Is it time to put our head in the sand and wait?

Is it time to put our head in the sand and wait?

In the last few months, mortgage rates have gone up like crazy. They went up a fourth time last week. Unprecedented. This is the biggest change in interest rates in years! And it only happened over 7 months!

In most of our properties, this has resulted in our debt payment DOUBLING. We care about interest rates, because when we put together a capital stack, a big chunk of the capital is the loan. The debt service on that is determined by the interest rate, which is very important to your bottom line and cash flow.

What’s unprecedented about these hikes is that it happened fast, happened multiple times, and the market hasn’t had time to adjust to it, resulting in minimal and even negative cashflows.

This is a sledge hammer that the federal reserve is taking to what they perceive to be “red hot, out of control inflation”.

No one has a crystal ball. It would have been impossible for anyone to predict this scenario. Despite multiple “what if” scenarios that we play out when we are underwriting a deal, we couldn’t have predicted all the factors affecting today’s economy such as: the credit markets, the federal reserve, inflation, energy costs going up, and supply chain disruptions.

The good news is that real estate is cyclical. We are currently in a down cycle.There are less sellers, less buyers, and the debt market is unstable because lenders are hesitant to lend!

 

So, is it time to sell and get out? Is it time to put our head in the sand and wait?

The cycle is neither bad nor good…it just is. For current real estate portfolios it requires pivots in strategy and requires the courage to keep going!  No, you shouldn’t sit this one out.

The truth is that a recession brings HUGE opportunities for those who can overcome their fear and prepare to take action!

Cap rates are expanding and real estate is at a discount. Debt is expensive but real estate prices are coming down! I’m seeing prices go down by several millions!

As long as the deal makes sense financially, you can bake in the interest rates.

Remember, interest rates go up and they go down. They won’t stay up forever, they will come down.

We just need to make sure we are able to play a longer game and ride it out.

Exciting things are coming.  Let’s get ready to go bargain shopping! 

6 Ways Real Estate Makes You Money

6 Ways Real Estate Makes You Money

Real Estate investing creates wealth. Period.

 

“90% of all millionaires become so through owning real estate”- Billionaire Andrew Carnegie

 

Real estate investing is incredibly lucrative because it makes you money in more than one way.

 

Here are 6 ways real estate investing makes you money:

1. Cashflow– it’s the amount of money you make each month after all of the expenses are paid. It’s the money that hits your bank account quarterly. 

2. Equity Pay down– when you buy a property with a loan, your renters are paying down the mortgage, thus creating equity for you!

3. Property Appreciation– your investment property will gain market value over time. Have you ever seen a $20MM property worth less in 5 years?

4. Rent Appreciation– this is the organic rent growth in your market which is the amount of rent rate increases per year. This is usually between 2-3% a year, but in 2021 some markets saw organic rents go up 15%. Check out this article in MultiHousing News talking about it.

5. Forced Appreciation-this is when the property’s value increases due to improvements made to the property and tenants paying more for the upgrades and added amenities.

This raises the net operating income and, ultimately, increases the value of the property.

6. Tax Savings-with depreciation and bonus depreciation, you’re creating phantom losses that shield your money from taxes. Don’t forget that taxes are your greatest expense!

What in the world is Depreciation?

What in the world is Depreciation?

Two things that are guaranteed in life are death and taxes! Sound familiar?

Taxes are our biggest expense.

One important way to build your wealth is to create strategies to minimize taxes.

It’s important to know that you can indeed decrease your taxes with certain investments.

In general, whenever you make money, you are typically taxed on that money.

For example, if you own a dividend stock, you will be taxed on the dividend you received as a distribution. Even if your money is sitting in a savings account, and you make an interest rate of 0.01%, you will be taxed on that income.

 

How does real estate investing provide tax benefits?

Now I am not a CPA or attorney, but you’ve heard me talk about the benefits of real estate investing and how one of the most powerful of those benefits are the tax advantages.

Do you know how those tax advantages work?

One word. DEPRECIATION

So what exactly is that? Well, The Oxford Dictionary defines depreciation as “a reduction in the value of an asset with the passage of time, due in particular to wear and tear.”

