Hi BP Community! Thought I would share my brief, hopefully insightful, dive into real estate and/or financial markets.
Today we’re keepin’ it short, but not light, it being the holidays and all, and let’s be honest, you are going to have some down time for contemplation. Where should you be looking to invest in real estate? The simple answer may surprise you. Plus, a personal story from a property I recently sold. It’s heavy.
Today’s Interest Rate: 7.32%
(👇 .08% from this time last week, 30-yr mortgage)
First, a super brief look at mortgage rates, which are in a trend down, albeit a short one, as we saw toward the end of 2022.
My take: this trend will continue, especially if the Fed signals a pause in rate hikes and/or cuts in 2024, as the large investment banks are predicting.
Where to ‘Real Estate?’
So where should one invest in real estate? And when? In short, if it’s green buy now.
This chart says it all. Buy green, sell purple, redeploy capital to dark green, and avoid dark purple like the plague.
At its center, that’s all real estate is. Buy in growth areas, were people not only want to live but are actively moving to. Keep up on the population trends and sell to redeploy capital so you are always in the green.
Don’t believe me? Let me tell you a story. (Queue cut-away scene)
Most of my real estate portfolio is in and around Nashville, TN (dark green). However I also own one last property in DC, where I lived and worked for 17 years in my previous lift, and invested in rentals for most of that time. In just the last 1.5 years DC has gone from green to purple. Dark purple, especially in the B class neighborhoods, interestingly enough. Under my nose, and I admit I wasn't paying enough attention, a 15+ year trend quickly reversed: from buying a nice rowhouse after getting your first decent government job, which ostensively never relocates and always requires you to be in the office, to, screw that lets move a few minutes out of the city, get a much larger home with some land because I’ll just commute, and likely only have to do that 3 days a week. If that. Importantly, DC city and Federal government lockdowns were pretty stringent for 2 years, providing an extra incentive to bounce to the suburbs. This trend may reverse, but that’s the trend.
Because of this, home prices in much of DC, more so than the major cities, have stood still for 2+ years. To put this in perspective, my home market of Nashville saw annual price increases of 19%. Each year.
This year (not during covid or previously) I had two tenants in a row who were constantly late and/or didn’t pay the rent. So this early fall, when I went to turn over the leases and find new tenants, I was met with even more difficulty in both the number of and quality of potential residents. This 2023 trend confused me. I had easily found tenants in the past, and until this year, they were always great folks.
The renovated kitchen in my DC rowhouse
What was the problem? One thing I hadn’t accounted for was a confluence of 2 events: a ton of new supply of nice rental apartments competing with homes, interest rates driving down demand/affordability of homes and driving up demand for high-quality apartment rentals, families and other folks leaving DC for the suburbs, and significantly increased crime (also favoring apartment buildings vs single homes). In fact, Crime has gotten DEFCON level - ‘San Francisco’ in DC, I’m earnestly sad to report.
Anecdotally, not too far from my home a young man was killed when trying to carjack the car of an off-duty police officer. This man was wanted for several other carjackings as well. This “man”… was 13 years old. His accomplice, who was just arrested, was 12. As of October 1st, there have been 827carjackings this year in DC. Including to Member of Congress. Holy hell.
It wasn’t just the crime so don’t solely focus on that; I realized all of these things too late. So last month I decided to cut bait and sell. I’ll make a few bucks, but not much. Why am I selling when I have a 3% mortgage? It’s all about return on equity, and I recommend everyone do this every year. Ask yourself, how much equity (value/wealth) do I have in this property and what return am I making from it? If I sold and redeployed this capital into another property, would my 5-year return (my timeline of measurement) be higher? If so, sell and redeploy. And make sure to include all forms of investment income from the property when calculating the return, not just that rental check:
- - Cash flow and expected rent increases in the next 5 years
- - Estimated natural appreciation
- - Principle pay down of mortgage
- - Forced appreciation through a renovation (I couldn’t since I already did this)
- - Tax depreciation (3.6%/yr)
- - Non-Financial: crime, tenant quality etc…
- - Did I hit all the highlights @davidgreene? :)
Bottom Line
Learn from me, monitor your investments everyone. Especially if you have a property manager telling you everything is roses. You may still be getting that same rental check but how is the asset doing? Are there any emerging local trends that may cause concern? How can you asset manage the property better? For example: It may make sense to build a deck or landscape the backyard to keep top-quality residents and / or increase rents. In a high mortgage interest rate environment reinvesting in your current properties may make more sense than buying another property.
Should you redeploy? Is the property green or purple? Run the numbers, double check that every dollar you have is still a little worker bee making you the highest return on equity, even when you’re sleeping.
And above all, never lose money. That’s rule number 1 and 2.
Stay Green Y’all.
That’s it for this week. If you are interested in digging deeper into these ideas or talkin’ real estate investing - which I always love doing - don’t hesitate to reach out. You can direct message me on BP!
Until next time, stay Aware, stay Skeptical.
Herzliche Grüße
-Andreas
* The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.
