. Interest rates would be the next key factor going forward. Real estate interest rates are important, not just because of the debt service one pays. They’re also critical because all value in real estate is determined by capitalization rates. If interest rates increase, cap rates increase. As interest rates and cap rates increase causes downward pressure on property values. Many analysts think the risk of rising interest rates far outweighs any reward present in today’s real estate market. Unless an owner can qualify for a very reasonable, fixed longer-term rate, it may be difficult to charge enough rent to service the debt and the operating costs of the rental unit. Sure enough, operating expenses are the next key factor to focus on. We’ve already witnessed expenses increase for every product type, in all areas. This is inflation at work and inflation will continue to have a major impact on the value of real estate. In fact it already has, and if inflation suddenly increases it will impact wages, cost of materials and other operating expenses.
Next, a good property management must be aware of the kind of prospective renters that are out there looking for a place to live. There are more extremes appearing. There are some extremely qualified people who have lost their homes due to the “upside down” valuation implosion on their homes. There are also a growing number of unemployed and under-employed people who are having to lower their standard of living while at the same time having to move to less expensive rental housing. Many new apartment complexes are in the process of being built around the country. I’m told anecdotally that rarely have many areas seen as many apartment units planned as are now on the drawing board. In Denver for instance, there were at least 12,950 units proposed but only 500 units completed in 2011. This number has caused a construction drought. The only way builders can afford to build new units today is to build A class high priced rental units to recoup there development costs. The rents that are needed for these new multifamily units are high and going higher. This is due to the increasing construction costs.
Reports from around the country are telling us that the housing market under $250,000 is active and apparently stabilizing. However, the more expensive home market is still deteriorating. As you know, the GSEs (Government Sponsored Enterprise) and HUD doesn’t finance homes over $417,000 in most of the country. That’s why if a home buyer requires a loan over that amount, it’s very likely that they’ll have to come up with the money themselves for 20-25% of the price of the house. So, a borrower looking to finance a home with a price of $500,000 will likely have to write a check for at least $100,000 to get the loan. In this day and age of volatility and negative savings, there aren’t many borrowers who can do that. As a result, the jumbo markets are severely impacted.
The Bottom Line
Efforts are under way by lenders and the GSEs to organize rental programs for single-family homes becoming available due to foreclosures. Once available, a rental home has far more appeal to a resident than an apartment. This is especially true for prospective renters who formerly were home owners. That’s why the houses usually rent faster than apartments in many parts of the country. This is an anomaly we should watch carefully because as single family home rents increase it will put a higher demand on lower cost apartment units. When one considers this reality and the other risk factors confronting real estate, investors are seeing that building new apartments could be a risky proposition in these times. We are most likely at least another year away from the bottom of this housing price slump. The price of houses in your area may not drop much further, but their recovery may be a few years away. Rents are not going up in all areas like they are in Denver, but operating expenses are continually going up. Know what the trends are in your areas of operation and know them accurately.
Property managers need to streamline the application and screening process of filling vacancies. Finding good renters in this economy is becoming a numbers game. The better you or your property manager knows the condition of the housing market in your area, and the more potential renters you can reach and process, the more you’ll succeed with your investment property.