Building Out an SFR portfolio

[Joe Mivshek]

Here is why I'm still focused on building out my own long-term SFR portfolio, even tho times feel a little uncertain right now…

If home prices in the US grew at the same percent as inflation since 1970 the median home price today would be ~$177,000. But, today’s median home price is just north of $400,000. Inflation is only one part of the equation, you also have to consider currency debasement, scarcity, etc.

As an economics major in college, I love this stuff. So, here is my why I’ll keep buying deals even tho they are tough to cash flow in today’s market:

(1) HISTORY & TIME

* If you are leveraging the advantages of long-term real estate, time will do its work. (i.e. principle pay down from tenants, cash flow as rents rise, tax advantages, etc.) $100 in the future will not have the same value as $100 today. Keeping in mind your mortgage is locked in on today's dollars.

(2) ECONOMICS 101

* Supply is still woefully low compared to current & future demand and will remain constricted for a few reasons:

---> One, building has a very long ways still to go to catch up to decades of under-building (Fannie Mae estimates we are 3million units short), especially on the affordable side of the equation

---> Two, the ‘stalemate’ we are in when it comes to sellers listing will continue as 85% of people are locked in at interest rates below 5% and we are about the experience the largest wealth transfer in history between boomers and millennials.

LET'S play out some interest rate scenarios

Rates continue to rise —> this could come with QE leading to debasement of currency. This will continue the ‘locked in’ effect but your debt will be ‘less’ in future dollars

Rates fall to 5% —> Demand will go bananas and even though sellers will jump on this opportunity, demand will still outstrip supply leading to higher property values

(3) GENERATIONAL VIEWS & FEASIBILITY OF "THE AMERICAN DREAM"

* This opinion is my own. But home ownership importance will slightly dwindle as younger millennials and gen Z put more importance on flexibility.

* Additionally, the home ownership will occur at later ages given the high cost to entry, later home formations, etc.

* The number of primary residence homeowners will practically flip from the 65% it is today in the other direction in the next 20 years, creating a nation of renters and further consolidation of owners — leading to a larger pool of renters looking for a myriad of rental options.

MY APPROACH: target markets & sub markets that have strong macro fundamentals (pleasant to live, lower taxes, landlord friendly, strong industry) and assume that the ~$600k house today will be $1.5m+ in 30 years because there will always be a new norm when there is a combination of inflation, low supply, and the gov’t printing money/debasing currency.

If a property can cover its costs today and I plan to long term hold then I’ll let rent growth, appreciation, and time do its thing.