Don’t Let Them Lie to You: Real Estate Investing Is Crucial to Housing Market Health

August 6, 2024

It’s time to stop villainizing investors, no matter the scale.

Original Story per Think Realty: https://thinkrealty.com/topics/market-trends/dont-let-them-lie-to-you-real-estate-investing-is-crucial-to-housing-market-health/

Don’t Let Them Lie to You: Real Estate Investing Is Crucial to Housing Market Health

In July of last year, certain groups claiming to be “advocates” for homeowners took aim at real estate investors with a series of reports claiming, among other things, that 7% of the existing low-income housing tax credits currently in existence are “at risk of becoming market rate” (National Low-Income Housing Coalition, Public and Affordable Housing Research Corporation) and that “the problem [of affordable housing availability] could be further exacerbated by private equity firms and other investors managing real estate portfolios for maximum profit” (Liz Farmer, RouteFifty).

“Advocates” like these who villainize real estate investors for building and acquiring residential assets and (so the argument goes) renting them out at “staggering profits” while undermining the stability of local housing inventory are really doing anything but advocating for the would-be homeowners and residents they claim to support.

The sad truth of the matter is that it is impossible to solve the housing affordability crisis by throwing statistics at it—no matter how many numbers are thrown—and misapplication of said statistics can cause lasting harm to critical players in housing-market health, like real estate investors. In truth, real estate investors, both institutional and individual, play a significant role in maintaining the health of the housing market.

It Started Long Before 2008

It is common to hear people say that the single-family residential asset class—both fix-and-flip properties and single-family rentals (SFR) properties—“started” in 2008 in the wake of the mortgage meltdown and housing crash. This is untrue. Although the confluence of overbuilding, poor lending practices, and the advent of the digital age did create unprecedented awareness of this asset class, the truth is that SFR has existed for at least 2,000 years and has been a positive economic driver the entire time.

The historian Livy describes Roman homes (domus) that were rented out to individual households in documents dating back to 191 B.C. Residences with street-level living quarters commanded the highest rents because those were the homes with the fewest vermin. Ostia, a port city associated with Rome at that time, experienced a huge development boom just before Livy’s writing that sent both its economy and its population skyrocketing.

Sound familiar?

Of course, an ancient manuscript describing residential assets may seem a little outdated at this point, but the message it drives home remains indisputable. When individuals or entities with the ability to maintain lots of properties are willing to permit other individuals to access those properties for a fee, it creates a stronger infrastructure for everyone in the community.

Modern-Day Scenarios Demonstrate the Power of the Portfolio

Of course, just because something worked for the ancient Greeks does not necessarily mean it’s good for today’s housing market, although the dry dock, Archimedes’ Screw, and geometry are all still working pretty well in the modern world. As it turns out, property ownership, both short term and long term, is also still going strong.

According to an analysis published in 2022 by a team of economists hailing from the Federal Reserve, IE University, and the Herbert Business School at the University of Miami, when the percentage of inventory in a housing market purchased by real estate investors large or small increases by one point, it leads to a 1.46% percent housing price growth for a median house. This is great news for everyone in a given market because their property values are rising. Interestingly, this effect is outsized in the lowest-income housing stock.

Although the paper does point out that an institutional buyer can have an outsized effect on a local housing market in the form of diminished affordability, the team also noted that the increased presence of institutional buyers is dwarfed by the “overwhelming increase in small and local investors” who tend to shore up the stability of a market for both renters and owners while also pushing home values higher.

Institutional investors and individual investors fill distinct niches in the housing market. They do not, on the whole, tend to drive each other out of the market. Instead, both elements contribute to the increase in available and affordable inventory over time and support the activity and viability of the retail buyer as more inventory is created.

Real Estate Investing Is Essential to Housing Health

Although there are certainly “bad apples” in our industry as in any business sector, the habit of attempting to tar and feather all real estate investors as “destroying affordability” or “keeping people out of homes” is outdated and uninformed in 2024. Real estate investors buy up unused and abused inventory that retail buyers are not equipped to renovate or restore, shore up markets that otherwise would deteriorate due to abandonment and neglect, and support local housing ecosystems by creating environments in which employment opportunities can increase and other elements of the local homeowners’ ecosystem (e.g., quality schools, well-maintained green space, and outdoor recreation) can thrive.

The time has come to stop permitting “housing advocates” who are no longer truly advocating on behalf of homeowners and residents to vilify this industry. Real estate investors are a crucial and integral element of the greater housing economy.

