Should You Invest in Turnkey Properties or Fixer-Uppers?

15% ROI”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/05\/large_Extra_large_logo-1.jpg”,”imageAlt”:””,”title”:”SFR, MF & New Builds!”,”body”:”Invest in the best markets to maximize Cash Flow, Appreciation & Equity with a team of professional investors!”,”linkURL”:”https:\/\/renttoretirement.com\/”,”linkTitle”:”Contact us to learn more!”,”id”:”60b8f8de7b0c5″,”impressionCount”:”267582″,”dailyImpressionCount”:”181″,”impressionLimit”:”350000″,”dailyImpressionLimit”:”1040″},{“sponsor”:”The Entrust Group”,”description”:”Self-Directed IRAs”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/11\/TEG-Logo-512×512-1.png”,”imageAlt”:””,”title”:”Spring Into investing”,”body”:”Using your retirement funds. 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Available on county-by-county basis.\r\n”,”linkURL”:”https:\/\/kit.realestatemoney.com\/start-bp\/?utm_medium=blog&utm_source=bigger-pockets&utm_campaign=kit”,”linkTitle”:”Check House Availability”,”id”:”62e32b6ebdfc7″,”impressionCount”:”42988″,”dailyImpressionCount”:”90″,”impressionLimit”:”200000″,”dailyImpressionLimit”:0},{“sponsor”:”Xome”,”description”:”Search & buy real estate”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/BiggerPocket_Logo_512x512.png”,”imageAlt”:””,”title”:”Real estate made simple.”,”body”:”Now, you can search, bid, and buy property all in one place\u2014whether you\u2019re a seasoned\r\npro or just starting out.”,”linkURL”:”https:\/\/www.xome.com?utm_medium=referral&utm_source=BiggerPockets&utm_campaign=B P&utm_term=Blog&utm_content=Sept22″,”linkTitle”:”Discover Xome\u00ae”,”id”:”62fe80a3f1190″,”impressionCount”:”25268″,”dailyImpressionCount”:”93″,”impressionLimit”:”50000″,”dailyImpressionLimit”:”1667″},{“sponsor”:”Follow Up Boss”,”description”:”Real estate CRM”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/08\/FUB-Logo-512×512-transparent-bg.png”,”imageAlt”:””,”title”:”#1 CRM for top producers”,”body”:”Organize your leads & contacts, find opportunities, and automate follow up. 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2022-10-06 21:00:00

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These 20 Housing Markets Are Cooling the Fastest, According to Redfin

According to the latest data from Redfin, the housing market is slowing down in several major U.S. metros. The report included the top 20 U.S. hotspots and ranked them according to the number of home sales, home prices, supply and demand ratio, and the time it took for a listing to go to pending sale status.

After two years of record-breaking data, the newest report shows a stark change of direction for many major U.S. housing markets. Notably, the cities that led the pandemic-fueled homebuying frenzy are increasingly less attractive to homebuyers put off by the high home prices that are now coupled with rapidly rising mortgage rates. 

The latest data and news coverage swirling around the housing correction has caused a lot of concern amongst real estate investors, and rightfully so. The question is: how should you react to this?

The West Coast Is Slowing Down The Fastest

The most obvious takeaway is the cool-off in popular west coast housing markets. Seattle, in particular, is experiencing the most dramatic downturn, with home sales down 34% year-over-year as of August. It’s a marked contrast with the 23% increase in the number of home sales in the city, which came as recently as February 2022, going to show how quickly things have changed.

Seattle is not an isolated example, either. Several major cities in California are experiencing a similar drop-off in buyer demand and, thus, home prices. Sacramento, San Jose, San Francisco, and San Diego are all seeing double-digit percentage decreases in home prices. Below are the 20 markets that are experiencing the fastest cool-offs, according to Redfin.

redfin's 20 fastest cooling markets

The west coast has had a problem with increasing unaffordability for a long time, and the pandemic merely exacerbated an existing trend. It’s unsurprising that buyers are already feeling the squeeze from high home prices and are now reconsidering buying in these areas, especially since the typical mortgage interest rate is almost double what it was at the beginning of the year.       

According to Redfin Chief Economist Daryl Fairweather, “These are all places where homebuyers are feeling the sting of rising home prices, higher mortgage rates, and inflation very sharply. They’re slowing down partly because so many people have been priced out and partly because last year’s record-low rates made them unsustainably hot.”

Similar effects are observable in areas that became popular pandemic relocation hotspots, notably Las Vegas, Nevada, and Phoenix, Arizona. These markets consistently made headlines over the last few years as the best cities for professionals migrating from the expensive markets of California. This year, however, they are experiencing the same issues. Housing markets in these metros became overpriced fast, and there are plenty of indications that buyers no longer see these destinations as attractive alternatives to overheated, overpriced coastal markets. 

Las Vegas, for instance, peaked at $440,000 in median home prices this summer, up from $289,000 in February 2020. The median home price has since fallen sharply to $405,000.

las vegas real estate stats
Las Vegas Median Sales Price – Redfin

On the other hand, Phoenix peaked at $469,000 in May and has since fallen to $430,000. In February 2020, the median home price was $279,000.

phoenix housing market stats
Phoenix Median Sales Price – Redfin

Does It Make Sense To Invest Right Now?

There’s no denying that with the housing market cooling off, investing requires a more cautious and calculated approach. According to Bloomberg, the first reaction to a market slow-down from investors is always an instinctive pull-back, with landlords canceling contracts and house flippers selling off their stock to clear inventories. 

Does this have to be you? Not necessarily. One thing to remember about this housing market is that it’s not poised to crash, but instead, correct. With the right approach, you can still turn a profit, whether you invest in long-term rental properties, short-term rentals, develop, etc. 

In a buyer’s market, it becomes necessary to consider buyer needs and seller perks that will entice buyers who may be hesitant, given our higher interest rates.

If you flip homes, which is of course one of the more challenging strategies in a receding market, seeking out cash buyers is the wise thing to do right now. According to Redfin CEO Glenn Kelman, accepting lower offers is the better strategy in a slower market over ‘’accruing interest expenses and other carrying costs as listings linger.’’

If you’re an institutional landlord, then you may choose to hold back on expanding your inventory just now. It’s all about waiting for the right moment when home prices come down even more. As Mark Zandi, chief economist for Moody’s Analytics, explained to Bloomberg, “Institutional buyers are opportunistic. I’m sure they’re waiting, thinking they’ll get a much better price for these properties in the not-so-distant future.” 

While it’s easy to run the wait-and-see strategy going into 2023, there are still plenty of opportunities to find in this housing market. That’s why it’s more important now than ever to become a BiggerPockets Pro Member to stay on top of the latest news and proven approaches to real estate investing.

On The Market is presented by Fundrise

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

2022-10-07 19:44:56

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Even As Rates Rise, Builders Aren’t Worried About an “Overbuilding” Problem

The 2020-caused supply chain shortage went from bad to worse over the span of just a month. By the summer of 2020, builders were facing massive delays, a lack of labor, and material prices that made new homes look almost comically unaffordable. Lumber skyrocketed in price, basic building materials sat on ships for weeks, even months at times, and subcontractors left to get paid more by working for themselves. Is this nightmare finally over for the new construction industry?

Joining us today is build-to-rent expert Chris Funk from Southern Impression Homes. Chris got into real estate investing around the same time as the last crash. He was buying foreclosed homes off the courthouse steps, then later built a property management company and a new development company he still owns and operates today. He realized that buying new build homes as rental properties significantly reduced his maintenance and management costs, without adding too much of a price premium.

Now, he’s working with investors across the nation to offer new-build quality at regular residential pricing to those who want a headache-free investing experience. But Chris doesn’t just supply the homes, he also works with investors to get property management set up from day one, so it’s as turnkey as can be. Chris gives his read on today’s market, what investors should look for before they buy, and whether or not our supply chain nightmare is over!

Dave:
Hey everyone. Welcome to On The Market. I’m your host, Dave Meyer. Joined today by Kathy Fettke. Kathy, what’s going on?

Kathy:
Oh, so happy to be here again and see you.

Dave:
Thank you. Well, today we have a guest who you recommended and is your friend. How do you know Chris?

Kathy:
He’s one of the property managers through Real Wealth that we recommend to our members there. And he’s helped our members buy properties for years. We’ve seen the struggles. We’ve seen prices go up and people get angry about that. So we’re constantly trying to educate and let people know what’s really going on in the new build-to-rent world because it has had a lot of challenges.

Dave:
Yeah. Chris, who is, like you said, a property manager, a builder, entirely focuses on build-to-rent, super knowledgeable, articulate guy. I don’t invest and build-to-rent currently or new homes, but I learned a ton today. What do you think our audience should be listening for in our conversation with Chris?

Kathy:
Well, again, if you are somebody who’s in a contract to buy a new home already, you really need to read your contract and see what your rights are because people didn’t really think they had to do that before. One of the big benefits of buying a new home as a rental is that you’re locked into a price and it’s probably going to close a year later or six months later, and the price might be higher when you close. We just did that. We bought a town home and it’s gone up $400,000 since we went into contract. Fortunately, my contract was bullet proof and they couldn’t raise the prices on me. But many contracts today are different because builders don’t know what the end price is going to be and then you might not be able to close. So that would be the most important thing to pay attention to is if you’re going to buy a new home or if you’re in the process of buying one, make sure you understand your rights or the rights that you may not have in your contract.

Dave:
Yeah, that’s excellent advice. I really loved learning from Chris just why buy for rent is taking off and why it’s such an appealing option for some of the larger investors. And from our conversation, it seems like build-to-rent is potentially an option for smaller investors than I sort previously assumed. And Chris has some advice if you want to get into this particular niche on how you can do that. So with no further ado, well actually a little bit of further ado, we do have to take a break, but right after that, we are going to welcome Chris Funk, the president and CEO of Southern Impression Homes.
Chris Funk, president and CEO of Southern Impression Homes. Welcome to On the Market. Thank you so much for being here.

Chris:
Well, thanks so much for having me. Appreciate it.

Dave:
Well, we’d love to hear all about your business and what you’re thinking and doing in today’s market, but we’d love to just start by understanding your history and involvement in the real estate investing industry.

Chris:
Well, our history began back in late 2009 when it was a different place and a different time in the real estate world right after the last crash. We were buying foreclosed homes at the courthouse steps. Like many real estate investors today, that’s where they started their careers. And so we were buying renovating and leasing homes. So we’ve always had a focus on rental real estate. And through that process, we started a property management company. We started a building company and then ultimately a title insurance company here all in the state of Florida.
And at some point, we went from being renovators and fixed and flip sort of folks to build-for-rent. As the market started to increase in price over the years, we started to see that we could take advantage of the fact that we could get new product at the same price as old product and have a lot less maintenance related to that product because it’s new. So from about 2015 and ’16, we made that conversion until today we’re 100% built-to-rent and we actually don’t do any renovations in rentals anymore. So no more REO-to-rent for us.

Dave:
That’s incredible. Sounds like you’ve done a little bit of everything. Could you just tell us a little bit about the scale? How much build-to-rent are you doing right now?

Chris:
Sure. So this year we’re going to finish right around 800 units of build-to-rent. That’s down from where we wanted to be. Our plan was 1,100 units this year, but as we’ve all seen with the shortage of materials and the supply chain issues, we weren’t able to hit our goals. But still pretty respectable number. Now, we’ve also, in addition to that, put about 600 lots on the ground that we’ve sold to other builders, National Home Builders, properties that we don’t construct. Those are kind of our two main business models right now in addition to, of course, the management of the finished properties.

Kathy:
Chris, are you building homes on one-off lots? Or are you building full build-to-rent subdivisions?

Chris:
A combination of both. So right now we have a mixture of about 6,000 lots in our pipeline. And of that, about 3,000 of those are what you would consider traditional subdivisions where you see 150 houses being built typically by the same builder, a couple builders, track home sort of style. That’s about half of our pipeline. The other half is infill, which is scattered lots in our various markets. So there might be an existing community that there were a couple of lots left over that nobody ever built on and we would buy those. There’s some other areas like Palm Coast and Ocala where there’s quite a few more infill lots available due to the way that developers used to develop in those markets many years ago, and they would sell off lots to individuals from up north that maybe thought they were going to retire down to Florida but they never retired or they never built their home. So all these individual people own these lots that never got built on.
So we have a pretty robust acquisition strategy to find these individual lot owners so that we’re able to make that nice product mix between traditional subdivisions and infill. And then in our traditional subdivision side of things, that even segments out further where we have traditional single family home subdivisions, but we also provide a product that’s a quadruplex and duplex product that provides more of an investment vehicle as opposed to just single family homes, which are both investment and for sale to retail home buyers. Not by us, but they might be at a later point in time. So the quadruplex product is also about half and half between infill lots and new construction communities.

Kathy:
Yeah. When built-to-rent came into play in a big way, what was that? Four years ago, five years ago would you say?

Chris:
Yeah, I think that’s when it really started to take hold. Yes.

Kathy:
Yeah. And as you know, because we’ve had lots of conversations, I was always really concerned about a community of single family homes that was all rentals. So just tell me a little bit about the risks to that model and what you’ve seen play out in reality.

Chris:
Sure. It really depends on the buyer type. So we see a lot of institutional investors that only want to own a whole community of rental properties. And in that case, that’s more of a management style that they want to have. They want to know that they own the whole community, that there’s nobody else there and that they can treat it like a horizontal apartment complex. Whereas our model has primarily been selling some lots to national home builders that sell to retail clients and then we would build rental properties in and amongst those communities to sell to our clients, because we don’t sell to any retail home buyers, we only sell to investors looking for rental properties.
So what that does when you have that mix, and particularly the single family properties because it can be both a home buyer product and an investment product, it really gives a lot of upward momentum to the sale price for the investor that buys it. So typically as builders build their way through a community, meaning retail home builders, the price goes up as they go through the phases. So we have a community in Panther Creek here in Jacksonville, Florida that’s an 800 lot community. We’re building 50 or 60 lots for rental properties, the rest we’ve sold to National Home Builders. And every phase that they go through they raise the price. So it really helps boost up the values for the folks that are buying from us.

Dave:
Kathy and Chris, both of you, you said that build-to-rent got popular around four or five years ago. Were there specific market conditions that made build-to-rent become more attractive around that time period?

Kathy:
Absolutely. Right, Chris?

Chris:
Yeah.

Kathy:
I mean first and foremost it was really hard to find existing homes. And then like Chris said, they were about the same price as a new home. So why would you buy an old one, an old cranky one when you could get a new fresh one?

Chris:
Exactly. Exactly.

Dave:
I’m curious because something I’ve always thought, I mean it makes so much sense, Chris, you said earlier, right? If they’re close in price, the maintenance is lower, you have a nice product that’s really appealing to your perspective tenants, I probably falsely always assumed that build-to-rent only worked at subdivision scale like what Kathy was asking about. But it seems that you’ve been able to achieve that on infills and individual one-off lot. Is that because you have the scale of a large building company or is this something that small investors can also achieve financially even if they’re sort of outsourcing they’re building?

Chris:
Yeah, I think I’ve got kind of two answers to that. One of it depends on where that investor lives, first of all, and how they’re going to manage those properties. So one of the things that we really see sets us apart and that our clients really like, and I think why we’ve seen so much success in the build-to-rent market with Main Street investors, individual investors, is because it comes from a full service standpoint. Meaning we build the homes and then we immediately hand it over to our property management company that manages the homes. So we have scale to that effect where we manage a couple thousand houses at this point in time. So the clients that are buying from us are able to really get that institutional style management on a one-off basis where they might not be able to get that if they bought two, three houses and they’re trying to manage them themselves.
If you’re trying to manage a property yourself, you’re the leasing agent, you are the maintenance technician, you are the property manager and the complaint department and everything wrapped into one. Whereas we have 160 employees on our payroll right now, each one of them has a specialty in one of those segments. So we’re able to provide that institutional type management to folks that may only own one or two houses, but their houses get treated the exact same way as a large institutional buyers would. Which is again, that’s really part of our goal and our business model, is to supply that type of product to Main Street investors versus all the institutional Wall Street guys being able to get all the product and make all the money.

Kathy:
Yeah, I mean again Chris, I’ve known you a long time and we talked about taking on these subdivisions. And my fear was that if you have so many different owners, landlords in one subdivision, somebody might mess up. They might be in a situation where they need to rapid sell. They’re going to lower rents, they’re going to lower prices and then that starts to spread throughout the community. Back in 2009 when I was buying foreclosures too, I went to one of those communities and that’s where my fear stemmed from. I went to one where a group like mine, like Real Wealth but a different one, not us, went in and sold out the entire community to individual investors. And then when the market tanked, then literally I’m walking through the subdivision and it was for sale signs, like hundreds of them. It was awful. So suddenly this investor group, all these individuals are competing against each other trying to rent, trying to sell, not getting anywhere on any of it.
So maybe that particular area, and it was El Paso, Texas, so not a growth market like Florida for sure. So it could have just been market related, but that’s always been my fear. I get if an institutional company’s coming in and they’re buying the whole thing out and they’re managing it like an apartment but it just happens to be homes, that’s controllable. But how do you control it when you have so many individuals that could potentially be in competition with each other when it comes to rent and to sell?

Chris:
Sure. Again, two things on that. One is just how we manage it internally and one is just kind of a general market condition. So how we manage internally is when we sell a property in the community, it comes with a two year property management agreement. So at least for the first two years our property management company is stabilizing the community at the rents that we anticipated that we’ve underwritten. So there’s not a competing nature because it’s all one property management company leasing the properties. So everybody’s on the same page, incentives are 100% aligned. Now I will tell you, even here in Jacksonville and Florida back in 2008, 2009, the scenario that you mentioned very well could have happened here.