Depreciation is an accounting method, allowed by the IRS, of allocating the cost of a tangible asset over its useful life to account for declines in value over time.

Ok, but what does that mean in layman terms?

On a very basic level, you are telling the IRS that your asset is losing value, even if it is cash flowing AND appreciating in value. You’re doing this legally! These are essentially phantom losses.

When you invest in an apartment syndication, you are a fractional owner of a multimillion dollar property. Every tax year, you will receive a K-1 Tax form that will claim either gains or losses.

Below is an actual  K-1 from one of my investments. You can see that I invested $50,000 and received a loss of -$49,001 for that year.

This passive loss can offset any future distribution I get from this real estate investment or any other passive investments, meaning I don’t pay taxes on my gains unless they are more than $49,001.

If I don’t use it in one calendar year, then I can carry it forward until I can use it!

 

Affordability Gap

Affordability Gap

Did you know that the average American can’t afford to buy a house? 

There is a HUGE affordability gap between renting and owning real estate, and it’s growing every year.  

And, not surprisingly, the rising interest rates only made matters worse!

Let’s take a look at this example of a 3 bedroom/2 bath home- 1,585 SF that was sold in 2020 and then sold again in 2022.

Let’s compare the affordability of the same house 2 years apart for 2 different owners.

 

Not only has the house appreciated in value, making the purchase price more than $100K more, but the interest rates are much higher now, making the monthly payment higher. The new buyer not only has to come up with a more substantial down payment, but the monthly payments are higher due to higher taxes and a higher mortgage interest rate.

This is pushing renters into apartments longer and preventing many people from purchasing their own homes, which in turn drives the demand for apartments.

 

We all remember from Economics 101 that when there is a high demand  of anything and a low supply, this drives prices up. This same principle applies to apartments. There is a huge housing shortage that is predicted to continue for the next decade.

 

This supply and demand imbalance makes investing in apartments a no brainer. As long as this affordability gap exists, we will always have tenants which de-risks this asset class making apartment investing a safe one!

Five Reasons Why Multifamily Real Estate Is The Best Place To Invest Right Now

Five Reasons Why Multifamily Real Estate Is The Best Place To Invest Right Now

Five Reasons Why Multifamily Real Estate Is The Best Place To Invest Right Now

With interest rates rising and the capital markets in turmoil, people’s fear is at an all time high! Let me assure you that apartments are still THE BEST place to put your money!

Five Reasons Why  Apartments Are The Best Place To Invest Right Now

  1. Hard assets like real estate are the best hedge against inflation, and apartments are arguably one of the best positioned real estate asset classes to create wealth in an inflationary environment. Why? Because the short-term leases allow apartment owners to pass along higher expenses to the tenant base through rent escalation. Apartment rent growth is outpacing inflation by a wide margin and is well positioned to do so for years to come, which will drive up returns. 

 

  1. Demographic trends are favorable for multifamily housing, particularly in regions experiencing net migration. Dallas is growing like crazy and  just moved up 5 spots in US News’ List  of Best Places to Live in 2022. The Dallas market is experiencing double-digit rent growth. It doesn’t matter if interest rates and cap rates rise, as long as they are outpaced by rent growth.

 

  1. Most of the underlying economic conditions that favor apartment investing remain solid. Employment is arguably the best economic indicator for forecasting the health of the multifamily market. There have been more than 20,000 jobs created in the Dallas market. Doing business in Texas costs less and many employers have moved here…bringing employees who need housing. Luckily, we are in the housing business and can provide affordable apartments.  😁  

 

  1. The debt terms for multifamily remain extremely attractive. Even with the recent rise in interest rates (and further increases likely on the horizon) the cost of capital for multifamily housing remains near historically low levels.  

 

  1. Multifamily real estate has proven to be recession resistant and offers superior risk-adjusted returns. In contrast, investments like stocks and cryptocurrency are subject to the whims of the market and have never felt more speculative and volatile.  Real estate is boring by comparison, but may allow you to sleep better and build more wealth in the long run. 

Even in a crisis, real estate remains a solid investment.

 

Put your cash to work in apartments—the best place to invest right now.