The advantage of investing in today’s market is the potential to capture appreciating assets that provide strong cash flow. These investments are the holy grail of real estate investing. In strong markets, these properties simply don’t exist, but in down markets, a smart investor can pick out these diamonds among the rough.
Consider the price declines in many areas of the US. Housing prices in the strongest metro areas like Los Angeles, New York, San Francisco, etc. have dropped in the double digits. But what have rents done over that same time period. Honestly, they have dropped as well, but not nearly as much. Rents did not experience the same run up in values as home prices because renting or owning is a zero sum game. As more renters decided to become owners, owners of rental units had to lower or at the very least not increase their rental rates. Rent growth slowed and owner-occupied values soared.
Now the pendulum is swinging the other way. Many buyers are returning back to the rental market by choice or by force. Rents are still experiencing some stress because of the increased inventory of rental units and shadow rental units (people renting their home or rooms because they cannot sell). Renters are moving back home with their families or doubling up. Despite these negative signs, rents should not be expected to decline at the pace or to the degree of the housing market.
This presents an interesting opportunity to buyers of small multifamily or single family homes as rentals. Areas that made no sense to buy for rentals now make sense again. Some areas in LA, San Diego, New York City, etc. should be re-examined. Buyers in these markets have a rare opportunity to buy cash flowing properties with the prospects of double digit appreciation. Even if that appreciation doesn’t come back for five to seven years, the buyer has the luxury to wait because of the cash flow coming off the properties.
The combination of low interest rates, level rents and a steep decline in property values has created an interesting market opportunity. Investors should reconsider hot markets that were closed off to them a year ago. Cash flow and appreciation, yet another reason to consider buying now.
Sean Purcell says:
Hey Michael,
Couldn’t agree with you more. Our investor clients in San Diego have been trying since January. Here’s the fly in the ointment: investors are capped at fundamental value and home buyers will pay utilitarian value (read more on the four values of property). There is simply WAY,WAY too little inventory in our neck of the woods. We put our clients on hold until after September 15th (end of CA’s self-imposed foreclosure moratorium), but we’ve seen no improvement since then. Bottom line: the investors in San Diego are sitting the sidelines.
October 13, 2009 — 12:10 pm
Eric says:
To the extent that the the price of a multi-family property is driven in large part by potential rental income (because it’s the more experienced investors crunching the numbers), is it fair to say that prices for multi-families haven’t gone down as far as prices for single-family residential properties?
October 19, 2009 — 8:28 pm
Cooksquared says:
Eric,
That is fair to say, but it should also be noted that financing in multi-family also drives some of the price. Assuming that Fannie Mae continues to lend, multifamily should continue to outperform residential.
October 20, 2009 — 1:37 pm