Kathy:
That’s true.

Chris:
I did not get in until 2009.

Kathy:
You got to pick up the pieces.

Chris:
Right. I’m not 100% sure what happened. But what I’ll tell you, and I’ve done a lot of research on this today. As you can imagine with a very large lot pipeline, one of the things that’s given me a lot of comfort to have that pipeline, because as a developer we need to be planning three, four years into the future with our product lines because it just takes so long to get these entitled and developed. So when we are looking at it, we’re really looking from that time period in that 2008, 2009 time period, what did the inventory look like? Inventory went up from 2009, ’10, ’11. ’11 was about the peak of inventory.
And so when we look at those numbers, I say, what does it look like today? Because what really caused that scenario was the fact that lenders were lending to anybody and everybody. So everybody wanted to become a landlord that, A, shouldn’t have been qualified to buy the house to begin with, but then, B, they was just so much overbuilding in the market that there were these properties that created all of these issues where people were competing with each other, which it’s just a downward spiral where there’s no stabilization.
In today’s market, we have such a shortage of housing. So we have about a third of the inventory on the market from a for sale standpoint today than we did in 2011. When you look back at the numbers, I’m very familiar with the Duval County numbers. That’s our home office here. It’s in Jacksonville. In this five county area around Jacksonville, in 2005… So remember, the peak of inventory was 2011. In 2005, there were 18,000 permits pooled in this market. This year we’re only on track for 16,000 permits. So we’re almost two decades later. So huge population growth. Probably over 20% population growth in that time period and we’re still pulling less permits today than we did at the peak back in 2005. And we see further inventory issues arising as we go along just due to the fact that development has become harder and harder to do and there’s less and less lot inventory coming online. So all of that’s to say not that there couldn’t ever be one of those issues again, but right now we just don’t see an overbuilding in the market that we saw back in 2005 to 2008.

Kathy:
And what’s so cool is that you get a view of both sides. Most builders have absolutely no clue about the rental side of things. But you’re able to gauge that. So how has the rental demand been over the last few months when… Or I would say just this year, but specifically the last few months when rents have gone up so high that it’s becoming really challenging for people to pay?

Chris:
Absolutely. It’s the good and the bad, right? I mean with inflation, as a landlord, as a property owner, you’ve locked in your basis. So you’re now a fan of inflation. For your tenant, not so much. So we’ve really seen some turnover in properties as rents have gone up and we’ve seen new tenants coming in at much higher prices. So when we’re speaking with our property owners, that’s really a decision to make. The rent could be 200 or $300 more on a unit in the market today than it was when the property was rented a year ago, a year and a half ago, two years ago. But you have a potential of a turnover over cost and whatnot if the tenant does not accept that rental increase. So it’s been a lot of conversation with our investors to say, “Hey, this is what we think we can get in the market. Would you like us to increase the property to that amount? Would you like to keep the existing tenant?” And in most cases, people are looking to increase those rents. That’s why everybody’s in real estate. You expect it to go up over time.
Real estate prices and rents have… You look it at a chart, they’re always up into the right. They have been for as long as they’ve been keeping score of those things. But it has put a little bit of a strain on the leasing staff. You really have to make sure that you’re vetting folks at these higher prices. When you’re giving an increase that’s 200, $300, does that tenant still qualify for the new increase, even if it’s an existing tenant? So it certainly brings its own set of challenges as we’ve seen rents escalate really more than they ever have in this given time period in history.

Dave:
Chris, you were talking about all this data that you look at with inventory and population growth. Can you just tell our audience a little bit about what the key factors and variables that you look at when you’re deciding which lots to pursue and what types of developments you’re pursuing strategically based on that data that you’re looking at?

Chris:
Absolutely. So Kathy mentioned it earlier, but our number one key component is, is there net-in migration coming to the area that we’re buying lots in? So if we’re going to be putting new housing inventory on the grounds, we want to make sure that there’s new people coming to that market to fill that gap. Fortunately, we live in Florida so you’re hard pressed to find a town or city or county in Florida that is not growing. We’ve been the beneficiary of a lot of COVID related relocation and we’re thankful for all these folks coming to town. So that’s the number one key component.
But then, quickly there behind that, we’re looking at the median household income in the market. Our goal has always been to provide housing that meets the widest range of tenants within a market. And so we look at, can the average person in a market afford three times the monthly rent? So if you annualize the rent, multiply by three, is the normal household making at or around that median household income? Because then we’re hitting the widest range of the market from a tenant base.
And so those are really the two biggest factors that drive our decisions. The others dig a little bit deeper. What are the jobs in the area? How many jobs are in the area? We pull a lot of this data from ESRI. I’m not sure if you’re familiar with ESRI, but it’s really the driving data behind CoStar and LoopNet, those sort of big data services. It really has a lot of granular information. Jobs and new jobs in the areas is a big one, college degrees versus not, or technical degrees within a particular community are a couple other things that we look at. And net worth. What is the net worth in each of these areas?

Dave:
Do you try and forecast out three or four years? Just out of curiosity. Because you were saying that as a developer you’re planning several years out. Are you just looking at data now and presuming these trends are going to continue or how do you think that far into the future?

Chris:
It is very, very tough.

Dave:
Glad we’re all the same page about that.

Chris:
We first try to make sure, does it make sense in today’s world? And then we look at what’s happening. So last year we saw rents go up over 20% on average. Certainly, that is not sustainable, that there’s just no way that continue to happen. So we have much, much lower expectations of rental growth in what we’ve seen. We still think that we’re going to see plenty of rental growth this year and we’ll reevaluate at the end of this year and see where things are trending. But we’re looking more at what are rents today when we’re making these decisions on property purchases. And if rents are able to go up over time, then fantastic. We’ve seen a lot of our clients go under contract and think the house is going to rent for $1,400 a month. By the time they close on it’s $1,550, $1,600 a month. So those are some really big pickups, but they’re not guaranteed. There’s no guarantees in real estate, that’s for sure. So we really try to stay on the conservative side of that approach.

Kathy:
So on the really challenging side of being a builder over the last two years as what you mentioned earlier, you shut down the world, keep people in their houses, you don’t have production. And then you turn the lights back on, everybody gets to go outside and do things, and the world isn’t ready for that. So obviously the builders felt the brunt of that in not being able to get the most basic of things. The things you wouldn’t even thought would be an issue, starting of course with lumber. That’s never, as far as I know, been an issue. Today it’s concrete. What are some of the big surprises you’ve had to face over the last couple of years?

Chris:
How long do you have? This has been a rough couple of years from a building perspective. Man, it’s been literally everything. You mentioned that the biggest one right out of the gate was lumber. Lumber was just skyrocketed and it went up. It doubled and we thought, “Well, it can’t go up anymore.” And then it tripled and it’s, “Sneeze Louise. It was impossible.” I mean we’ve seen such massive 30, 40, 50% increases in build costs in these markets in these time periods. It’s been incredibly hard to budget and to try and produce a product and give a price with the way it’s been.
If I was sharing my screen, I would share with you one of these reports that you were asking about, Dave. It’s the St. Louis Fed puts out a producer pricing index for inputs to housing. Oh my gosh, I mean for 20 years it was flat, flat, flat, flat, flat, and then all of a sudden it just went straight up. I mean, the last two years has been literally a straight up turn in the cost of materials. But lumber, again, to answer your question more specifically, lumber was the big one in the beginning. And then everything else started to pile on. As things got to be in short supply, it became more of instead of vendors bidding for our business, “Hey, this is what we can do the work for” and us negotiating a price down, it was really as a builder, we were bidding up prices to see if we could actually get them to show up at the job site because there were way more people wanting to build homes than there were vendors to do the various parts.
So we’ve seen shortages from everything from AC duct to garage door springs, to windows, doors, appliances for a while were a biggie. Oh geez, radiant ducts for fire rated systems in our quadruplexes. I mean, we finally found some of those and we bought a semi full of them. So we bought a couple thousand of them at once because we didn’t want to let them go. But that’s just perpetuating the problem, right? That’s just making it worse because there’s probably somebody else out there that needs them today and we have a truckload full of them. So it’s really been tough.
And I will tell you here over the last couple of months we’ve started to see some leveling out, I would say, at least in pricing in some of our markets. In some markets it’s still incredibly difficult. Southwest Florida, it’s hard to even find truckloads of dirt to fill the lots down there, let alone find concrete and block in those markets today. But we’ve seen Palm Coast, Jacksonville, Ocala, we’re starting to see our build times come down, which means that the materials are a little more readily available than they have been in the past.
Block is still an issue right now. That’s kind of our big, no pun intended, that’s our big stumbling block at the moment, is blocking concrete. But we start to see those coming around. When I look at the averages of what we are paying to build a home today, it’s still taking up slightly but not nearly as drastically as it has been over the last two years. So we look at our eight week average. Our eight week average right now is trending up about a thousand dollars. The total bill cost is about a thousand dollars per unit more than the average of the last eight weeks. I mean, in any given month during the last two years, that easily could have been 5,000 or $10,000 per unit. I mean, we’re down a several multiples of what we’ve been experiencing.
We still haven’t seen any decreases in pricing, which is a little frustrating honestly. As a builder, we see lumber prices coming down. But as lumber has come down, drywall’s gone up. Concrete’s gone up. Paint’s gone up. Every other input has really eroded any of the savings that we would’ve thought we would’ve seen from lumber. But to put a silver lining on it, it does seem to be flattening.

Kathy:
What have you had to change in your contracts? Your contracts with subs, with trades, with buyers. Because think of the builders who didn’t write the right contracts at the beginning and they’re stuck in these prices and can’t raise the prices and they’re just losing money. I mean, how have you changed the wording in your contract?

Chris:
Yeah. Well, and you’ve seen a lot of builders go out of business for that fact. Everybody thinks that this is such a great environment. A lot of people have been buying houses, but a lot of people have been losing money on houses too from a builder perspective. So to answer your vendor question, our vendor contracts have changed drastically because a lot of our vendors, we can’t even get to sign contracts anymore. I think those tides might be turning or might be starting to turn. But for the past two years, nobody would commit to a price. They’d say, “Hey, we think that we’ll have the material for you and we’ll let you know what it’s going to cost when we get it.” And so we’re really starting these houses without great budgets. We know what we think it should cost, but we’re really at the mercy. If AC units are in short supply and the vendor comes and says, “Hey, I got 12 guys that want one AC unit, how much are you willing to pay for it?” Those are some of the conversations that we’ve been forced to have.
And even right now, trusses for instance. They’re still in short supply. So even though lumbers come down, truss prices haven’t come down hardly at all because the truss manufacturers are going, “Well hey, you still can’t get them so we’re going to keep charging the price not because it’s what the material costs, it’s because nobody else has them.” So from a vendor perspective, it’s been difficult. We’ve really gone away from a lot of contracts because they’re not honoring them and/or they won’t sign them.
So from our perspective on when we’re selling home side, we’ve had to institute causes into our agreements that say, “Hey, this is the price right now, but when we go to build your home, if the price has increased, we’ll tell you what the increase is and then you have the option to terminate the contract or move forward at the increased price.” When we were seeing such delays to materials coming in, we really had to institute those sort of measures because we didn’t know when we were going to be able to start a house. And that was 2020, 2021 and early part of 2022.
I am happy to announce though, as of June, we were able to get caught up enough on production to eliminate the need for that. Those causes are still in our contracts, but the cause states that we’ll give you a price increase when the slab is poured. So since June we’ve been able to wait until the slab is poured so we have a much better visibility in pricing before we sell a home. So we are, knock on wood, hopefully out of the woods, on at least new contracts on those. We’ve still got a few working their way through the pipeline that are going to need some price increases but there’s a light at the end of the tunnel.

Kathy:
Does it still make sense for those investors? Again, most of your buyers are investors, whether they’re institutional or individual and they knew they were going into this with the idea that prices could go up. But have rents gone up equivalently and does it still make sense? Or have cash flows reduced dramatically?

Chris:
Well, we’ve seen two different things on that as well. For new product that we’re selling, as lot prices have gone up over time, we’re definitely seeing a compression in cash flow just simply because the interest rates have gone up so much here recently. Still positive cash flow on… The vast majority of the product that we build has positive cash flow. But to answer your question related to the people who have had price increases, the good news for those folks is we typically bought those lots at a lower basis. So even though there’s a price increase due to material increases, there’s not a full price increase to current market rates. So they’re still walking into a fair amount of equity in those properties, which is a great thing. But to your point, the rents have also gone up significantly over that time period as well. So really in a lot of cases, they’re the same or maybe slightly better in some cases, or maybe slightly worse in some cases, but very similar because we’ve seen such rent growth.
The real wild card is interest rates. What are interest rates compared to what they were when they contracted? What are interest rates today and what are they going to be in six months from now? I think as we sit here today, we’re probably going to be seeing another Fed rate hike. From my perspective, what I see in the world, I think we’ve already overcorrected, which tells me at some point in the future here, probably sometime next year, we’re going to start to see either leveling or maybe even backing off of some of those rates. So for me, in my portfolio, I’m looking at it from a perspective of locking in my basis now, because as I mentioned, the build cost isn’t going down. So locking in that basis and hoping for better interest rates in years to come.

Dave:
Chris, I’m sure you have a lot of friends and colleagues who are building around the country. I’m just curious what you’re hearing from them as well because at least what I see at the data is that construction starts and permits are trending down and people are not building as much. Is that what you’re hearing as well?

Chris:
We’ve seen the same data. Duval County permits are significantly lower. In all markets we’ve seen significantly lower permit levels. But what we haven’t seen because I think there’s a lot of properties still under construction, and that’s why we have not seen any real decreases in that pricing. So we’re hopeful that it’s to come. I talked to a lot of other builders throughout the country. We all keep thinking that we’re going to see some decrease, but it keeps not happening. So I don’t know if we’re just wishful thinking. Because some of this pricing gets very sticky. I mean, the material suppliers have now made commitments based on margins at higher price of goods that are paying their staff a lot more. So in some ways, it’s hard for the pricing to come back because we’ve all seen so much inflation over the last two years that we know we’re not going to get it all back. We’re never, never, ever, ever going to go back to pricing that we had pre COVID. That’s not ever going to happen.
We’re hoping for some sort of reprieve just as things stabilize and the supply chain straighten themselves out. But it always… Like I said earlier with the lumber, the lumber’s gone down, but we’ve had two or three other big things go up. So I’m reluctant to say that we’re going to see any sort of price decreases. I think from an inventory standpoint, I think we’re going to see a peak of inventory in Q4, maybe Q1 of 2023. So end of 2022, beginning of 2023.
But being a lot developer that sells homes to retail home builders, so all the National Home Builders, those guys are pulling way back on their starts. They all got burned in 2008, ’07 and ’08 badly so they have a big knee-jerk reaction to what we’re seeing in the world. So they’re saying, “Hey. Psst. Stop. Starts, mothball development projects,” which is going to in turn mean that we might have some increased inventory for a few months. But as that gets gobbled up, we’re going to be back to maybe even more of a severe shortage than we are today because really the building and development world/sector had really just started to catch its stride in being able to produce enough lots in homes to support the demand. And we were still at a major shortage, but we were starting to see that momentum to where we would have an equilibrium. Everybody putting the brakes on has really put a big damper in that. So yeah, we’ll see what happens, but right now I see a lot of people mothballing projects.

Kathy:
Even the build-to-rent institutional purchasers, are they slowing down?

Chris:
So the built-to-rent folks are not slowing down nearly as much, because as you can see with the retail home builders, not only are they pulling back on what they’re building so they’re going to have less supply ultimately, you have a lot less people that’ll qualify. So if you had somebody that was going to qualify at 3% for a retail home, they may not qualify at 6%, and probably don’t. Certainly not for the same home. So unless they’re going to move down in housing type, they’re probably not buying a home. So we have a lot more folks that are trending back towards rentals than really we had even anticipated previously. So the Institutional, again, some of the folks that we do work with, they’re still buying development projects. We’re just about to sign a contract with an Institutional to sell them another a hundred lots in one of our communities. So we see those guys still plowing ahead, but they feel the wind is at their back from a rental perspective. They’ve been waiting for this moment.

Dave:
Well Chris, this has been super helpful. You are obviously a wealth of knowledge and I’m just fascinated about this build-for-rent and think that it’s a really helpful lesson for everyone who’s listening to this, just learning from your experience here. But is there anything else that you think our audience of aspiring and active real estate investors should be considering about today’s current market conditions as they go and build their portfolios?