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Four- and Five-Bedroom Single Family Rental Homes – THE NEW NORMAL

By Bruce McNeilage • November 6, 2024

Meeting the Needs of Consumers, Developers and Investors By Bruce McNeilage In early 2022 I made a prediction. The three-bedroom house would die a slow death. What was once a staple of American construction and homeownership has become as outdated as ‘70s floral couches and wood-paneled living rooms. Consumer demand is pushing builders to create more four- and five-bedroom homes. In addition, existing business conditions make four- and five-bedroom homes the best option for developers and investors. As 2022 played out, my prediction came to fruition. Of the more than 1 million homes constructed in 2022, more than half were four bedrooms or more. That is up from just 25% in 1973. Given current demographics, mortgage rates and work-from-home trends, we expect this trend to continue in the foreseeable future. Older Renters, Work from Home, Drives Need for More Spacious SFR Homes From the consumer standpoint, more bedrooms in a Single-Family Rental (SFR) home makes sense. Most families are clamoring for more space. Millennials, the largest demographic cohort, are entering peak child-rearing years and more space is a necessity. Of course, the global pandemic has played a role in shaping housing trends, as well. More people are working from home and need extra space for one, even two, home offices. More than one-third (35%) of workers with jobs that can be done remotely are working from home all the time, according to a new Pew Research Center survey. This is down from 43% in January 2022 and 55% in October 2020 — but up from only 7% before the pandemic. That’s a five-fold increase in people who need – or likely want – more home office space. While many companies are still hoping to bring workers back to the office, the trend seems to have leveled out. Work from home, in one form or another, is now an entrenched part of the working world and it will continue to impact housing decisions for consumers, builders and investors, alike. Even for a family with only two children, a three-bedroom home no longer has the utility needed for the typical family. Many families are caregivers for an aging parent. In fact, according to Pew Research, 23% of US adults are now part of the sandwich generation — people taking care of an aging parent and a child under the age of 18. These people simply want – and need — more bedrooms, whether they are owners or renters. More families are opting to rent today, as well. The typical age to buy a first home has jumped from 33 years old in 2021 to 36 years old today. It is the oldest ever on record for first time buyers, according to the National Association of Realtors. The rising age is a sign that high housing costs and mortgage rates are pushing homeownership out of reach for younger Americans. Mortgage rates have shot up so rapidly that the average monthly payment on a 30-year fixed-rate loan rose by more than $600 in one year, according to the Consumer Financial Protection Bureau. The CFPB says the average payment for a home purchase loan surged more than 46% — from $1,400 per month to $2,045 — over the 12 months ending December 2022. Likewise, the median total of costs and fees for such mortgages spiked almost 22% to nearly $6,000 in the same period. And with mortgage rates rising to decades-old highs this week, the average monthly payment has almost certainly grown in 2023. This is pushing more people to rentals . Additional Bedrooms Drive up Rental Income, Profits for Builders, Institutional Investors From a business perspective, there is almost no reason for a builder or investor to construct or invest in new three-bedroom homes. If a builder has invested in a lot for $100,000, that is a fixed cost. It is not going to change no matter what they build. A 2,200-square-foot house can be configured with three-, four- or five-bedroom options, so why not go for the configuration that brings a higher profit margin? Won’t an extra bedroom cost more, you ask? Not really. In a 2,200-square-foot house, adding an extra bedroom is a minimal investment up front (approximately $1,000) and will continue to pay for itself over time. Each bedroom can bring an additional $150 per month in rent. That means opting for a four- or five-bedroom house adds $150 to $300 in rent per house per month directly to the bottom line. For builders putting together a Build-to-Rent subdivision, those numbers multiply quickly. A 30-home rental development with five-bedroom homes will yield an additional $100,000 in rent per year. It is as simple as creating a layout that includes five bedrooms. Four- and Five-Bedroom SFR Homes Yield High Occupancy, Positive Cash Flow I have seen this strategy work first-hand. In two of our most recent Build-to-Rent subdivisions, we have opted exclusively for four- and five-bedroom 2,200-square-foot homes in up-and-coming communities. The confluence of demographics (older renters with young families) along with higher home and mortgage costs are pushing more people into high-end rental homes. One key to success is finding cities with growing populations and desirable amenities. Like any real estate transaction, good schools, youth programs, restaurants and entertainment options are important factors. Once you check those boxes, occupancy falls into place. Our occupancy rates are close to 100%, creating positive cash flow, from a demographic of affluent renters with high credit scores. Finally, we anticipate our five-bedroom rentals will add value significantly faster than three-bedroom homes. Whether we hold these assets for one, five or 10 years, the return on our initial investment will be significantly higher with a five-bedroom SFR rental strategy. While no real estate investment strategy is fool-proof, four- and five-bedroom homes show great promise over the next several years. As for the three-bedroom home: You are more likely to see one in the Smithsonian someday. Bruce McNeilage Bruce McNeilage is co-founder and CEO of Kinloch Partners. He has been in the real estate investment business for 33 years, is a national speaker and guest lecturer on the topic of single-family “Built to Rent” (BTR) housing and started his own BTR business in 2005. Kinloch currently owns assets in the MSAs of: Nashville, Tennessee; Atlanta and Augusta, Georgia; and Aiken, Greenville-Spartanburg, and Columbia, South Carolina. Learn more at KinlochPartners.net.