I’ve heard about an upcoming “reawakening” in the housing market lately. People blindly look at ridiculous housing prices and sky-high rents and assume a crash is imminent.
The great housing bust of 2008 is still in everyone’s mind, and today’s market does look similar—at least on the surface. But are things the same as in 2008?
What happened leading up to the Great Recession of 2008-2010? The lead-up to the Great Recession was spectacular at best. Everyone that wanted a house was able to obtain one.
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The banking and mortgage industry was making money hand over fist in two ways. First, banks created cash flow by charging origination fees for new purchases and refinances.
However, the banks would then sell those mortgages to Wall Street quickly. The Street would package them up into Collateral Debt Obligations (CDOs) and get them into the hands of institutional investors.
The banks nor Wall Street had any real incentive to conduct due diligence on these loans. The game they played involved getting people to buy homes and getting the mortgages off their books as quickly as possible.
Of course, lousy lending practices will eventually lead to a massive crash when people have to actually “pay” their mortgage. Enter the Great Recession.
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What’s happening today? Today, banks are doing a much better job issuing loans to the masses. But, many people don’t need loans because they are paying cash. Yes, cash!
The phenomenon of cash purchases occurs because investors are moving into your neighborhood. But first, let’s take a quick tour of who is in your community.
The older couple that can’t move. Since the average American doesn’t know much about investing, they consider their home an asset. Robert Kiyosaki warns us in “Rich Dad Poor Dad” that our home is a liability.
The older couple may have significant equity in their home, but they are afraid to TAP their home equity. So they are stuck in quicksand. They would need to update their home entirely if they wanted to receive a full value offer.
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Because the older couples can’t leave their home, they are causing a supply shortage. This raises prices for our next team, the new homeowners.
First-time homebuyers are screwed. There is almost no reasonable way to buy a home today without help from your parents. Unfortunately, the parents are the older couples I described above.
First-time homebuyers get a bank loan approval letter. They find the house of their dreams and make a full value offer. Someone offers $20,000 above the asking price. That person is an investor.
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Investors everywhere! Yes, investors are moving into your neighborhood—wreaking havoc on prices. But, you need to understand the different investors to prepare yourself to do battle more effectively.
Some of the various investors are random small-time people like me (I own three homes), Airbnb operators, Real Estate Investment Trusts, foreign buyers, and institutional money managers. Let’s explore each of these.
Small-time investors. Like me, small-time people are looking to own 2-6 homes to participate in the rising inflation. During inflation, hard assets like homes and gold tend to hold value and increase their worth along with (or above) inflation rates.
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Small-time people follow the money, study, and prepare to make a move when one becomes available. Small-timers will talk to folks in the neighborhood and attempt to get homes off-market. The book “Build a Rental Property Empire” explores small-timers who obtain multiple single-family properties.
Airbnb operators. Airbnb is all the rage, and for a good reason. If you can obtain a home, the chances of you making a profit is high. You just need to find a home that is reasonably close to noteworthy attractions.
Airbnb operators, especially if they have some prior history, can leverage their success with the banks. They can buy the home with an LLC and tap into business loans and lines of credit.
If they have been running Airbnbs for a while, they may have a $1 million line of credit. That means they can offer substantial down payments by tapping into their lines of credit.
Real Estate Investment Trusts (REITs). REITs are popular securities on the stock market. They offer solid growth, high dividends, and protection against inflation. Most REITs specialize in a particular sector such as apartments, commercial, self-storage, or office space.
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But there is a new sector starting to catch fire—single-family residences. Yes, REITs are coming to your neighborhood. Chances are, they are building their own neighborhoods directly next to yours.
I invest in many REITs on the stock market, but I also use Fundrise to get into real estate investment trusts. I pulled some of the projects I have a stake in, and what do you see? Yep, single-family residences everywhere.
This will be an ongoing trend moving forward. I read somewhere that institutional investors only account for 3% of the single-family market, so look to see that number reach 7-10% over the next 5-10 years (my estimates).
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REITs are going to be aggressive in buying homes and building neighborhoods. If they own the entire community, they can control rent easily. This movement is something to keep a close eye on because it will affect your children.
Foreign buyers. The United States real estate market is a great place for wealthy foreigners to invest money. They have no problem coming in with all-cash offers. No matter how erratic it may seem, the US is the most stable economy globally.
According to this article on Statista, in 2019, over $54 billion flowed from foreign investors into our real estate market. That is a drop in the bucket in a $43 trillion housing market but look for this to keep increasing. Everyone wants a piece of this insane housing growth.
Institutional investors. Finally, we look at institutional investors. They may seem similar to REITs, but they have significant differences.
Institutional investors are entities like college endowments, local government pensions, state pensions, and other entities that need to earn a return on their investments.
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To keep their money safe, they impose strict limits on how they invest their money. That’s why mutual funds are so popular among this ilk. The mutual funds ensure they meet the criteria so the funds can invest.
For example, a college endowment may have to keep 30% of their money in bonds or can’t invest more than 20% overseas. Things like this can limit how these funds maneuver their large pots of money. They can’t put all of their money into Tesla, for example.
But today, they are looking for ways to tap into the real estate market and cryptocurrencies. A fund would need to find an investor who can package homes and communities into something that meets their bylines.
Trust me; they will find a way to get into the single-family game. Why do you think it is such a big deal to bring cryptocurrencies into ETFs sanctioned by the Securities & Exchange Commission? This would perhaps allow institutions to dabble with cryptocurrencies.
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Although REITs exist on the stock market, it’s hard for big money to buy into them. When you are purchasing large amounts of stock, you end up raising the price for yourself. They are looking for solutions to get into real estate to keep their money stash growing ahead of inflation.
Conclusion. That’s a lot of information, and I need to wrap up this article. Don’t worry; I’ll come back with part two, so we can discuss how to overcome these new obstacles.
If it sounds like all doom & gloom, that’s because it will be tough for the standard person to buy a home. It is getting more complex every day. However, if you can read, research, and react, you’ll still have a fighting chance.
Right now, understand that your neighborhood is changing. If you can’t beat them, join them. Build your own team (family) of real estate investors that together can offer cash. You have options—whether you are willing to use them is the question.
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