Chris:
Well, I’ll jump in with a couple of mine and I’m sure Kathy has some. One of the biggest things that we’ve seen change for our clients, our Main Street clients today, is they don’t have access to the institutional capital that these institutional buyers do. And so we’ve had to get creative with financing to help folks and figure out how to offset some of these higher interest rates. Everybody looks at that 6% rate that they hear on the news. That’s only one component. So we’ve seen a lot of lenders out there get very competitive. The lending market is rather disjointed at the moment. You see some lenders really hedging and putting big margins on their loans and then others are getting very aggressive and even offering rate by down solutions to clients to really bring that payment down. So we still see a lot of our clients doing Fannie and Freddie loans and buying the rate down to create that cash flow for the hold, for the investment that they’re buying.
We’ve also seen a lot of our clients move to some of these interest-only loans. So we’ve seen some very interesting product, 5/1 ARMs, everybody has a bit of a stigma of ARMs because that was one of the things that caused the problems back in 2005 and ’06. But ARMs done the right way for investor clients are great. That’s what these institutional guys are doing. They’re not getting 30 year fixed loans, they’re doing these adjustable mortgages that have some period of fixed rate. So I personally have been doing a lot of five year fixed rates. I found a product that’s non recourse, it’s five year fixed rate. At the end of five years it can adjust, but there’s caps on how much it can adjust. And at the end of the five years, it doesn’t balloon, it fully amortizes. So it’s still a 30 year loan, so you’re never stuck with that big balloon payment, you may get stuck with a higher interest rate.
But my thought is for my personal portfolio, I believe rates are going to go down in the next five years. I think they’re going to go down in the next 12 months, but I certainly believe they’re going to be lower in the next five years. So I anticipate that I’ll refinance out of those and into longer term debt. So I think for investors out there, particularly Main Street investors, don’t get stuck on the rate today. The beauty of real estate is you can refinance that property as often as you want to or need to maximize the return and the investment in that project.

Kathy:
Yeah. Another loan that at least in our developments people are choosing is the construction-to-perm loan, because it is scary to go into a contract and have no idea what rates are going to be like when the project’s finished and you got to close or else you lose your deposit. So I really like the, just get one loan, it covers construction, it converts to whatever your terms are, 5, 7, 10, or 30 year once the building is finished. So I’m taking those as well. I think it offers a lot of security.

Chris:
I 100% agree.

Kathy:
Sometimes, Chris, I don’t know if you do this, but if the buyer is then buying the lot and getting their own construction loan, oftentimes that means you can get the price a little lower because the builder’s not taking on that cost of debt.

Chris:
Yeah, absolutely. Debt is a… That’s big number in the home building game. That’s one of our biggest line items, is the finance cost. Individual line items anyway. So yeah, I think that’s a great way to go about it. We’ve done that on some of our personal building holds as well. I think all of these are things that we didn’t talk about a year ago. You know what I mean? And Kathy and I talk a lot, but there was no need to talk about it then. As the markets changed, now you need to think of these creative solutions. The option is, think of a creative solution to do business or just sit on the sidelines and do nothing and see what happens. Either one’s scary.

Dave:
Yeah, it wasn’t really hard when there was 3%, 30 year fixed rate mortgages to decide what loan product to go after as an investor. But as they say, the people who are going to get creative and find these solutions, like the ones you guys are pointing out here, are the ones who are going to get the best opportunities in this market. And from all the people we talked to on the show, it does seem like there are opportunities if you are willing to do that extra leg work and think through some solutions that you weren’t thinking through a year ago, just like the two of you.

Kathy:
100%. One thing about real estate having been in it for so long, is it’s always changing. When I first started, new homes were the thing. It was the same kind of thing. I could get amazing cash flow on a new home, so why would I buy an old one? And then all of a sudden everything fell apart and you could get existing homes for almost nothing. So of course we pivoted and did that and we’re buying foreclosures from banks and REOs. And then those all got bought out, I was like, “What do we do now? There’s no inventory. I guess we got to build again.” So it’s always changing. And if you’ve been in the game long enough, you’ll be changing too or else you won’t be playing the game.

Chris:
True. So true.

Dave:
Well Chris, thank you so much for joining us. If anyone who’s listening wants to connect with you, what’s the best place they can do that?

Chris:
Oh, we’d love them to come check us out at southernimpressionhomes.com. There’s a lot about our product and inventory on the website. There’s ways to interact with our team right there. Happy to connect that way. So just fill out one of the forms and somebody will be in contact almost immediately.

Dave:
All right, Chris Funk, thank you so much for joining us here On The Market.

Chris:
Appreciate you having me.

Dave:
That was awesome. Kathy, you have the coolest friends. Thank you for bringing Chris. How do I get cool friends like you?

Kathy:
Oh, well we search the country for them, I guess.

Dave:
Honestly, I’m actually curious, how do you meet so many people? Is it just networking and going to conferences? How do develop such a great network of other real estate investors and people who have helped you in your journey?

Kathy:
I do speak at a lot of conferences. I have had the Real Wealth show for, oh my gosh, 20 years so I’ve interviewed a lot of people. But our company is also based on finding really good builders and property managers and teams nationwide to help our members at Real Wealth buy stuff. So that’s my job, I got to find cool people.

Dave:
Well, you’re good at it.

Kathy:
Thank you.

Dave:
What did you learn from Chris today? I know you talked to him all the time, but was there anything in particular you got out of this conversation?

Kathy:
Just a reminder of how difficult it’s been. Obviously, we have three or four subdivisions. We finally sold off a couple of them, so that’s good.

Dave:
Nice.

Kathy:
But I’m not hands on obviously the way he is. And to hear all the challenges… And on my side I hear the investor complaints. So my job is to get everyone communicating. And so I figured there were some BiggerPockets people who also are frustrated with their builder. A lot of the comments we get from our buyers is, “Oh, they’re just trying to rip us off. They’re just trying to raise the prices because they can and they’re keeping all these profits.” And so I’ll put together the webinars and say, “Open your books. What’s going on? What are you paying for things? What’s your profit?” Generally, profit margins on new homes are really small anyway. They’re 5 to 10%. Generally, you make all your profit at the very, very, very end. And in our subdivisions, we still have to create… 30% of our subdivisions need to be affordable for the teachers and the firefighters and the police. There’s no negotiating on those. We’re locked-in in Park City, we’re locked-in on $400,000 properties that cost us 800,000 to build. But it’s an agreement, we have to do it.
So anyway, bottom line is I want investors to really understand that it’s not always the greedy builder that’s trying to rip you off. It’s just the way things are. It’s just inflation. Not just inflation, but it’s a severely unhealthy version of inflation that it also includes complete lack of supplies. It’s one thing to have things be expensive, it’s another thing to not be able to find what you need at all.

Dave:
Yeah, it’s crazy. That chart he was talking about, the Producer Price Index for home building is a crazy thing to look at if you’re at home and you just want to understand what Kathy and Chris are talking about. The new home industry actually has really good data, generally speaking, that just like an average person can look up if you just want to understand broad macroeconomic trends. So if you want to understand what Kathy’s talking about, go check that out for yourself. I think this whole industry is just really fascinating. The whole build-to-rent model just makes a lot of sense. And I know that there’s a lot of cries out there or headlines in the media that make it say like, “Oh this is the beginning of a renter nation.” The data honestly doesn’t really bear that out at all.

Kathy:
Yeah, doesn’t support that. I know.

Dave:
Yeah. Yeah.

Kathy:
I’ve been on CNBC. I’ve been-

Dave:
Home ownership rate is the same. It’s the same.

Kathy:
They’ve been saying that for 10 years and I would go on these big stations on, again, CNBC and Fox and ABC and say, “No, no, no, no, it’s not that different.” It’s always in the 60%. Like 62% home ownership. The highest was, I think, we got to 69. There are still a lot of homeowners out there.

Dave:
Totally.

Kathy:
Right.

Dave:
And to me, if I were a renter… I actually am a renter. I rent in Amsterdam. But if I were a renter in the United States, a build-to-rent like subdivision and getting single family home sounds like a good option. So to me it sounds like if this is a profitable endeavor for builders and investors and it’s allowing people to live in a product that they really like, it just seems like a really interesting trend that is likely going to continue for the next couple of years and something that investors should be considering. Because I always assumed it was just at the subdivision level, not that people were doing build-for-rent in terms of infill. But I guess to Chris’s point, you have to have the systems to manage those efficiently to actually generate the cash flow.

Kathy:
Yeah, ours has always been infill or we would negotiate with builders for our clients that will take 10% of your inventory. But most subdivisions don’t want more than 10% of the homes to be rentals because it can change the vibe be if they’re individuals, because some people might self manage, some might hire a horrible property manager and it can bring down the value of the other homes around it if it’s not well cared for. So I would say that the number one thing that investors should keep in mind, because there’s going to be a lot of builders looking their wounds right now, it is a good time to be able to probably get a good deal on new homes. But do keep in mind, ask, “How many other renters do we have? Who are you selling to?”
And most importantly, I’ve met a lot of people who’ve come to me and they want us to promote them and sell their stuff to investors. I won’t say any names, but there’s one guy who’s got 800 homes in his subdivision that he’s selling one off to investors who are not like Chris. Now, Chris is going to manage those subdivisions, but this other guy, he’s just building them, doesn’t have property management and he’s selling 800 rentals to different buyers. That is not going to end well. So always ask, in my opinion. Think about it, one person faces a hardship, they need to fire sell their property or they need to just get anyone in there, they bring in the local drug dealer and it just could really spread like wildfire very quickly.

Dave:
Oh yeah, yeah. Sorry. I was glad you asked that question because I’ve always stayed away from investing in subdivisions because it just seems like there could just be a quick race to the bottom. If there’s an increase in vacancy in the market and all of a sudden your neighbor needs cash more than you do and they drop their rents 200 and then the neighbor next door drop, there’s no way to differentiate. Your product is exactly the same. And so the only way you compete is on price. And if someone else is willing to go lower than you, you just get screwed. So I was really glad you asked that question. That honestly just sounds like a nightmare, just selling those individual units one at a time to individual landlords. That is not a situation I would want to get myself into.

Kathy:
Be very careful out there. Yeah, because there’s always going to be greed and there’s going to be desperate sellers, desperate builders that will just sell to anyone. So that would be my first question. How many investors do you have in here? And then you might have trouble getting financing if it’s all investor. I mean, that was my other question to this guy. How on earth or are these people going to get loans when the lender finds out that’s basically an apartment?

Dave:
Mm-hmm. Yeah, it’s a condo basically.

Kathy:
Mm-hmm.

Dave:
Yeah, that’s a good thing to look out for. But I do agree with you that right now is probably a better opportunity than most times to look at new construction. I’ve never bought it, but I’ve been looking at it because the premium now is about 8% nationwide. And in some markets it’s lower. It is extremely close in terms of the price of existing homes and new homes. Depending on where you are, that could allow you to get a brand new product at a similar price to what you would pay for an existing home. So like Chris said, the prices just aren’t that different and you get a better product. So I would recommend people look at it. It’s traditionally not the best way for investors to make money, but right now it could be.

Kathy:
Oh, I think so. I mean, I think I’ve mentioned we are launching another single family rental fund in the Texas area. We’re really focused on buying new homes that builders, like Chris said, they are going out of business and we can help them, save them, but also buy these either half finished homes or lots that they couldn’t complete. And that’ll be part of our rental fund.

Dave:
Great. And I just watched your YouTube video about it.

Kathy:
Oh, cool.

Dave:
Yeah, it was very good. So if anyone else wants to, check that out, Kathy’s Real Wealth Network. Well, Kathy, thank you so much for joining as always. And thank you for bringing Chris who was an awesome guest. I appreciate you recommending him.

Kathy:
Thank you. I learned a lot too.

Dave:
All right. Well, thank you all for listening and we’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kalin Bennett. Produced by Kalin Bennett, editing by Joel Ascarza and OnyxMedia, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

2022-10-07 06:02:51

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Canadian Housing Market Outlook: Fall 2022

RE/MAX Canada Network expects Canadian housing market prices to decrease 2.2 per cent this fall

  • RE/MAX brokers and agents anticipate prices in the Canadian housing market to ease by 2.2 per cent this fall, due to high inflation, rising interest rates and economic uncertainty
  • Rising interest rates have prompted 44 per cent of Canadians to temporarily shelf their home-buying aspirations, while 34 per cent say they won’t hold on purchasing a home for the foreseeable future
  • Recession worries have impelled 41 per cent of Canadians to wait to purchase/sell their home in fall 2022

Toronto, ON and Kelowna, BC, September 28, 2022 – RE/MAX brokers and agents are anticipating the national average residential sale price in the Canadian housing market to decline 2.2 per cent in the final months of the year (September-December), according to RE/MAX’s 2022 Fall Canadian Housing Market Outlook Report. This market moderation comes on the heels of rising interest rates, record-high inflation and broader global and economic uncertainties that have impacted consumer confidence and market activity. Bucking the downward trend, seven out of 30 Canadian housing markets analyzed are likely to experience modest price appreciation between 1.5 and seven per cent. Meanwhile, RE/MAX brokers and agents expect a decline in sales this fall, in 18 out of 30 markets surveyed.

In a survey of RE/MAX brokers and agents, 25 out of 30 said rising interest rates have affected activity in their local residential market this year, with some indicating that this has been the biggest factor impacting homebuyer and seller confidence – a trend that is likely to continue for the remainder of 2022. These insights are supported by a new Leger survey commissioned by RE/MAX Canada, which reveals that 44 per cent of Canadians agree that rising interest rates are compelling them to hold on buying a property this fall, while 34 per cent say they won’t hold.

“While we are still facing significant housing supply shortages across the Canadian housing market, many regions are experiencing softer sales activity given recent interest rate hikes. This provides some reprieve from the unprecedented demand and unsustainable price increases we’ve seen across Canada through 2021 and in early 2022,” says Christopher Alexander, President at RE/MAX Canada. “However, the current lull in the market is only temporary. Until housing supply increases, these ‘boom’ and ‘bust’ cycles will likely be a recurring event.”

Despite the fact that nearly half of Canadians are waiting to buy or sell a home, we’re confident that as economic conditions improve by mid-2023, activity will resume,” says Elton Ash, Executive Vice President, RE/MAX Canada. “Timing the market for short-term investment is extremely difficult and rarely successful. But as a long-term investment, the Canadian housing market continues to yield solid returns. If someone needs to buy or sell, regardless of those cyclical peaks and valleys, being informed and working with an experienced real estate professional can help consumers clarify some of those unknowns and make the best decision possible.”

Regional Canadian Housing Market Trends

RE/MAX brokers and agents in Canada were asked to provide an analysis of their local market this fall and share their estimated outlook for the remaining months of 2022 (September-December).

Western Canada and the Prairies

In regions such as Vancouver, BC, Victoria, BC, Kelowna, BC, and Edmonton, AB, RE/MAX brokers reported rising interest rates as a factor impacting local market activity, resulting in softening consumer confidence, fewer multiple offers from buyers, and a shift toward more balanced conditions between buyers and sellers. In all regions analyzed in Western Canada and the Prairies, with the exception of Calgary, AB and Edmonton, AB, the average residential sale price is expected to decline between zero and 6.5 per cent.

In Calgary, AB, interest rate hikes and recession worries have not had a notable effect on the market, due to the region’s relative affordability. As such, a modest three-per-cent price increase is expected through the remainder of the year. In Edmonton, AB, rising interest rates have had the greatest impact on homes priced from $500,000 to $1,000,000, while those priced at $400,000 or less are still relatively affordable and a good entry point into the market, despite the current economic climate. Edmonton is likely to experience a modest price increase of 1.5 per cent for the remainder of the year. In both Vancouver, BC and Edmonton, AB, demand for luxury properties has remained stable, with interest rate hikes having a minimal impact on this segment of the market. This is expected to continue into the fall months. Low inventory remains a pressing concern in Kelowna, BC, Victoria, BC, Vancouver, BC and Calgary, AB, and is expected to place upward pressure on home prices in 2023 and beyond. In contrast, recent commercial and industrial developments have eased inventory concerns in Winnipeg, MB for the time being.

Ontario

Much like other provinces across the country, Ontario has not been immune to the impacts of rising interest rates. Many markets including Oakville, Windsor, Barrie, Durham, Kingston and Kitchener-Waterloo, anticipate – and in some cases already experiencing – a reduction in the number of units sold over the coming months. Apart from Oakville and Muskoka, average residential sale prices in Ontario are likely to remain steady or decrease between two to 10 per cent in the fall months.

Similar to Western Canada, the luxury market has remained resilient and in-demand among buyers in Oakville, despite rising interest rates and a looming recession – a contributing factor to the modest two-per-cent average residential sale price increase expected in Oakville this fall. Muskoka continues to attract homebuyers to the area, while simultaneously, many sellers are eager to sell before year-end. Given a steady stream of demand, Muskoka is expected to experience a modest five-per-cent increase in average residential sale price this fall. In Peterborough, interest rate hikes and the subsequent effects on the stress test have eroded affordability in the area, which is the main factor contributing to the seven-per-cent decrease in average residential sale price expected in the coming months. The return of conditional offers has been a prevalent trend across the province, including in Kingston, Kitchener-Waterloo, Muskoka and Peterborough. Echoing many regions across Canada, Durham, London, Sudbury, Ottawa, the Lakelands and the Greater Toronto housing market are expected to regain balance in 2023, albeit with low inventory continuing to place upward pressure on prices. As one of the more affordable markets in Ontario, Thunder Bay is unlikely to experience any significant fluctuations in average residential sale prices this fall.

Atlantic Canada*

Similar to Western Canada and Ontario, economic factors such as rising interest rates and a possible recession have contributed to decelerated home-buying activity in the region. Charlottetown, PEI experienced immediate impacts as interest rates rose, with the number of sale transactions reduced by almost half on a month-over-month basis, particularly among properties in the $500,000 to $1,000,000 price range. Despite these circumstances, Atlantic Canada continues to attract out-of-province buyers due to its affordability, relative to the rest of Canada. The majority of Atlantic Canada housing markets analyzed are expected to experience modest price increases through the end of 2022, including Halifax, NS (+1.5%), Moncton, NB (+6%) and St. John’s, NL (+7%). The outlier is Charlottetown, PEI, where average residential sale price is expected to decline by two per cent in the fall months.

