Property Management Blog

4 RESIDENTIAL REAL ESTATE INVESTMENT INFLECTION POINTS

SFH Landlords … Save Money, Build Equity, Expand Your Portfolio

An Inflection Point for SFH landlords is triggered when a significant event or combination of events surface that dramatically changes the trajectory of residential real estate investments … for better or worse.

In this article, I’ll make the case for considerable upside wealth creation for current landlords seeking to enhance the value of their current properties along with those looking to increase their portfolio holdings. And if you are a potential, “newbie” investor … there’s much here for you to consider as well.

So here goes! We’ll look at the positive synergistic effect generated by the combined presence of 4 residential real estate investment inflection points:

• Interest Rates
• Inflation
• Inventory
• Increased Rent

Interest Rates

Uncertainty strikes fear into the heart of every residential real estate investor. Today, interest rates are at an all-time low. Thirty-year fixed rate mortgage rates hover in the 3% range and it appears to be a safe-bet that they will remain low for the foreseeable future.

No less an authority than Federal Reserve Chairman Jerome Powell said interest rates will remain at or near zero through 2023. That underscores the Fed’s intention to keep longer-term interest rates low (including residential mortgage rates) to assist with post-pandemic economic recovery. This is in line with the Chairman’s promise to leave borrowing costs unchanged until the economy reaches full employment. It’s logical to anticipate no significant increase in longer-term interest rates is on the horizon.

That’s good news for SFH investors as lower interest rates help qualify borrowers for the purchase of single-family home rental properties that have increased in sales price. Today’s interest environment is a perfect invitation to lock in 30-year fixed rate financing … on new purchases or refinancing existing loans.

Inflation

On this topic, Fed Chair Powell said the U.S. economy is going to temporarily see "a little higher" inflation this year as the recovery strengthens and supply constraints push up prices in some sectors …  but he emphasized the Fed’s commitment to limiting any overshoot of the 2 percent maximum inflation target in the near-term.

In contrast to the Fed’s stated position, some investors are betting that inflation is likely to climb steeply in coming months, driven by pent-up spending as well as supply bottlenecks. Covid-19 vaccines are returning daily life closer to normal. This welcome turn of events coupled with anticipation of increased employment along with as much as an additional $6 trillion of Congressional infused stimulus … prompts many stakeholders to prepare for price increases across the economy.

Now, I’m going to make a case for the fact that inflation is the friend of SFH rental investors … when tied in with our current climate of historically low interest rates. As a matter of fact, the combined synergy of the two can convert borrowing to immediate profit. Here’s a story of traditional real estate investor leverage … and the accelerated power of leverage on steroids. Stay with me. It’s worth the ride!

Traditional SFH Investor Leverage: Leverage is the result when only a fraction of the value of the property is purchased by the investor’s commitment of cash … with the balance provided by a lender. So, for simplicity assume a property purchased for $100,000 … financed by a down payment of 10% ($10,000) … and a $90,000 mortgage loan.

As the property value increases in asset value, let’s assume 3% annually, the effective return to the investor is based on the amount invested … in this case $10,000. At the end of the first year, the property is now valued at $103,000 yielding an unrealized gain of $3,000. Now relate that number to the amount ponied up by the landlord and you end up with a paper profit of 30% … $3,000 divided by $10,000! Why? Leverage!

Leverage on Steroids! Today, interest rates are at an all-time low … and deliver added leverage when inflation is factored in. Stay with me now while we look at the following:

• Borrowing at interest rates less than inflation = leverage
• Borrower’s interest rate minus the rate of inflation = real interest rate (true cost of borrowing)

(The nominal rate charged by the lender minus the inflation rate, e.g. a 5 percent nominal rate when offset by an inflation rate of 3 percent means the borrower’s out-of-pocket interest cost is 2 percent).

Lesson Learned: Inflation is a boon for residential real estate investors who borrow money at an incredibly low fixed rate and pay it back later with inflated dollars … money that is worth less than it was when the loan was originally granted.

See these numbers as dramatic illustrations of the incredible opportunity that exists today to refinance or make your first purchase of a rental property … particularly single-family homes. Will this “perfect storm” of ground-floor interest rates positively influenced by inflation repeat itself? Never has, so why hesitate to be a winner.

OK … let’s tie the net results together with following Wealth Creation Calculator example.