Housing affordability continues to attract buyers in Moncton, who have been able to leverage the recent decrease in demand to negotiate with sellers and include conditions on purchases. Meanwhile in St. John’s, NL, economic pressure from rising interest rates has resulted in extended rent periods by would-be buyers, despite this region anticipating an increase of seven per cent in average residential sale prices. The trend has been further exacerbated by low housing inventory. However, recent “green” government announcements and initiatives are anticipated to boost the local economy and in tandem, the housing market. In spite of concerns over supply falling short of demand, Charlottetown, PEI is expected to regain more balance in 2023. However, inflation coupled with the increased cost of living will likely result in a moderate two-per-cent decline in average residential sale prices through the end of 2022.

About the 2022 RE/MAX Canada Fall Outlook Report

The 2022 RE/MAX Canada Fall Outlook Report includes data and insights from RE/MAX brokerages. RE/MAX brokers and agents are surveyed on market activity and local developments. Average sale price is reflective of all property types in a region and varies depending on the region. When referring to “fall” this includes the months of September 2022-December 2022. *Insights/figures in Atlantic Canada were gathered prior to Hurricane Fiona. Regional summaries with additional broker insights can be found at the RE/MAX Canada blog.

About Leger
Leger is the largest Canadian-owned full-service market research firm. An online survey of 1,522 Canadians was completed between September 16 and 18, 2022, using Leger’s online panel. Leger’s online panel has approximately 400,000 members nationally and has a retention rate of 90 per cent. A probability sample of the same size would yield a margin of error of +/- 2.5 per cent, 19 times out of 20.

About the RE/MAX Network
As one of the leading global real estate franchisors, RE/MAX, LLC is a subsidiary of RE/MAX Holdings (NYSE: RMAX) with more than 140,000 agents in almost 9,000 offices with a presence in more than 110 countries and territories. RE/MAX Canada refers to RE/MAX of Western Canada (1998), LLC and RE/MAX Ontario-Atlantic Canada, Inc., and RE/MAX Promotions, Inc., each of which are affiliates of RE/MAX, LLC. Nobody in the world sells more real estate than RE/MAX, as measured by residential transaction sides.

RE/MAX was founded in 1973 by Dave and Gail Liniger, with an innovative, entrepreneurial culture affording its agents and franchisees the flexibility to operate their businesses with great independence. RE/MAX agents have lived, worked and served in their local communities for decades, raising millions of dollars every year for Children’s Miracle Network Hospitals® and other charities. To learn more about RE/MAX, to search home listings or find an agent in your community, please visit remax.ca. For the latest news from RE/MAX Canada, please visit blog.remax.ca.

Forward looking statements
This report includes “forward-looking statements” within the meaning of the “safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as “believe,” “intend,” “expect,” “estimate,” “plan,” “outlook,” “project,” and other similar words and expressions that predict or indicate future events or trends that are not statements of historical matters. These forward-looking statements include statements regarding housing market conditions and the Company’s results of operations, performance and growth. Forward-looking statements should not be read as guarantees of future performance or results. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. These risks and uncertainties include (1) the global COVID-19 pandemic, which has impacted the Company and continues to pose significant and widespread risks to the Company’s business, the Company’s ability to successfully close the anticipated reacquisition and to integrate the reacquired regions into its business, (3) changes in the real estate market or interest rates and availability of financing, (4) changes in business and economic activity in general, (5) the Company’s ability to attract and retain quality franchisees, (6) the Company’s franchisees’ ability to recruit and retain real estate agents and mortgage loan originators, (7) changes in laws and regulations, (8) the Company’s ability to enhance, market, and protect the RE/MAX and Motto Mortgage brands, (9) the Company’s ability to implement its technology initiatives, and (10) fluctuations in foreign currency exchange rates, and those risks and uncertainties described in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission (“SEC”) and similar disclosures in subsequent periodic and current reports filed with the SEC, which are available on the investor relations page of the Company’s website at www.remax.com and on the SEC website at www.sec.gov. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made. Except as required by law, the Company does not intend, and undertakes no duty, to update this information to reflect future events or circumstances.

2022-09-28 05:00:37

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Are Higher Fixed Mortgage Rates Here To Stay?

One question many Canadians are asking is are higher fixed mortgage rates here to stay? At the September policy meeting, the Bank of Canada (BoC) raised interest rates by 75 basis points, bringing the benchmark rate to 3.25 per cent, maintaining its hawkish approach to monetary policy. The central bank signalled that it would be prepared to keep pulling the trigger on rate hikes until there is sufficient evidence the consumer price index (CPI) is showing signs of coming down.

Although the Canadian annual inflation rate has eased from its 30-year high of 8.1 per cent in August, officials conceded that this was driven mainly by gasoline prices. The national economy endured “a further broadening of price pressures, particularly in services.” As a result, “the policy interest rate will need to rise further,” and additional tightening was on the horizon to ensure price stability.

Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further,” the BoC said in a statement. “Quantitative tightening is complementing increases in the policy rate. As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target. The Governing Council remains resolute in its commitment to price stability and will continue to take action as required to achieve the two-per-cent inflation target.”

Now that rates are normalizing from their pandemic-era lows, borrowing costs are increasing for credit products and services. Of course, this also means higher returns on bank deposits.

But many buyers and homeowners have a major question: What about mortgage rates?

Are Higher Fixed Mortgage Rates Here To Stay?

In response to the central bank’s policy decision, most Canadian financial institutions, including the Bank of Montreal, Scotiabank, and Toronto-Dominion Bank, raised their prime lending rates by three-quarters to 5.45 per cent. This is up from the previous prime lending rate of 4.70 per cent.

This matters because it is the starting point for lenders’ loan calculations. In other words, it will trigger a significant boost in borrowing costs for many Canadian consumers.

Many economists, market analysts, and homeowners are concerned that this will add pressure to the Canadian real estate market. While this is true, the effects of higher mortgage rates on the nation’s housing industry are not as cut and dry as experts would purport.

Variable-rate mortgages will be immediately impacted by higher mortgage rates. Homeowners who are due for renewal on their fixed-rate mortgages within the next couple of years will also feel the financial squeeze of higher mortgage rates. Homebuyers will now need to contend with a higher mortgage rates compared to what others received a year ago.

A rising-rate environment in Canada’s housing sector is expected to create a ripple effect throughout the economy. Because homeowners will contend with greater debt-servicing payments, many will inevitably slim down their budgets and cut back spending on other areas, be it trips to restaurants or buying apparel.

But is this the new normal for the Canadian real estate market? Yes.

Governor Tiff Macklem has been clear that he intends to tighten policy a lot more until the central bank successfully tames inflation. While the institution noted that it could not contain the supply component of rampant inflation, it does possess the tools to douse red-hot demand. So, as rates go up, it will trim demand, whether it is for labour or real estate.

The consensus among many central banks is that they will lift their respective benchmark policy rates and leave them there for an extended period. When many Canadians acquired a home during a historical bubble, the debt factor could be troubling for new homeowners.

In addition, with higher interest rates on the way, it will add to the minimum mortgage stress test. But while it is unlikely federal regulators will reform the stress test in this environment, other industry experts think it might be time to take another look at it. The thought is that it might be placing too many buyers at a disadvantage amid rising rates.

Will Higher Rates be Real Estate’s Death Knell?

RE/MAX expects average residential prices to moderate downward by 2.2 per cent through the end of 2022. However, it appears that some market experts have thrown in the towel for the Canadian real estate market, with downturn forecasts as high as 20 per cent. And climbing mortgage rates will not do the industry any favours moving forward.

We see the downturn intensifying and spreading as buyers take a wait-and-see approach while ascertaining the impact of higher lending rates,” wrote Robert Hogue, assistant chief economist with Royal Bank of Canada, in a research note.

That being said, there is some hope that perhaps the five-year fixed rate mortgage could have already peaked, as long as the Bank of Canada does not approve any supersized rate hikes for the rest of the year or heading into 2023.

Ultimately, the effects of rising interest rates are already being seen in the Canadian real estate market. In July, national home sales tumbled by 5.3 per cent month-over-month, while the MLS® Home Price Index (HPI) tumbled by 1.7 per cent month-over-month, according to the Canadian Real Estate Association (CREA). The next few months of data should give the industry a clear picture of what to expect in 2023.

2022-10-06 17:36:55

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When is the Housing Market Going to Crash?

Is the Housing Market About to Crash?

The housing sector has exploded in recent years, particularly in the post-COVID-19 era. Double figures became the norm.

Everyone is asking whether today’s housing market will follow previous trends where giddy sellers scour the information superhighway and frantic buyers were being forced out of the marketplace by soaring demand and bidding wars.

Yet, exorbitant price growth fuelled by a low inventory of housing supply and the upward pressure of market forces has hit everyone in the global economy, from the average worker bee to upwardly-mobile professionals. The front end of 2022’s real estate party has been going very well.

But does that mean that we are poised for a housing correction or worse, a crash sometime soon? As real estate prices continued their upward march, investors and homeowners alike are asking themselves what the housing market will do in the near future.

The State of the Union

The housing market appears to be slowing; According to Canadian Real Estate Association (CREA), residential property sales recorded over Canadian MLS® Systems were down slightly by 1% between July and August 2022. While this was the sixth consecutive month-over-month decline in housing activity, it was the smallest of the six as the national sales slowdown triggered by rising mortgage rates continues to moderate.

Due to rising interest rates, it was close to an even split between the number of markets where sales were up and those where sales were down.

Gains were led by the Greater Toronto Area (GTA) and a large regional mix of other Ontario markets. These were offset by declines in Greater Vancouver, Calgary, Edmonton, Winnipeg, and Halifax-Dartmouth, giving real estate professionals in those historically strong seller’s market condition cause for concern.

The actual (not seasonally adjusted) number of transactions in August 2022 came in 24.7% below the same month last year despite more available housing options and supply being able to meet demand. While today’s market still shows a large decline, housing experts felt it was smaller than the 29.4% year-over-year drop recorded in July.

Another impactor is home construction. Previously supply chain issues (the consumer prices of wood were at their highest in more than a decade) caused significant new home price appreciation which was a contributing factor to the property bubble in early 2022.

The national median listing price for single-family homes for August 2022 was $637,673, down from $663,343 in August 2021, showing prices fall by $25,670.

This price reduction trend in real estate prices continues in the province of Ontario, much to the chagrin of many a real estate agent $829,739 in August 2022, down from August 2021 housing costs of $835,124.

According to a senior property economist and chief economist opinions expressed, this is mainly due to lower interest rates that have since become higher interest rates.

These rising rates, in looking at capital economics, in contrast to the previously relaxed lending standards due to an increase in disposable income over covid-19 marked the beginning of when housing started to right-size the so-called real estate bubble.

Don’t Expect a Housing Crash Like the one we saw in the 2007-2008 financial crisis

In 2005 and 2006 banks in the United States loaned money to “inferior borrowers” with low credit scores. During these years fraud by banks and mortgage lenders was widespread. Although this mainly occurred south of the border, it’s said that if the United States sneezes, Canada gets a cold.

During the subprime mortgage lending crisis there was an increasing number of defaults on mortgage payments on existing homes and, ultimately, a significantly decreased home equity and the subsequent market crash. When these mortgage rates were packaged in an exchangeable financial product or asset and sold to the global market, the tsunami housing market crash hit globally.

Will it Crash Again?

The housing economic system predicts that housing prices and the subsequent market will continue to cool down. House price appreciation outpaced incomes and the rate of approved mortgage purchase applications and their subsequent home loans bloated beyond capacity. This was always unsustainable, so a burst of the housing bubble was due, not a crash anytime.

US Housing Affordability Index vs. Canadian National Consumer Confidence

The housing affordability index from the US Federal Reserve is down 40% from last year alone. Moreover, the pressure has become visible in the corporate sector.

The House Builders’ chief executive said he had cut the company’s 2019-2024 forecast by about 45%. A drop in housing demand is making management afraid to over-invest in new projects. It seems likely we will experience a slowdown.

CREA (the Canadian equivalent to the National Association of Realtors) reports the nation’s consumer confidence continued to dive in July 2022, according to the Conference Board of Canada’s survey-based index of consumer confidence; Overall sentiment was down across all regions of the country.

In regards to expectations for their household budget over the next six months, the number of responses from those expecting stability continued trending downward, at the expense of more respondents expecting a deterioration in their overall household finances. The gap between those expressing pessimism over their future financial outlook and those expressing optimism continues to widen.

Sentiment about making major family purchases, like a home or a car, remains at historically low levels across the country. The quantum of responses from those who thought it was a good time to make a major purchase fell again in July, as the number who thought it was a bad time to do so continued to increase.

Housing Market Forecasts for the Future

Tell us the expected trends in the housing industry over the next decade: Despite declining buyer optimism in buying houses, homebuyers’ interest remains high. This is most likely true of younger buyers, who are often first-time buyers but struggle to make down payments as rental prices continue to rise.

In the same vein, sellers have expressed increasing expectations for greater deposits due to the relatively competitive housing market. This may overburden first-time home buyers who don’t have existing equity to draw upon when coming up with their down payment. The housing market will not change in this regard much for buyers in the foreseeable future; In fact, as consumer confidence struggles, sellers may be asked for buyers to have “more skin in the game” in the form of higher deposits.

The Zillow Home Pricing Expectations Survey speculates that home values would likely return, but at a slower rate by 2024 to pre-pandemic levels. The price increases in available properties have likely forced a decline in property prices.

Borrowers are Less Likely to Default on their Mortgages

Despite the fact that the current housing market was less competitive in 2008, these mortgage applications today have fewer potential defaults than the ones approved during the period prior to the crisis. There are few lenders in existence today which have offered so-called “no-doc loans” to individuals whose incomes were not documented before the economic meltdown. To put it another way, safeguards have been put in place since 2008 to limit the amount of improperly secured loans. Some loan programs subsidized by government agencies also now have certain standards, such as a minimum credit score and down payment criteria.

People Less Willing to Sell their Homes Now, too.

Home prices will struggle at least through 2022, according to analysts. This can reduce people’s choice to sell their houses. This means that unless folks need to sell their homes, they may elect to sit on the sidelines until they see the stability in home prices that they’re looking for. This may also negatively impact the quality of the properties put on the market during this time.

Millennial demand for housing is up and Generation Z is Behind.

Some may say that there is no housing crisis and there’s an ample supply of prospective buyers for homes. North American Millennials or younger represent more than half of the population in today’s housing markets. This relates particularly to buyers who are first-time home buyers (that 32%) attempting to purchase a property.  Most first-time buyers’ median age is under 50, so the buyers’ pool is larger than it may seem–an indicator of strong demand. While the desire of these buyers is evident, whether these first-time home buyers meet revised stress test requirements or whether housing affordability is truly within reach for this group when home prices are coupled with increasing interest rates, is another matter entirely and one of which time will tell.

In conclusion, there are indications that the real estate market and housing prices are shifting rather than there being a crash in the housing market. Real estate experts are all noting that it’s not a burst because of the elevated housing prices and outrageous demand seen this past year and the front end of 2022 was never going to be long-lasting as it simply wasn’t sustainable. The shift that needs to happen though, is not in the market but in the minds of sellers and home prices. Gone are the times of the real estate gold rush of house prices. It’s incumbent upon sellers and realtors to reset reasonable expectations because if the property market, home sales, and housing inventory for the last two and a half years have taught buyers anything, it’s that they can wait.



2022-10-06 13:11:00

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Will the “Silver Tsunami” Flood You with Cash Flow?

Assisted living investing isn’t your typical type of rental property investing. When someone thinks “I want to get rich in real estate,” they’re often not considering setting up a home for seniors, those in medical decline, or medical patients. Investors almost prematurely dismiss any idea of RAL homes (residential assisted living) if they have no medical background and no personal need to do it themselves. This can become a costly mistake, especially when the evidence adds up on why assisted living could be the most recession-proof real estate investment out there.

Isabelle Guarino-Smith is one of the investors that decided to go down this path. Without any medical experience of her own, she led her family business to become a successful assisted living brand throughout the state of Arizona. When her grandmother needed care many states away, Isabelle’s father realized that building not only a better facility, but a more profitable portfolio, was a smart move to make. And this risk has paid off significantly, as Isabelle now takes home a five-figure monthly cash flow from each of these properties.

She knows that the “silver tsunami” is coming in quickly and that capitalizing on this niche now could mean even great profits in the future. But, this isn’t all about the money for Isabelle and her team. She’s seen how much better care seniors can get in smaller facilities and that this type of investment doesn’t just pay itself back in profits, but in knowing that you’re making a difference in the lives of those who need it most.

David:
This is the BiggerPockets Podcast show, 671.

Isabelle:
Nothing is recession proof, but this is probably as recession resistant as you could get. Because when money gets tight, you know what you pull back on is those high end items, that Euro vacation, that Disney trip with the kids. You stop going to Airbnbs. You stop buying nice items, but you’re not going to stop paying for your loved one’s care. You just don’t do that. This is probably as recession resistant as you can get.

David:
What’s going on there, BiggerPockets listeners? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with my co-host, Rob, the STR specialist, Abasolo. We’ve got a great episode for you today. We are interviewing Isabelle Guarino, one of the industry experts in residential assisted living facilities. This is a new strategy of investing in real estate that is relatively unknown and not talked about very often, and we bring you a ton of information that would help you decide is this an investment strategy that you should get into? Isabelle’s family is one of the premier experts in this space and she does not disappoint. One of the things that we should highlight about today’s show is this is a strategy that becomes a hybrid of business with real estate. We see in the industry this is becoming more and more popular.
Short-term rentals are actually a good example of this. You’re not just buying a house, you are running a business and the real estate becomes a part of that business. This is similar to cattle ranchers. A lot of people don’t realize a lot of cattle ranchers don’t make a ton of money on the actual cattle, but they usually do on the land. I think in the future, we’re headed towards a world where real estate and business are more closely tied together. The real estate element supercharges the business. It’s becoming a little less passive, but you’re able to make a lot more money. My personal opinion, this is a great strategy if you are in the healthcare industry, you know someone in the healthcare industry, your family works in there, your spouse works in there, and you want to get out of that W2 world and into real estate, but you’re not sure how. Rob, what are some of your thoughts?

Rob:
Oh man, this is a good one. I remember listening to this show long time ago, and we brought in someone else in this niche and I was just so fascinated, I don’t know, by the asset class of residential assisted living. I just remember at the end of that episode, I was like, “Oh, there’s so many questions that I wish they would’ve asked,” because I was just so fascinated. Today, I ask all those questions. I ask all the questions and things to consider and caveats, and I’m still really fascinated by this. I’m very entrepreneurial. Wheels are always turning when I really start uncovering new business models. One thing to keep in mind, not necessarily the most passive way to get into real estate. It’s very hands-on. But if you’re entrepreneurial, if you like hiring staff and building out systems, and like David said, if you’re in the healthcare industry, I think it’s going to be a good one. I think you’d be real fascinated and very curious as to what Isabelle has to say.

David:
If you just heard us talk about this but weren’t really sure what this phrase meant, after today’s episode, you will know at a very good level exactly what goes into a residential system, living facility, and if this is the right option for you. Before we bring in Isabelle, today’s quick tip is real estate is different in the ways that it works, and it’s a great way to play to your strengths. Different asset classes work for different personalities or level of resourcefulness, so don’t try to follow somebody else’s blueprint. What works for Brandon, what works for David, what works for Rob, don’t just copy and paste what you see from us. Ask yourself, “What are my personal strengths? What are the competitive advantages I have, and which asset class works best for what I’ve got?” Build your portfolio that way and you will like it a lot more. Our guest today, Isabelle, mentions that if it’s not a hell yes, it should be a no. I think this applies really good into the type of real estate that you invest in. Rob, anything before we bring in Isabelle?

Rob:
This is a good one. Like I said, we ask a lot of questions and I think by the end of it, you’re going to have a very clear picture on what this asset class has to offer.

David:
All right. Isabelle, welcome to the BiggerPockets Podcast. Tell me a little bit about how your family and you got started in real estate.

Isabelle:
Yeah. For me, it really started with my dad. He was a real estate investor his whole life for 40 years since he was 18 years old. He was in this industry and his mom, so my grandmother fell, broke her hip and the doctor said, “Hey, she needs 24/7 care.” She was living in Upstate New York. We were in Phoenix and it was just like, “Okay. What do you do?” Whether you have or haven’t dealt with this, at some point, you will, a loved one needing care and assistance, and especially if you are the wealthy one in your family, this is a big reality that a lot of times they’re calling you to say, “What’s going to happen? Where do we put mom or dad?” At that time, we flew up to Upstate New York to look for something suitable for her. Everything was disgusting. Everything was super expensive.
The things that were decent had a long waiting list, it was just insane. We went back to Phoenix thinking, “There’s a lot of old people here. There has to be something more,” and stumbled into residential assisted living. My dad saw an existing property and he was touring for his own mom, but did quick math, “Wait, I’m going to be paying five grand a month for her to live here, or I could own this property, own this business, be cash flowing 10 grand a month.” He literally pulled the owner aside and was just like, “Hey, can I buy this? I want to buy the real estate. I want to buy the business.” He got up and running right into it. Over the next coming years, we purchased two other single family homes that we converted into this, and I really just saw what he was doing and saw the changes it had made in his life.
I was a flight attendant at the time when he did this and I was like, “What are you doing? What’s going on? Why are you working with old people?” I just kept asking more and more and pushing my way in and became his first employee. We grew to eight companies, three homes and 50 employees since then and had so much fun. My dad passed last year, so I’ve taken over everything from there, but it’s been the biggest blessing being left with three cash flowing businesses. Now, I want to give that to as many real estate investors and entrepreneurs as I can, that legacy.

David:
Okay. You own three of these facilities yourself?

Isabelle:
Yes.

Rob:
With being a flight attendant, that’s a really awesome job. You get to fly anywhere you want if you have the right airline. It’s fun. I’m sure you’re dealing with things, so obviously it’s very secure as well. What was that like for you? Because you’re doing that and then you’re like, “All right. Maybe I’ll do this residential assisted living thing.” When did you actually jump from the stable job to going into real estate, which in a lot of people’s eyes isn’t really quite so stable?

Isabelle:
It’s really interesting because growing up with a dad who was a real estate investor, I watched him go through ups and downs, but I just never had that fear. He never gave us that fear because many people listening who are real estate investors and entrepreneurs know that, the example you’re leaving for your kids, it’s like the Rich Dad Poor Dad book. I grew up with that mentality of a dad who was the rich dad basically saying, “I’m going to get through this. I’m going to make it work. It doesn’t matter what happens. We’re going to make it go forward and have it be a really good thing.” I was never fearful of entrepreneurship or owning and operating any businesses or being in real estate. I saw it as a great way to cash flow and make an impact on your community. I will say being a flight attendant is a pretty sick job.
It is so much fun except for the fact that you basically make nothing. At some point, I turned and looked at my dad and I’m like, “You’re making a lot of money. What are you doing? I want to follow suit with that.” I think not only did the cash flow drive me to it, but honestly, I was on a missions trip out in Jamaica and I saw a retirement community out there and it broke me to see the conditions in other countries, what’s happening with assisted living and I came back and I knew what my dad was doing, but his homes were upscale, luxury, gorgeous. When I saw how terrible the conditions were, I was like, “We have to do something.” I actually really wanted to get involved to not only make more money for myself as a younger person getting involved in their career and starting their life, but also to be able to give back to other assisted living communities across the whole world because this is just a massive need that we’re going to start seeing more and more.

David:
My understanding is there’s several different levels of care. An assisted living facility in general is a place where typically older people are going to go that need in-home care, maybe the family is functioning as the caretaker and it puts a big strain on them or it’s too expensive to stay at a hospital all the time, so you have to have some way to take the pressure off of the family, but there’s different levels of care. Some people need a little bit of oversight, then there’s like memory care. Can you break down how that framework works and then how much energy and attention has to go into the different levels?

Isabelle:
Yes. Okay. The lowest level would be independent living, which think Golden Girls. Right? For mature women living in a home, they need minor help with landscaping, changing a light bulb. It’s really light. They’re really just paying you rent, plus a little bit for you to basically be a property manager who swings by and make sure, “Is everything okay?”

David:
Would you be dropping off groceries, stuff like that or no?

Isabelle:
I’ve never seen those homes run in a way that cash flows, so I don’t pay attention to that market because it’s just something that… You know what I mean? Maybe you do it for your own parents because it’s like, “Oh, let’s throw them all in a home and we’ll help a little bit.” Right?

David:
Would this be more when you see… It almost seems like an apartment complex, 200 units of older folks that are staying there, an old folks home is what we might call it. That’s what you’re describing?

Isabelle:
Yes. Independent living. They still have the salsa classes. They still have the pickle ball court, the pool, all that, because they’re still… That’s probably age 65 upwards to 85, but it’s like you don’t have to be that old to be there. That’s independent living. You just need a little bit help.

David:
You can take care of yourself, but you need oversight. You need someone on site in case someone does fall and gets hurt.

Isabelle:
Yes.

David:
But mostly, you’re providing amenities that make it a fun place for a senior person to live.

Rob:
David’s really interested in this model because he actually owns all the box to The Golden Girls from the TV series. Hopefully, we can unlock this for you, David.

David:
Huge Golden Girls fan. Nobody knows that.

Isabelle:
It’s a great show. It’s a classic.

David:
Thank you for being a friend. Okay. What’s the next level?

Isabelle:
Okay. Next level would be assisted living. That’s what we’re focused on. By the time you need this, you typically need help with three to five activities of daily living. In the industry, we call it ADLs. Right? That’s everything you do from the moment you get up out of bed to the moment you go to bed at night, including getting out of bed, walking, bathing, showering, eating, taking medication, brushing your hair and teeth. You need help at this point. Most seniors move in when they need help with three to five. Some need seven, right? Some need three. That’s where you’re talking about the level of care ranging. Every person within your home might be paying a different rate to live there based on their level of care.
If they’re a high level of care, they’re paying more and if they’re low, they’re paying less. Assisted living, we can take care of a lot of different issues. Honestly, most people, they only live in assisted living. They don’t increase to the next level, which would be a nursing home. Right? Doctors, gurneys, IVs, medical attention is needed at that point. Very expensive. A skilled nursing facility, a sniff, they call it in the industry. Both of those are… That’s like the highest form of care, but in assisted living, that’s what we focus on, that middle one.

David:
If I understand you correctly, you’ve got the basic level, which is what you called independent living. This is more providing amenities. This is the shuffle board court, the salsa dancing, perhaps a van that might take them from the place to go shopping and bring them back because they don’t want to have to drive?

Isabelle:
Bingo.

David:
Then, you’ve got the middle ground, which you’re saying there’s various levels of care. They might need help getting out bed. They might need help bathing. Maybe they don’t, but they need someone to drop off food or make sure they take their medicine, something in between. Those residents will have vary levels of care and maybe the facility classifies them and then lets the nursing staff know, “This is how you take care of him.” Then, the last here, which you said like… Was it a nursing home that you said? It’s almost like a hospital brought into a house.

Isabelle:
Not even in a house. I don’t think you can have nursing care in a house. It’s basically a hospital like setting because there needs to be doctors and nurses on call at all times. Basically, this person, it is very end of life by that point.

David:
Is that something that people can own a property and operate out of the nursing level of care?

Isabelle:
Not that I’m aware of because the licensing would probably need to be so great that… Also, I don’t know how many doctors would be down to just go to a home that only has six to 10 residents. Typically, those are big facilities that are very, very medical feeling.

David:
Okay. If we’re talking about residential real estate, you’ve pretty much just got the first two options that you’re choosing between?

Isabelle:
First two options and I only focus on the middle option.

Rob:
I’m curious. On the scaling side on that middle option, is that a lot tougher to scale than that first tier given the amount of customizations with each different patient?

Isabelle:
Interesting question. When we talk about residential assisted living, right? It’s not a commercial facility, it’s a single family home being used for this, scaling is a bit difficult because 80% of this industry is currently run mom and pop style, meaning the person who owns it might also live in it, might also take care of the residents themselves. It’s very mom and pop. When we came into this industry, we said, “This isn’t going to work. Let’s run it as professional owners, so that we can scale.” We really took the real estate play of it to the next level because everyone else was just focused on having one or two homes and not doing much or I will say some of our people that I work with, they want to have 50 or 100 of these, package them up and sell them to the hedge funds. That’s not my personal goal, but that is a way that you could scale and exit this for sure.

David:
All right. One of the benefits of this is that it’s a little less on the passive side. This isn’t investing in real estate like most people get used to hearing. You are running a business. However, as cashflow becomes harder to find, as yields become smaller, more and more people are understanding that real estate is less passive income and is becoming a form of active income. Rob, you’re familiar with this because running an Airbnb is much more work than buying a duplex and letting a property manager handle it. What are some things that people need to be aware of if they say, “Hey, this sounds good.” Well, maybe let’s take a step back. What are some of the numbers that someone can expect to make per rent and then what are some of the expenses that they should expect to have to pay? Because you’re providing a lot more service than typical just real estate.

Isabelle:
100%. The national average to live in one of these homes is $4,500 per month per person. Now, there’s a website, genworth.com/costofcare. When you go there, you can type in the area where you live or your loved one lives and it will show you how much the national average in your area is. This cost has gone up 79% over the last 10 years and with the silver tsunami coming, it’s going to keep going up hardcore. We are currently 1.3 million beds short and the silent generation is who’s living in assisted living. There’s only 46 million of them. The baby boomers, 76 million of them. If we’re already that short, this is about to skyrocket in cost of care.
What people are paying to live in these homes, let’s just call it $4,500 is our national average. Every state varies greatly. DC is the most expensive at average rates of $6,978 per person per month. I should also say this. Average assisted livings, I don’t want to leave my goldfish, let alone my mom. They are typically disgusting. They smell bad. The food is not good. The quality of care is not good. I really only like to do upscale, high end luxury assisted livings focusing on private pay or long term care insurance residents, not government funding, not Medicare, Medicaid. I want to go after that higher end market, not the tippy, tippy top, but the people who are making more money and willing to pay for the best of the best.
Within these homes, if you had 10 residents paying five grand a month, right? A little bit above average, you’re bringing in 50K a month, your expenses, I know you asked about that. Expenses are high in this industry because you’re paying for 24/7 staff, caregivers and administrator. You’re doing food for them, activities for them, all the regular house bills, plus your licensing and all these different things. Your expenses on that home that has 10 people might be running around 30K a month and then if your debt service, your mortgage is maybe like 5K a month, that means that home’s bringing in anywhere between 10 and 15 grand a month to you, the owner. It definitely is a more active investment, more along the lines of Airbnb. This is not set it and forget it, but I like to show people how to be as hands off as possible.

Rob:
Is there a reason? Because this seems like a high… Cash flow wise, this is great. Is there a pros or cons of pursuing residential assisted living versus just going to traditional rental route or is it just like a preference type of thing?

Isabelle:
I think for me, it’s a lot of intrinsic pros. You could literally have your loved one live for free. If you have a parent, a grandparent who is going to need assisted living care and you don’t want to be paying for it, they could live in your home for free and you are still cash flowing. Right? We know that the supply and demand is off based on those numbers I just shared and it’s only going to get crazier and crazier. If you’re looking, nothing is recession proof, but this is probably as recession resistant as you could get because when money gets tight, you know what you pull back on is those high end items, that Euro vacation, that Disney trip with the kids. You stop going to Airbnbs. You stop buying nice items, but you’re not going to stop paying for your loved one’s care. You just don’t do that.
This is probably as recession resistant as you can get because we know the supply and demand, because we know what’s coming and if you’re going after that higher end clientele, you’re not dealing with as much riffraff. Also, providing a home for yourself. Right? Supply and demand, leaving a legacy for your own children, a cash flowing business. I always say like money in the bank is cool, a trust fund is cool, but the fact that you’re changing lives, communities lives, these seniors get so much better care in these smaller homes than in the big box facilities. It is night and day. The caregivers as well. When you’re a medical professional and you go into an industry, you go into it because you have a big heart. You want to care for people and then you get thrown into a big box facility where you’re taking care of 15 to one, that’s not okay. There’s no ability for them to even be that good caregiver. Providing jobs and just making such a big impact is really what draws me to this and makes me say, “This is worth it. The extra effort’s worth it.”

David:
You make a really good point that you’re going to be getting better care, but that is going to come at a price. The caretaker that is providing that care has to be managed by the owner if it’s an owner operator of this deal. We have a couple clients that we’ve helped in the Bay Area, literally buying these deals. I go through the MLS. I find one that will work and then we go through the process of getting it licensed. There’s a lot of different ways you have to adapt the house. You need handicap access, fire sprinklers. There’s a huge list of regulations. This is a highly regulated industry. The people that I’ve seen do the best at it are the people that already work in the caretaker space. They’re typically working for someone else or in the healthcare industry and then they combine it with house hacking.
That, to me, is brilliant. They’re getting in and they’re buying a house where they normally would be paying five or $6,000 a month to live in the Bay Area and they’re actually making money because they run the facility out of their own house. I think that’s a cool combination of these two strategies, but I want to ask you if someone is hearing this like, “This is good. I’m in the healthcare industry. I’d like to be an entrepreneur.” This is a clear path that you can get into it and own real estate because it’s kind of a hybrid of business, plus real estate investing, but the regulations make this very difficult. Can you share some of the regulations when it comes to the administrator that you have to hire? How many people can be overseen by an administrator and how that varies by the different markets as well as all of the modifications that have to be made to the home so that it will be approved for licensing?

Isabelle:
Yes. I completely second what you said in the beginning that it is a perfect marriage between potentially someone who’s in the healthcare field and someone in real estate. I know you have a lot of male listeners and if they have ever wanted to be in a business with their wife or partner or spouse, this is one of the best businesses for couples to do together, especially that perfect mix of one abuse medical professional, one abuse real estate because sometimes it is hard to match those and that’s where I do see a lot of our successful people come from where they have that perfect combination.
As far as the regulations go, you’re 100% correct. They’re state by state. There’s no national rules on this. Some states are really hard and some states are not hard at all, right? Texas, the requirements to be an administrator is literally FAM, fog a mirror. Be 18, have a GED. It is lame. It’s so bad. You have to, if you live in a state where has low regulations, look at a state with higher regulations and make your home suit that. California, like you mentioned, much higher restrictions and requirements. Arizona, one of the highest in the state. It’s like 140-hour work that they have to do, hours of work that they have to do. They have to take a four-hour test every two years. It’s just a lot more rules and regs on getting that license.

David:
Can you clarify what role the administrator plays in the business?