1. Year Fixed Rate Mortgage

FREE Personalized Wealth Creation Analysis

Request your FREE Wealth Creation Analysis and Learn How You Can Increase the Value of Your Residential Rental Portfolio … or Become a First-time Landlord.

Call or email Bill Le to schedule your brief, confidential telephone session. You’ll find your 10-minute investment of time well worth it … plus receive a comprehensive print-out of the benefits to you based on the sample purchase info you share. E: ble@krsholdings, or DD: 804-376-8471

Inventory

These graphs illustrate shrinking inventory for single family home purchases.

Yes, I agree that bargains on single family home purchases are few, far-between and in some areas non-existent. That said, in light of the forgoing regarding the synergy of super-low interest and the likelihood of inflation, it doesn’t have to be a perfect world to make attractive long-term, profitable investments.

Of course, in order of priority it would be ideal to have:

• Ideal: Low Interest Rates coupled with Low Purchase Prices
• Second Best: Low Interest Rates and Stable Purchase Prices
• Third in Line: High Interest Rates and Low Purchase Prices
• Worst: High Interest Rates and High Purchase Prices

Today, “Ideal” is not an option. However, I believe significant opportunities present themselves in this economic environment of:

Second Best: Low Interest Rates and Stable Purchase Prices

With that profile in mind, this is an excellent time to refinance existing holdings and/or borrow for an addition to your portfolio. So, as KRS Holdings seeks to expand its portfolios for our clients and our company, our guiding principles are based on confidence that when it comes to acquiring rental properties today …

With interest rates at record lows, inflation on the horizon …and SFH prices stable

now is a good time to save money and build equity!

Increased Rent

There is evidence of surges in single family home rents as landlords become more aggressive to test the limits of the strong demand for suburban rentals. With homeownership out of reach for many Americans, rents are on the rise.

The anticipated taming or elimination of C-19 is the apparent driver of increasing housing costs. There is optimism that post-pandemic employment will rapidly rebound. As a result, employers may need to pay a premium over past wages to retain and attract quality talent as the post-Covid economy builds steam. Additionally, post-pandemic workers are likely to have a magnified mind-set in their compensation demands.

In the wake of C-19, pent-up demand for pandemic-deprived products and services will propel more consumer spending that will drive prices in an upward trajectory … including rents. Note: This may add to inflation concerns as the economy recovers.

The latest monthly survey by Fannie Mae suggests Americans expect the median increase in rent to be 5.3 percent this year … rivaling the highest in the past decade.

In line with the above, two major SFH corporate investors increased rents on vacant property in April by 11 percent! That was a response to reported occupancy rates of 98 percent during Q1 2021.

How long will the increase-rent-scenario last? No telling, but it’s here now and landlords are profiting.

Summary

So, let’s quantify the positive synergistic effect generated by the combined presence of the 4 residential real estate investment inflection points:

1. Interest Rates
2. Inflation
3. Inventory
4. Increased Rent

The following expanded presentation of the Wealth Creation Calculator illustrated above include the following projections:

• Asset value of the property will increase generally in synch with inflation
• Landlords enjoy inflation-stimulated rental spread increases while loan servicing remains level.

Key Takeaways

Yes, I agree that bargains on single family home purchases are scarce. That said, there is significant upside cash-flow and asset growth potential given the synergy of super-low interest and likely prospects for inflation … a one-two-punch that minimizes the net effect for investors given today’s higher home sale prices.

While inventory remains low … there are SFHs for sale, albeit they are swept off the market in lightening-like speed. So, align yourself with a lender and real estate professional who will be alert and promptly present opportunities to you for your purchase consideration.

Note: Whether becoming a landlord was a choice or a result of circumstance, it doesn’t change the fact that managing any property comes with its challenges… and we want to help.

At KRS Holdings, we stand by our core principles: Successful property management is based on simple math: Add value to your assets, subtract unnecessary expenses.

Give us a call or drop an email. We’ll respond promptly to relieve

your stress and help you evaluate your property management options

plus maximize your rental property return on investment.

FREE Personalized Wealth Creation Analysis

Request your FREE Wealth Creation Analysis and Learn How You Can Increase the Value of Your Residential Rental Portfolio … or Become a First-time Landlord.

Call or email Bill Le to schedule your brief, confidential telephone session. You’ll find your 10-minute investment of time well worth it … plus receive a comprehensive print-out of the benefits to you based on the sample purchase info you share. E: ble@krsholdings, or DD: 804-376-8471