Isabelle:
In real estate world, the best way for me to correlate them is they’re kind of your property manager. What they would be responsible for is far greater than that. They might be in charge of marketing the home, touring the home with the residents, filling the home, choosing which residents are coming, hiring and firing your caregivers, dealing with all your independent contractors. It’s kind of endless and…

David:
It’s a form of getting the… What’s the word I’m looking for here? Not responsibility, but the liability off of the owner and onto the administrator. Because if a rule is violated, if you are your own administrator, you lose your license, you can’t run the facility. But if you’ve outsourced that, if a rule is violated and the state comes in and says, “You can’t operate anymore,” you could just get another administrator in there as opposed to you as the owner losing the ability to run the business. Right?

Isabelle:
100%. I do not suggest that anyone become the administrator. I always suggest you pay someone to do that. You hire someone to do that, put them in there because exactly that. If they’re not the right fit, you fire them and you get a new one. Right? I want to encourage people to be the owner of the real estate and the business. Not working in it, right? Working on it, sitting in that owner’s box.

David:
When you’re establishing this business, how often are you taking on a green administrator, someone who’s just getting started or if they come up to you and they say, “Isabelle, I’m down to do the training. That sounds like a great opportunity. Would you hire me?” Kind of thing. Would you do that or are you always looking for someone that’s cut their teeth in the industry already?

Isabelle:
Personally, I’m always looking for people who have experience and I’m just big on character and reputation. I will ask other people in the industry in the local area like, “Hey, what do you know of this person?” Because it’s a pretty tight knit industry. Everybody knows everybody and if they’re scammy and slimy and doing the wrong thing, word gets around real quick. I prefer someone with experience who has a stellar reputation.

David:
Okay. One of the things that’s interesting about this model is you’re operating a home and you’re operating a business which opens up doors to financing because those are valued differently. You can use a standard mortgage, buy a house, but you also have SBA loans and other options to get a business loan, which means you potentially have two sources of financing. Can you tell me from your experience how you’ve seen people that are running these taking advantage of both sides?

Isabelle:
For sure. I would say the number one most popular ways to fund these is using SBA. They’re very friendly to us. They understand this concept and that’s got to be one of the biggest ways that people are funding these. The second one I would say that people are using the most is syndication or private money. A lot of people do like to raise capital on this because there’s plenty of people who are intrigued by this industry, but they don’t want to own the real estate. They don’t want to own the business, but they’re very willing to invest. I love teaching and training on this and sharing all across the country and when people have the mindset that. “No one’s going to want to lend to me,” it’s like, “You’ve got to be joking.” Every day, someone comes up to me and says, “I don’t want to do this, but I want to give someone money to do this. Who do I give my money to?” Money is out there. Literally, you might be one handshake, one conversation away. Syndication, private money, SBAs are all great ways to do this. Obviously, you can do bank loans, hard money. Really, it’s endless. I would not suggest crowdfunding. Right? I would go with something a little bit more solid and stable. But truly, SBA is probably my preferred point of direction.

David:
I think the clients that we’ve helped… Shout out to Stephanie Cruz. She’s bought a couple houses with us and she’s doing the same thing in the Bay Area. I believe the method or the strategy we came up with was that they used an FHA loan to buy the house. They put people and I think California limits you at six people per home or something.

Isabelle:
Six. Correct.

David:
Yeah. It was more strict. They got it filled up. They turned it into a profitable business. They had to rehab the house with their own money. They were then able to get an SBA loan which paid them back for their down payment and the money that they had put into the property and then made further improvement, so they could charge more per room. Then, that money that they got from the SBA loan became the down payment for the next facility. That became a way that this model is self-fulfilling as when you want to scale.

Isabelle:
I love that. That is a perfect way to do this.

Rob:
Isabelle, question for you on the syndication side, because I’m getting into the fundraising world myself and when you’re raising money for this, what types of, I guess partnerships or splits are you doing or what kind of returns can one expect from a syndication? Is it pretty comparable to other types of syndications like a 10% return, 8% pref?

Isabelle:
I would say typically, we’re looking at 10 or upwards of 12% returns. We do have some people who like to go that route. Yeah. I would say between 10 and 12% and it’s pretty competitive and aligned with what you’re seeing probably for most other deals.

Rob:
Okay. David, this is getting me all jazzed up. We have our $3.25 million mansion in Scottsdale. It’s a 6,000 square foot, six bedroom, eight bath place that has real luxury residential assisted living vibes.

David:
The sport court could be turned into a shuffle board court. Right? We wouldn’t have to spend the full 25 grand.

Rob:
A jazzercise court.

David:
That’s exactly right. We could make the pool a little more shallow and turn it into an exercise place for everybody. It would. That’s a perfect property to do something like this with.

Rob:
You’re already a jazzercise fiend, so that’s kind of a fit.

David:
Huge. Huge. That’s actually another page I have that people don’t know it’s me. It’s like my pen name. You could follow jazzercise with Dave and see my morning workouts. It’s exactly right. I still like to wear those ankle weights, those little sandbags that we used to put when our moms were exercising back in the day.

Rob:
Well, two pounders.

David:
Yes. Isabelle, I want to ask you, when the market’s red hot and it’s super hard to find properties at cash flow, there may be a property like this that will cash flow. What are your thoughts on if somebody can pay more for a property than what it would appraise as a typical house just off the comparable sales, if they could get more cash flow on it as an assisted living facility?

Isabelle:
That’s exactly what I tell people is that it doesn’t really… I should rephrase this.

David:
I know where you’re going with that.

Isabelle:
You are not in competition with your typical single family home buyers. Everybody wants the three, two that’s on a nice street. I do not care if there are power lines in front of the house. I do not actually love if it’s on a super busy road with a ton of traffic going by. I do not care if it backs up to a parking lot with a target in it or there’s a bus station around the corner.

David:
An apartment complex right nearby.

Isabelle:
That’s a pro to me because that’s more busy people, that’s more traffic coming by seeing it. A mom, dad and two kids doesn’t want Johnny to kick the soccer ball in the road. Right? But for me, I’m going to put a nice big sign out there and get a whole bunch more eyes and that’s marketing dollars for me. I’m already looking for something different. Other things like funky layouts, homes that… There’s a lot of baby boomers who are already retrofitting their homes, adding ramps, guardrails, things like that. Those homes, then when that senior passes on, it’s like a single family’s like, “What do we do with this home? It’s kind of weird. It’s kind of funky.” I prefer already the weird homes, the big homes, the homes on weird streets. We do not compete in the same things we’re looking at from so many other investors.

Rob:
Let me ask you this because one of the things that I deal with as a real estate investor is when I put an Airbnb in a neighborhood, everyone loves me. Right? Everyone’s like, “Oh my god, that guy put an Airbnb in the neighborhood. That’s going to make it better.” Not really, no. Everyone’s always mad that I’m creating the parties that are going to ruin the neighborhood. I have heard similar sentiments with residential assisted living. What is that like? What kind of community outreach or backlash? Honestly, I don’t know too much about this. What do you hear from neighbors? If you do buy a single family residence and you convert it, is there any pushback or is it usually smooth sailing?

Isabelle:
There is always nimbyism. Right? Not in my backyard. Everyone’s always like, “No, not here.” We have seen so many people just flip their lid over this happening, freaking out. Because of the Federal Fair Housing Act, it’s discriminatory. It’s against disabled persons to say that you cannot do this home in a neighborhood. That’s a federal law which pretty much trumps any city state government, angry neighbor HOA. We did create the RAL National Association, which is the only association that represents the smaller care homes. The big boxes, they have their own associations and believe me, they’ve got money and power fighting for them, but no one was fighting for us. People were getting told, “Hey, you can’t do this,” and no one was there to back them. We created that association and it has a whole legal team who’s there to support people wanting to get into this.
It’s a free membership, but it’s really important for us that these are being allowed, that people understand the value that they’re bringing to the community. It is not a million fire trucks driving by every day or old people running down the street. We are not destroying the value of the neighborhood by any means. If anything, our homes usually sell for more because if someone was to sell it, they’re going to sell the real estate and the business. It’s going to actually be a larger transaction and bring the value up. We also keep these homes so well maintained because if you can’t take care of your front lawn, daughter Judy is not going to think you’re taking care of mom or dad. It’s vital that everything is perfect and clean. Also, there’s 24/7 staff there. Talk about neighborhood watch. You literally have someone awake there every day all the time. We’re the best neighbors to have. You want us to take out your trash can, you got it.

Rob:
Yeah. That’s awesome. Yeah, I’ve got so many selfish questions here because we’ve had episodes like this and I’m always like, “How do I do this?” Okay. Question, when you’re trying to locate a house, is it best to… Because for example, our Scottsdale property, that is on a pretty secluded… All the homes on the lots are on five acres, for example. We’re on five acres. It’s relatively private to get in there. Is it a good idea to find a home that’s maybe right outside the city in a suburb that is on a larger estate away from neighbors or is it the same success rate either way?

Isabelle:
I have seen these homes where, for example, one person I worked with, their home is on 19 acres. Right? Stunning property. It’s beautiful. It’s out in Tennessee. But then, my homes have neighbors literally right next door. It’s a genuine neighborhood. They both can be successful. I will say this is not… You can build it and they will come. It’s not the field of dreams. It’s also not over the river and through the woods to grandmother’s house, we go. No. You need to be located so strategically. By that, I mean demographics. Demographics are absolute key in this industry. You have to be in an area where there’s a mass amount of 50 to 70-year-olds who are upper middle class making twice the median income who are typically homeowners because that is who we call daughter Judy who pays for mom or dad to live in your home. She does not want to drive 30 minutes away. She wants to drive five minutes down the road. Demographics is the number one key when it comes to location.

David:
I really like what you said there because it highlights a business and real estate principle, which is supply and demand. It’s very easy when someone is learning real estate to hear what someone else does and just think, “Okay. I’m going to hit control C and then control V and I should get the same result.” In many times when you’re buying real estate, you are looking for a big plot of land, amazing views, the location to something people want to go to where wages are highest. Those are all factors that weigh in for a particular demographic of buyer or tenant that they care about that. What you’re describing is it’s different here. You could be next to the most amazing waterfall, but if you don’t have an aging population of people, that is useless. What you’re looking for here isn’t necessarily the exact property’s location. It is the demographic surrounding the property.
You go to where you’re finding aging population, what you described as the silver tsunami in Arizona, in Nevada, some of these areas that are having… Populations like that Florida would be another one. Typically, that was always the stereotype as old people moved to Florida when they retire. Well, they’re closer to needing care at retirement age than when they’re 20 years old. They’re very far away and you can find deals that normally would not work. It’s on a busy street. That’s a terrible, terrible house that I got to sell if I’m a real estate agent to a traditional buyer. They skip it. School scores are terrible. That’s a beautiful property. It’s really big. A lot of square footage, can’t sell it because the school scores are bad. All of these things that used to be hindrances to demand are taken off the board. They don’t matter anymore. Right?
You’re not going to have your population played football in the front yard where a busy street could be a problem when you’re a mom with six-year-old kids. It’s actually a way if you get into this that you can use some of the deficiencies of other properties against them. The house sits on the market longer. You can get it at a better price because those things that would hurt its value don’t apply.

Isabelle:
I couldn’t agree more. I will say it’s the opportunity that matters, not the investment. I’m not afraid to buy a house full price if it’s the right house and I know that the numbers are going to work when you’ve seen that it’s working with another home in that area. Like your home in Scottsdale, I would search then the other homes right nearby, how much are they charging? What are they getting? If you know that your amenities are better, your location’s better or whatever and you might be able to get a little bit more, it doesn’t matter how much that house costs. If you’re going to cash flow on it, it’s all about the numbers at the end of the day. They have to work.

Rob:
One thing that would scare me here, and it sounds like maybe the success rate is usually relatively high, but let’s say that you buy a property. Let’s say you buy a five-bedroom place and you renovate it to make it up to code. You put the ramps in. You put the shower and the bath situation to be accessible. Is there ever any fear that… Let’s say the business doesn’t work out that now you’re left with this retrofitted home that is tougher to sell or is that a rare scenario?

Isabelle:
A wonderful question. One way that I like to show people how to get into this is actually just on the real estate side. If you were to have taken a home just like you said, you retrofit it, you get it ready, you get it licensed and for some reason, it doesn’t work out for you. You can lease that home to another operator, be charging them twice the fair market rent because you just did all the work. You just got it retrofit. You just got it licensed. You pretty much did all that hard work upfront. They’re just going to pay you that lease or mortgage and then they’re going to operate the business. You don’t have anything to do with the operations. You’re now just a landlord on that. That’s one way that you could get out of that situation potentially. If you have done your research correctly and you’ve run the numbers and what’s happening in that area, you should not go wrong in this.
But I will say I have met plenty of people who listen to me on a YouTube thing or a podcast and they’re like, “Oh, I went out and bought this house and now I’m in debt because I don’t know what to do.” It’s like, “Oh, my gosh.” Education is key. You have to learn everything you can on this before you go into it because there’s no HGTV show on this. 18-year-olds aren’t jumping to get into this. It’s a tough industry. There’s a lot of things involved, a lot of rules involved, and you want to make sure that you do it right because it’s a high cost to get involved to this.

David:
Yeah. There are certain things I’m noticing that are becoming much difficult to run these businesses like caretakers, I think were a lot easier to find before. You’re having to work a lot harder to find them and you’re having to pay them more than before, which means now you have to pass that cost on to the end consumer and that becomes more difficult. I really like your model of, “Look, you can get the benefits of this, which are the higher revenues without the headaches of this, which is running the business by using the arbitrage model.” Like Rob, we know a lot of people that do this with short term rentals. They buy the house. They rent it out to someone else at double the rent and then that person has to do the work of actually running the short term rental. The acronym for these assisted living facilities is RALF, Residential Assisted Living Facility. What you’re talking about is RALbitrage, which I would recommend for someone that doesn’t have experience in the healthcare industry, RALbitrage would probably be a better way to get started.

Rob:
Are you able to actually renovate a place and do this arbitrage method? But once you’ve put in… Because obviously, I imagine there’s probably some capital intensive aspects of this. Do you know? Are you able to go out and just do a bur and does the appraised value of a property go up if you do upgraded in these capacities?

Isabelle:
It’s not upgraded because when someone buys the real estate and the business for this, let’s back it up to that, truly what they’re paying for is those seniors in the beds. If the home isn’t full, it’s not worth as much as you think it’s worth. It’s just the real estate. Right? Depending on who you sell it to, if you’re selling it to an operator who’s going to run an RAL, okay, now it might be worth something or they might be willing to lease it for you for something more. But if you’re trying to sell it as a regular home, no, and it’s not that the bank is going to say, “Wow. You put in so much value.” They don’t see it that same way.

Rob:
Okay. That makes sense. I’ve got one more question and then I want to jump into some actionable ways to actually get started in the residential assisted living capacity. But I imagine that there’s probably a couple of deal killers, if you will, if you’re looking at a home. One of those things that, to me, is popping up the most is if a house is seemingly perfect, however maybe it doesn’t have a great parking situation, is that something that would deter you from purchasing that property or is that just another obstacle to get through?

Isabelle:
The seniors aren’t driving, but your caregivers are and there’s a lot of in and out throughout the day. Yeah. A lot of times, even some states have requirements where they say, “Hey, for every four residents, there needs to be one parking spot.” There might be some requirements that you have to do. Yeah. Parking would be something that I would want to see. I would also want to see just density of the area that there’s a lot of people, and I’m not just looking for one year trends. I’m looking for three, five, 10-year trends because if you’re going to start a business, you’re planning roots. You really want this to take off and have longevity. I want to see the density of the area. I also just want to know the story of what else is happening around this? Meaning are we having a lot of people who are moving away when they hit a certain age?
What did the other homes and facilities nearby look like? That would be a deal breaker right then and there. If someone is building a brand new big box facility, a brand new Brookdale Sunrise nearby, bingo. I want to put my home there because they did the internal feasibility study to determine that that is a prime place that’s going to need a lot of beds, but if there’s a really old 30-year-old assisted living building that’s there and it’s empty, that’s telling me something too. You have to look at the story of the area, not just in regards to demographics real estate, but also assisted living. What’s happening around?

Rob:
Love that. That’s awesome. Yeah. I get a lot of people that will ask me, “Rob, don’t you think Airbnb’s oversaturated. Short term rentals are over, right? Everyone’s getting into the game. Should I invest in this city?” I’m like, “Well, are there hotels in the city? They’re like, “Well, yeah.” I’m like, “Are there being new hotels being built every day?” “Well, yeah.” Then, I’m like, “They’ve already done the research for you and they’ve spent a lot more money than you’re going to spend researching it, so you’re probably going to be fine.” That feasibility check seems to be a really good way to think through it.
Moving forward here, we’ve addressed a lot of the pros, cons, things to watch out for, caveats, green flag, red flags. Can we talk a little bit about actually getting started? If you’re someone at home and you’re really excited and you’re like, “Oh, my gosh. I want to do it.” I know you have three steps to getting started in this business and I’d love to talk about that from someone that’s like, “Hey, how do I do this from step one?”

Isabelle:
Yeah. I had mentioned one earlier when we were talking about just owning the real estate. Right? We call that being a preferred real estate provider. You are just going to own the real estate, possibly retrofit it, get it licensed, get it ready to go, and you’re going to lease it to an operator. That is a more passive way to be involved in this industry and it’s a great way to get started. Learning exactly what you need to know about where to put that home, what renovations need to be done? Like David was mentioning all the modifications to the home. In most states, it does not have to be ADA compliant, but you want it to be as close to that as possible. Putting in that work to make sure that the home is ready to go. The second way that you could get started is owning the real estate and operating the business.
Again, I would highly encourage you to get educated on this topic, especially if you don’t have familiarity with it if this isn’t your background or where you came from. It wasn’t where I came from. It’s not impossible, but it is important that you know everything involved with this, so that you can make sure that you’re being the best owner possible. That way, it’s probably one of the easiest or not easiest. That way, it’s probably where there’s the most cash flow, I should say. The third way to get started would be to just JV lend or partner with someone and just deploy your capital in this.
We do have a lot of people who I speak to who that’s all they want to do. They just say, “Take my money and I don’t even want to see it back for another three to five years,” and getting some good returns on that. Still playing a role in the silver tsunami because it’s either going to be a mega crisis or a major opportunity and I want everybody to have a piece of this. I don’t want anybody to get pummeled by this wave. We can all play a role and that might just be lending to someone who does this.

David:
I like that. There’s three basic ways. There’s the most hands-on, most active, and that would be owning the real estate and the business.

Isabelle:
Yep.

David:
Then, you’ve got the hybrid model, which is owning the real estate and arbitraging it out to someone else who runs the business. Then, you’ve got the pure passive way, which is a JV funding somebody else’s deal, putting in the money and letting them run the business and getting a return.

Isabelle:
Yes.

David:
All right. Now, I wanted to ask you a question. If you’re trying to figure out what would be a good market, like a long distance investor who says, “I want to do this. I think I can run it long distance.” They have experience with hiring and operating a different business. I’m thinking like a Codie Sanchez. She’ll probably start making videos on this. This is right up per alley. Would you look for an area with a very dense population, but a lot of it is urban environments like apartment complexes and condos where there isn’t a lot of housing, so you’ve got a family living in an apartment, mom or dad is getting a little bit too old. There’s not a lot of space. Now, you’re going to go find a suburb where there’s actually bigger single family houses and they maybe drive 45 minutes an hour to go visit mom and dad because there isn’t space within the big city?

Isabelle:
I would not necessarily put an assisted living home near a bunch of condos and apartments because of demographics wise, I’m looking, I mentioned 50 to 70 upper middle class homeowner. Typically, where there’s more homeowners than renters, there’s more money. Typically, not always. Not every market, but a lot of markets, being a homeowner indicates primarily more wealth. I don’t necessarily want to be where there’s a lack of suburbia. I want to be right plop in the middle of upper class suburbia. That’s probably my prime location, but I did love what you said in the beginning where you said, “What if I wanted to do this somewhere else?” I always say live where you want, invest where makes sense. 31% of ARL owners are remote owners. They do not live in the same state as where their home is. Right? That’s fine. You can do that.
In that case, I would choose it somewhere that you don’t mind visiting every so often because emergencies happens, stuff happens and you may have to jump on a plane and go visit and be there. If you hate Oklahoma, don’t do a home in Oklahoma just because it’s cheap. Do it somewhere you actually want to be, you want to go and that you’re willing to do that. I want my homes to be hands off. I’m about 45 minutes away from them and I visit every other month. I run it like I’m an out of town owner because I don’t want to be hands-on. That’s not the role I want to play. I’d rather have a Zoom call or a conversation with my administrator than be there visiting and getting more into the weeds. That’s not actually going to help me be a business owner. It’s going to help me be more hands off, having scheduled things. You come to me with your issues in this formal way.

Rob:
When you’re trying to acquire your first residential assisted living facility, I know you have four ways of actually acquiring one. Do you think you could just walk us through those really quick?

Isabelle:
Yes. First, you can buy land and build a custom home from the ground up. For a lot of my… People I talk to who are in the Midwest where land still exists and it’s still relatively cheap, that’s sometimes the way they want to go or my guys who are in construction or their contractors, they love that option. Plus, when you’re building a custom home, when you live in a state like Texas, Ohio, Illinois where you are allowed to have 16 residents in a home, you’re not going to find a single family home that has 16 bedrooms and bathrooms. You’re probably going to have to build it. If I was in a market like that, I would want to build a custom home that’s perfectly suitable for this, so I can house as many residents as I am allowed to house. The second way that you can do this is buying a single family home and converting it to become a residential assisted living.
As we talked about, having as many bedrooms and bathrooms to start. That way, you don’t have to do too much of a renovation or addition. Some neighborhoods will tell you, you can’t make the home look different from the outside. What does that mean? Right? In one of our homes, we built out the garage. I still have the door facing on the outside, but it’s not a real garage. Now, it’s two or three bedrooms back there. Different things like that. The third way would be buying an existing business and the real estate. That’s the fastest and easiest way to get up and running in cash flowing, but not every market has good ones for sale or ones that you’d be willing to take over. It’s a nice easy way to get your feet in right away. Someone’s done all the hard work for you, but you’re going to pay a pretty penny for it. The last way is leasing the home, so working with someone who’s going to be the landlord and you’re going to lease the home from them to operate the business.

Rob:
Okay. We’re running out of time. I have so many questions. Last thing here and then David, I’ll let you get to the deal deep dive here because I know that that’s probably going to be pretty juicy. But when it actually comes to market. Let’s say we overcame all the obstacles, we got it permitted, the neighbors love us and great, move in, and you got the house and you got it set up. Now, how do you market it? Because this seems to be… You’re marketing to an older demographic in theory, I guess maybe you’re marketing to the families of the older demographic. I’m assuming you’re probably not going to market this on TikTok. How are you actually getting the word out there for your facilities?

Isabelle:
Yeah, definitely marketing is so important. Number one, you are going to want all of those different key components like a website and brochures and business cards as well as having a Facebook page, right? Daughter Judy, you’re correct. She’s probably not on TikTok, but 50 to 70-year-old, she’s probably on Facebook still. Being a part of your local community, working with elder law attorneys, hospice agents, long term care insurance people, geriatric doctors and nurses, showing up at community events, whether it’s your RIA group or your local farmer’s market to let people know you are a home in the community that cares for your seniors and you exist. You could do anything from boots on the ground marketing to old school paper marketing. One of my best tips is I always tell people, “Walk into the local churches, synagogues, and temples,” because daughter Judy, when her loved one needs care and assistance, if she’s a religious person, you better believe she’s going to church to ask for prayer. Right?
She’s bringing that to her elder or her pastor and saying, “Help me out here.” Do you know any resources? The church probably won’t take a referral fee from you, but if you just recently came in with some brochures and cookies, they’re going to be like, “Wow. This nice guy came by. He had this cool home. It’s right down the road,” and they’re an excellent resource for marketing. Last but not least, placement agents. There’s an entire industry of people called placement agents. There’s a national ones like A Place for Mom, absolutely do not like them and I stand by that. Do not use them. I prefer using local placement agents.
People who are local in the community, basically their whole job is when the senior needs assisted living, that’s who you call on. They say, “Where do you want the home? How much do you want to pay? What amenities are you looking for? What area do you want it to be in?” They basically pass out business cards of homes that fit that criteria. They charge either first month’s rent or half of first month’s rent, depending on who they are and their local fees, but that’s a really nice, easy way to fill your home pretty quick working with them.

David:
Awesome. I like that. Get into this method and you too can be the answer to somebody else’s prayer.

Rob:
David, you’re the answer to my prayers.

David:
Thank you for that, Rob. I didn’t even have to get into residential assisted living facilities and run a business. All right. The next segment of our show is the world famous deal, Deep Dive. In this segment of the show, we go deep into one specific deal with our guest and remember that you too can do more deals with the help of BiggerPockets tools and resources, which is you will find at biggerpockets.com. All right. Isabelle, question number one. Rob and I will alternate firing them at you. What kind of property is this?

Isabelle:
Residential

David:
Shocking. Residential assisted living facility. Wouldn’t that have been funny if she came in and said, “Oh, I flipped a house in North Florida or something like that.”

Rob:
Airbnb. Okay. Question number two, how did you find it?

Isabelle:
Oh, on the MLS.

David:
Okay. Question number three, how much was it?

Isabelle:
It was 795,000.

David:
It’s shocking that you were able to find a deal on the MLS. I’ve been told that’s impossible, and the only way to find deals is to spend your entire life talking on the phone for 12 hours a day trying to find an off market opportunity.

Isabelle:
In this industry?

David:
No. I’m being sarcastic because everyone says, “There are no good deals. There’s nothing on the MLS.”

Rob:
We’re workshopping David’s sarcasm still.

David:
I do hear that a lot. People complain that I need to send the emoji face when I send a text because they’re like, “I don’t know how to take that.” It’s like, “All right. I hear you. I just will never send emojis.” All right. Rob, you’re up.

Rob:
Right. The next question that I have is, how did you negotiate it? I’m sorry. Is that the right…

David:
Yeah. Yeah. She paid 795. How’d you negotiate?

Rob:
Oh, yes. That’s right. Sorry.

Isabelle:
795. This particular home was actually listed for 835. We put in an offer for 825. They did not accept. They took it off the market, ripped out all the floors and put carpet in. Not what I needed for assisted living. Then, they put it back on the market for 800 and we offered 795 and they took it.

David:
Wonderful. All right. What did you do with it once you bought it?

Isabelle:
We put about 200K worth of renovations in, so 995, just about a million dollars all in. We made… It was a six-bed, five-bath and we turned it into a 10-bed, eight-bath without changing the square footage. 5,500 square feet.

Rob:
Then, sorry. Really quick, how did you fund that?

Isabelle:
We funded it through private money. We had two lenders on the deal.

Rob:
What was the outcome of the property?

Isabelle:
We got it licensed for residential assisted living, hired a licensed administrator. We have 10 residents in that home. They are paying average rates of about $6,000 each. It’s about 60K coming in every month in our gross. Our expenses on that house run about 35,000. Then, our mortgage, give or take 12,000. Now, it’s a cash flowing between 12 and 18, if I’m at 100% vacancy or less.

David:
Okay. Now, what lessons did you learn from this particular deal?

Isabelle:
Well, it was very frustrating because we did not tell the seller what we were planning to do and my renovation costs went up because I had to take out the carpet that they had put in. I think they had tile in there. We also put in a hardwood and hardwood soaks up liquids. That was a mistake. Would’ve put in LV or tile. I think the flooring was just such a pain. I wish I would had a conversation with the seller and then I wish I would’ve chose a different material.

David:
I really appreciate you sharing that actually, because too often, we hear about what everything that went great with the deal and nobody says what went wrong. But trust me, in every deal, more things go wrong than they go right, even when it’s a big win. I think that’s a testament to real estate that you can screw up royally and come out with a profitable deal that makes you hundreds of thousands of dollars over time. It’s one of the reasons I like playing in that space, because the target is so big. It’s almost difficult to miss is you get a couple of things right, but individual elements of every deal go wrong.
I know people that literally have negotiated closing costs of $50,000 that didn’t know that they could only collect $30,000 of those closing costs. In fact, one of them was a residential assisted living facility buyer who was buying with an agent in another state and didn’t run it by me and they lost $20,000 of money they negotiated because they didn’t know that was a rule. Yeah. It hurts, right? It’s like the same feeling you get when you like Mike Tyson had all this money and he lost it all to Don King. It wasn’t me, but it still hurts to know that it happened. There are so many things that happened like that in every single deal. It doesn’t mean you did things wrong, it just mean that you learned.

Isabelle:
Yeah. Have you seen the Mike Tyson thing on Hulu? It’s amazing.

David:
Is it like a documentary?

Isabelle:
It’s like a foe. It’s like actors are doing it, but I’m pretty sure he was involved, but oh my gosh, it’s so good. You have to watch it.

David:
I wonder what the auditioning was like to get someone that could do Mike Tyson’s voice.

Isabelle:
Oh, I have to put on the close caption.

Rob:
He said, “Hi, I’m reading for Mike Tyson.”

David:
How hard was it to find someone that looks like him and can talk like him? That could not have been easy to do.

Rob:
Okay. Also, I didn’t want to say… I’m glad you said that because I would’ve assumed that carpet was actually a good idea because I have always hated carpet. But once I had kids, we moved into a house that had carpet and I was like, “Oh, thank God for carpet,” because kids fall a lot.

Isabelle:
I know. But the thing is carpet’s a trip hazard for seniors because it’s poofy and fluffy and their feet are shuffling. You know what I mean? It’s a lot easier for them to trip on it. It’s actually better just to have the tile or the luxury vinyl. Hardwood carpet stinks, soaks up liquids and some of the wood, I’ve already had to replace. It’s just like, “We paid a pretty penny and I wish we didn’t.”

Rob:
Okay. Awesome. Well, last question here, who was the hero on your team for this deal?

Isabelle:
Oh, hero on our team? Well, my dad because he had secured the private money through his connections.

David:
All right. That sounds good. Remember that you two could do more deals with the help of BiggerPockets marketplace. Simply go to biggerpockets.com, look for the nav bar, and you can find agents. You can find lenders. You can find tradesmen. You can find a lot of the people that you need through the website. All right. Isabelle, I’m going to head us over to the last segment of our show.

Speaker 4:
Famous Four.

David:
It is the world famous, Famous Four. In this segment of this show, we ask every guest the same four questions every episode. Question number one, what is your favorite real estate book?

Isabelle:
My favorite real estate book, which it may be a business book, but it applies to real estate for me, The Pumpkin Plan. Have you ever read it?

David:
No, I’ve never heard of this.

Isabelle:
Oh, my God. It’s really good.

David:
Was this Starbucks plan to build pumpkin spice that would just take over the world and dominate the white girl industry?

Isabelle:
No. It is so good. You have to read it. It’s basically about when you grow those massive pumpkins, like the huge winning ones, that you have to kill every small pumpkin to make that one pumpkin grow that big. To me, it’s like a real estate business book because it’s like, “Stop letting all these small little things drain you and drain your business. Focus on what is going to make you the most amount of money the fastest.” It’s about killing off clients, people’s deal that drain you.

David:
That’s really good. Rob would grow a huge pumpkin like that, turn it into an Airbnb and rent it out as a novelty. He’s salivating over there at the thought of what that could look like.

Rob:
I see. People see a orange piece of real estate that’s going to rot in three days, I see dollar signs.

David:
That could be your book, Rob. The Green Pumpkin.

Rob:
Question number two, which now you got to come up with another business book. This is on you, Isabelle. What’s your favorite business book?

Isabelle:
My favorite business book, I would say the 5AM Club. Have you read that?

Rob:
Uh-uh.

Isabelle:
Oh, man. You guys got to read. I’m just joking. 5AM Club is great. It’s just motivational. Mostly, like get the most out of your day, wake up, get stuff done, live every moment like it’s your last. My dad being such a big inspiration with me in this business is really important for me to just have that vigor in everything I do and try to translate that to as many people as I meet. So 5AM Club.

Rob:
Awesome. What are your hobbies when you’re not out there building your real estate residential assisted living business?

Isabelle:
I love hiking. Praise God, I live in Arizona. I try to do the 52-hike challenge, which is a hike a week all year long. I love spin class, traveling and I’m a foodie. Great food.

David:
Question number four, I’m interested to hear your answer on this because you’re in such a specific niche. What sets apart successful investors from those who give up, fail or never get started?

Isabelle:
I’m going to say three things, having grit, getting punched in the face and getting back up and back up and back up, never letting it stop you, having a strong why. If you don’t know why you’re doing what you do and it doesn’t light you on fire, then stop doing it. Everything should be a hell yes or a no. Everything. Three, having passion. I think that a lot of people live life drifting and never committing and never being passionate about what they do. I think that if you don’t have passion in what you’re doing, you’re not going to be very successful. Even if you are, you’re not going to be happy about it.

David:
I like that. If it doesn’t energize you and it’s not a hell yes, kill that pumpkin.

Rob:
Unless you can turn it into an Airbnb. Lastly, Isabelle, thank you so much. We really, really appreciate it. This was amazing. Very enlightening. I’m going to try to talk David into turning our Scottsdale Airbnb into a high scale, high luxury RAL. Can you tell us where people can find out more about you?

Isabelle:
To find out more about us, you can go to ral101.com. There’s a whole bunch of free stuff there. Just like free books, free webinars, free phone calls. You can connect with me and I’d love to chat with you, so ral101.com.

David:
All righty. Thank you so much, Isabelle. Rob, where can people find out more about you?

Rob:
Oh, you can always find me on YouTube being goofy at Robuilt or on Instagram being even goofier these days doing a lot of reels, putting myself out there as they say again. Again, Robuilt. What about you?

David:
I’m a little bit less goofy, I will admit that, but I’m on Instagram, Facebook, everywhere else, @davidgreene24 and I’m on YouTube at David Greene Real Estate. Rob, you tend to make content that just tastes better. You’re like a Pop-Tart. I noticed my stuff’s very dry. It’s like a bran muffin. There’s a lot of nutrition in it, but you might choke on it. I got to learn to put a little bit of icing on what I’m doing here. If you guys agree that you need to see a little bit more personality out of me, go to the comments for this show on YouTube and say, “Yes, we want to see more of David being dumb.” Or if you’re like, “Nope, I like David being serious and Rob being the Pop Tart,” just put Rob’s a Pop Tart and we’ll know what you mean.

Rob:
That was actually my nickname back in high school.

David:
Thank you for that. Isabelle, great having you here. Thank you for shedding some light on this. Not often talked about the option for real estate investing, but it’s very profitable if you can get good at it. This is David Greene for Rob “The Pop-Tart” Abasolo, signing off.

 

 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

2022-10-06 06:02:09

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Interest Rate Forecast for The Next 10 Years

Understanding the Benchmark

A Benchmark Interest Rate, sometimes called a reference rate or overnight rate, is upon which other central banks’ interest rates are determined. It is the minimum rate investors will require for investing.

Here’s how it works in practice from ecb.europa.eu: A bank may agree to lend money to an organization at an agreed interest rate, say the benchmark rate plus 2% – meaning that the organization would pay interest of 2% more than the current benchmark rate. So, the cost of borrowing money goes up if the benchmark rate goes up, and the cost of the loan goes down if the benchmark rate drops. In this case, the benchmark can be a reliable, independent, and relatively simple reference for all involved.

Benchmark rates are used in more complicated financial transactions as well, such as the issuance of securities with variable rates, options, forward contracts, and swaps.

Bank of Canada’s 2022 Scorecard So Far…

In April of this year, the Bank of Canada increased the overnight rate by half a percentage point each. In June, we saw a half a percentage point increase again. On July 13th, the Bank of Canada increased its overnight rate to 2.5%.

On Sept 6th, the Bank of Canada increased the overnight rate again to 3.25%and a bank rate of 3.50% again to combat rising inflation.

Bank of Canada: What the Future Holds

On the Bank of Canada’s website, it lists its policy interest rate decision announcement dates. In the short-term, we can anticipate potential interest rate hikes on some of the following dates:

  • Wednesday, January 25
  • Wednesday, March 8
  • Wednesday, April 12
  • Wednesday, June 7
  • Wednesday, July 12
  • Wednesday, September 6
  • Wednesday, October 25
  • Wednesday, December 6

The Bank of Canada also reconfirmed the scheduled rate announcement dates for the remainder of 2022:

  • Wednesday, October 26
  • Wednesday, December 7

It All Started With Supply Chain

It’s common knowledge that the cost of virtually everything has increased due to COVID-19. It’s a trickle effect that started with supply chain constraints which in turn drove up the costs of goods.

Business owners had challenges finding the standard-issued products needed to provide their services to consumers, or when they did find those items, they had to pay a premium for them. This increased the business owner’s overhead and as a result, the cost to the consumer is greater, as well.

Canadian Consumer Price Index

According to Statistics Canada, “The Consumer Price Index (CPI) represents changes in prices as experienced by Canadian consumers. It measures price change by comparing, through time, the cost of a fixed basket of goods and services.”

Over the last few months, inflation has been increasingly putting pressure on Canadian households as the Canadian Consumer Price Index reports decades-high figures.

Bank of Canada Feels like a Variable Rate

A lot is on the line when the Bank of Canada is raising rates, including rising mortgage rates (fixed rates and variable rates may be affected long-term) and the possibility of a recession, so it makes sense that so many are watching to see where things go.

With the most recent increase, many homeowners are wondering just how high interest rates will continue to go. For anyone who has a mortgage, be it a fixed rate mortgage or variable rate, the fluctuation of interest rates might affect you for the next decade or more.

It only stands to reason then, that some may want the peace of mind of knowing whether we’ll be facing upward pressure on housing affordability and inflation expectations.

We can’t tell you with absolute certainty where the federal government will take interest rates will go in the next few months, let alone the next number of years.

Can versus Can’t

What we can do is help to give you a peek behind the curtain on monetary policy tools to assess economic conditions to determine whether or not to raise rates. We can also share some expert opinions expressed on where the Canadian rate may go in the future.

Why Do Interest Rates Change?

To begin with, you might need a bit of a refresher on the purpose of the Bank of Canada’s interest rates and why they change over time.

The Role of the Central Bank

Essentially, the role of the central bank ( in our case, the Bank of Canada) is the primary source of Canadian dollars entering the economy as well as the primary director of monetary policy in the country. Their mandate is simple: to control inflation at an acceptable rate of around one to three percent.

Bank of Canada and the Big Banks

The Bank of Canada raised the cost of borrowing money for big banks through a rate hike that the bank charges to borrowers. The banks then pass these costs on to Canadians. The higher interest rates are intended to control how much Canadians are willing to spend their money.

When borrowing and debt is at a record low, people tend to spend more, and inflation increases in response to increased demand. When we see interest rates go up, people tend to prefer saving their money and limiting debt, whether it be in the form of fixed mortgage rates or variable mortgage rates, which reduces demand and encourages companies to keep prices low.

If this rise goes further than expected, it may push companies to take aggressive action to combat the rate hike such reduce their spending with job cuts, which could push us into recession territory.

Risk of Recession

Notably, though, the Bank as a governing council is only concerned with maintaining a healthy rate of inflation and has no mandate to avoid a recession. If risking a recession now is in the best interest of the Canadian economy long term, the bank will, unfortunately, pursue this option.

The Bank of Canada’s Bottom Line

So the bottom line is this: the Bank of Canada’s interest rate is the single tool that is capable of influencing inflation at the highest level in Canada. In order to keep inflation within the target range, the bank will raise or lower interest rates accordingly.

Other things that influence interest rates beyond inflation may include supply and demand factors, government debts and a budget deficit, global commodity market conditions, and our commodity prices, the national labour market with wage growth, a rise or fall in home prices and more.

How Can We Predict Interest Rates?

In the short term, we can generally predict the course of the economy in broad strokes. In fact, the Bank of Canada uses these predictions themselves to decide how interest rates need to change. For example, if the Canadian economy starts off in the first half of the fiscal year in a way that is expected, this may signal to the central bank whether a course correction is needed for the second half of the year. When we look at a longer time period, however, it becomes increasingly hard to predict.

Even if there’s a five-year government plan that promises excellent efficacy to thwart a rise in inflation, we live in an increasingly connected modern world. Inflation is often a symptom of global causes and upon which we have little control.

This is most clearly demonstrated in our recent worldwide COVID-19 pandemic. The pandemic had a huge impact on global markets, including globally high home prices, which saw a rise in inflation.

While economists in the past have theorized the impacts of a global pandemic, there has been no real way to predict when it might happen and thus adequately prepare.

Factors that May Influence Rates in the Future

There are a number of national and international factors that can influence the trajectory of a nation’s average rate of interest, including the Bank of Canada rate.

Some short-term interest rate impactors that we’re already privy to internationally are in the form of the pandemic, decreased fuel costs by the Organization of Petroleum Exporting Countries (OPEC) and the Russian invasion of Ukraine. We can see the impact of each of these international factors in the near term, or in short order; they have caused large-scale interruptions of global markets that affect the way money moves and the way people spend.

The possibility of international conflicts is always present, and will no doubt have effects on our economy. Another factor that is sure to be an issue in the coming decades will be the cost of the effects of climate change, which will result in increased costs of necessities like food and energy.

Nationally, the number of people who received preapproval for a variable rate or fixed mortgage rate grew. With that increase in real estate closing costs, will we now see that we, as a country, are over-leverage?

It is the answer to this question that is causing some folks to speculate on the threat of a real estate market crash in the front and/or a global recession in the second half.

Interest Rate Predictions from the Experts

What does the future hold for Canada’s economy in terms of mortgage rates forecast, and housing prices?

What CIBC Says

Benjamin Tal and Karyne Charbonneau each of whom are chief economists for CIBC, note that given the September rate increase, they expect the Bank of Canada will call it a day, leaving the overnight target rate at 3.25% “for the duration of 2023.”

While CIBC doesn’t see any further rate hikes in 2023, in examining the economic factors, it also doesn’t expect the Bank of Canada to begin easing rates any sooner than 2024.

According to Altrua Financial

Altruafinancial.ca believes that the main tool we have when reading the current mortgage rate market is the Government of Canada bond market yield.

Currently, the Canadian bond markets are priced in anticipation of a further 0.75% increase in Central Bank of Canada rates in 2022- early 2023 or perhaps even slightly higher.

TD Economists Predict

In its short to medium-term Canadian interest rate predictions, TD Economics projected the Bank of Canada to increase rates in the fourth quarter and maintain the level until the end of 2023.    TD Economics predicted the Canadian central bank to lower the policy rate to 2.90% in 2024, 2.05% in 2025, 2% in 2026 and 2% in 2027.

Scotiabank indicates

Scotiabank expects the Bank of Canada to raise its overnight rate to 3.5% in the fourth quarter of 2022 and maintain the rate throughout 2023.

ING forecasts

ING’s forecast expects the Bank of Canada to have a further 75 base points of hikes, bringing the overnight rate to 4% in the fourth quarter of 2022, dropping to 3.75% in the third quarter and 3.25% in the fourth quarter of 2023 respectively.

What Will the Next 10 Years Look Like?

According to the CBC’s article, Typical mortgage payment could be 30% higher in 5 years, Bank of Canada warns “Bank says those who took out a home loan in 2020 or 2021 should brace for higher rates at renewal.”

In its Financial System Review, the Bank of Canada said that while the nation’s financial system is strong and weathered the pandemic well, the economy remains vulnerable because of higher household debt levels tied to the country’s increasingly expensive house prices.

Looking south of the border—which typically influences rates on this side of the border—Federal Reserve Chair Jerome Powell spoke to a quantitative tightening, “Restoring price stability will likely require maintaining a restrictive policy stance for some time…The historical record cautions strongly against prematurely loosening policy… must keep at it until the job is done in order to avoid a scenario like the multiple failed attempts to lower inflation [in the 1970s].”

It’s Safe to Say

It’s safe to say that both north and south of the border, we can expect those that hold the national balance sheets to be fiscally conservative. Whether that translates to increasingly rising rates, the experts seem divided on that. However, two things that are clear as day are that (1) no one is ready to rule out the possibility of a recession, and (2) everyone advocates a fiscally responsible approach to taking whatever steps are necessary to avoid a full-blown depression.



2022-10-05 14:54:00

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These 10 Markets Have Rising Commercial Vacancy Rates—Remote Work Is Hurting Investors

Office closures during the COVID-19 pandemic made it clear that productivity continues to flourish in many white-collar industries, even when employees aren’t directly observed under the same roof. For many companies, that meant a permanent shift to remote or hybrid work models. As of April, people worked remotely about 39% of the time, according to Pew Research. Data from a McKinsey survey shows that 58% of workers are allowed to work remotely at least once a week, while 35% have the option to work from home all the time. 

For many employees, this change is welcome. It means the opportunity to stay in pajama pants, spend more time with pets, skip the hassle of a commute, and claim the home office tax deduction. 87% of workers take advantage of the opportunity to work remotely. But for many commercial real estate investors, the change means higher vacancy rates in office buildings, less rental income, and debt concerns. What’s more, a decline in commercial real estate prices hurts cities and the broader economy. 

The Varied Impact of COVID-19 on Commercial Real Estate

Commercial real estate prices decreased globally with the onset of the pandemic and is now exhibiting a strong recovery in general. But outcomes have looked different across segments and markets. The International Monetary Fund found that the trajectory of recovery was most impacted by factors specific to the pandemic, including:

  • The aggressiveness of virus containment strategies 
  • The effectiveness of fiscal support 
  • The aggressiveness with which financial conditions were loosened
  • The vaccination rates in the area
  • Local and segment-specific changes in consumer behavior 

Some segments of commercial real estate boomed during the pandemic. Stalled multifamily new construction starts combined with rising home prices increased the demand for multifamily units, and, consequently, rent prices and occupancy rates. And as e-commerce heated up due to retail closures, the industrial sector experienced increased rents due to high demand for distribution warehouses. 

But retail and office space segments were harder hit by the impact of the pandemic. 71% of workers worked remotely in 2020, and that left office spaces empty. This had a negative effect on urban retail, as foot traffic for downtown restaurants and shops declined. Suburban retail saw improved performance accordingly. 

As offices reopen, office vacancy rates are declining overall. In fact, of 139 metro areas, only about one-quarter have office vacancy rates that are lower than pre-pandemic levels. Some cities have even seen increased occupancy rates since before the pandemic. But for other cities, the situation is far more dire. The metro areas in the chart below have the highest vacancy rates currently. 

Metro Pre-Pandemic Vacancy Rates Q3 2022 Vacancy Rate
Houston, Texas 16.36% 18.89%
Dallas-Fort Worth, Texas 15.14% 17.57%
San Francisco, California 6.28% 15.45%
Washington, D.C. 12.77% 15.2%
Chicago, Illinois 12% 15.08%
Phoenix, Arizona 12.07% 14.69%
Los Angeles, California 10.22% 13.81%
Austin, Texas 9.08% 13.58%
Atlanta, Georgia 11.55% 13.52%
New York City 7.69% 13.43%

San Francisco saw a particularly vast increase in vacant office space compared to before the pandemic. The city has a high concentration of office buildings, many of which host major tech employers that have embraced the future of remote work. Experts believe the San Francisco commercial real estate market is headed for a devastating crash. 

And vacancy rates could worsen in areas most impacted by remote work since office leases are generally for three years or longer. As leases signed prior to the pandemic expire and tenants choose not to renew, vacancies may edge higher, further deflating the value of commercial real estate.

Landlords of Older Office Space Buildings Are Hurting the Most

Leasing activity has increased since 2021, driven mostly by businesses seeking top-tier office space. In anticipation of employees’ return to the office, many companies are relocating to new buildings with amenities designed to draw workers away from their couches—think expansive rooftop lounges with gorgeous views, fitness facilities, other wellness-oriented features, media centers, and restaurants. 

Therefore, the buildings most vulnerable to high vacancy rates are older office buildings that haven’t been updated. On part of Manhattan’s Third Avenue, for example, a cluster of buildings erected between the 1950s and the 1980s has more available space than the rest of the city’s office buildings, with a vacancy rate of 29%. And in San Francisco, owners of lower-tier buildings face foreclosure. Some of these buildings have lost as much as half of their value, which is prompting landlords to request lower tax bills. 

Tenants Now Have the Power to Make Demands 

Real estate agents say that empty space in central business districts across the country has turned commercial real estate into a tenant’s market. While Class A office space may still be attracting rents on par with pre-pandemic times, owners of older buildings are offering office space at a discount, sometimes up to 25% for creditworthy applicants in certain areas. 

It’s also common for tenants to ask for flexibility in lease arrangements. For example, leases can include clauses that allow for subleasing or an extended lease in case of business interruption. Concessions such as tenant improvement allowances are also becoming more common. Before the pandemic, landlords held all the power, but the market has shifted into the hands of the tenant.

Rising Interest Rates Add Pressure on Investors

In addition to struggling with reduced rental income, commercial real estate investors face financing issues associated with tighter financial conditions. The Fed will continue to raise the federal funds rate in an effort to control inflation. The resulting high-interest rates make it difficult for investors to finance new real estate transactions or refinance existing loans. 

In markets with relatively low-interest rates, commercial real estate prices have been more resilient. This shows the direct impact of higher rates on property values. Additionally, slowing economic activity and fears of an upcoming recession may limit the demand for commercial real estate as more people cut back on shopping and dining out. 

It’s bad enough that commercial real estate investors are losing money as their properties depreciate. But declining commercial property prices also pose a threat to the stability of the financial system and the broader economy. 

How Commercial Real Estate Impacts the Broader Economy

Local governments in most states get the vast majority of their revenue from property taxes. As property values decrease and tax obligations are reassessed, budget cuts will be necessary in affected cities. This will have a detrimental impact on the availability of social services and spending on education. State and local governments spend about one-third of their money on elementary and secondary education. If commercial property values decline enough, schools could be starved of resources. San Francisco could be poised to collect 15% less in property tax revenue, equating to about a 4% dip in total revenue, according to economists. 

The second problem is the impact on the financial sector, particularly small banks. Soon after the pandemic began, banks saw elevated delinquencies on commercial real estate loans. And declining property values impact how much banks can recoup when they foreclose. Banks hold about 38% of outstanding commercial real estate debt on their balance sheets, and community and regional banks tend to be more exposed to commercial real estate loans than larger banks, according to The Chicago Fed. That puts these banks at a higher risk of failure. 

When banks fail, it limits the availability of financing to businesses and individuals. This has a ripple effect, causing unemployment as businesses can’t afford to hire staff. With more people unemployed, economic activity slows, creating less demand. Businesses slow their production, creating further unemployment. U.S. bank failures rose sharply during the Great Recession. Though we haven’t seen any bank failures in the last two years, there’s reason to be concerned about commercial real estate loan loss. 

Predictions for the Future of Commercial Real Estate

Some analysts are calling the outlook for commercial office real estate “apocalyptic,” while others are more optimistic. Research from professors at NYU and Columbia puts the potential loss in value of offices nationwide at $456 billion. Data from CommercialEdge only shows a small dip in office listing rates, which are down 0.1% year-over-year. But as leases expire and vacancy rates increase, investment in the sector could further decline, pushing property values down. 

However, Lawrence Yun, chief economist at the National Association of Realtors, expects the market to grow overall. He notes that some midsize markets are improving as businesses opt for more affordable office space away from central hubs. And other sectors are faring even better. Both industrial and residential rents are expected to continue rising in the future. And hotels and retail properties are recovering as well. 

How Investors Can Adapt 

Investors can pivot to find deals in areas with booming economies or sectors that are exhibiting strong growth, such as multifamily housing and industrial space. Those who still want to buy office space in the largest metro areas will need to be prepared to make updates that accommodate companies’ evolving needs. 

Land is also a viable opportunity. Yun asked local governments to loosen regulations and zoning requirements to encourage investment in residential developments, which would address the shortage of homes. But there’s another option as well—e-commerce businesses seek land for delivery truck storage. Commercial banks may be more willing to offer financing for these deals because they can quickly become profitable. 

What’s clear from the outcome of the pandemic is that cities and sectors are typically not unilaterally affected by economic disruption. Therefore, diversification is the best defense against negative returns. Commercial real estate investors need to start somewhere, and right now, the multifamily and industrial sectors have the advantage, but ultimately it’s wise to have your hands in multiple sectors and markets. 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

2022-10-05 17:04:22

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