Housing is recovering from its worst decline since the Great Depression, and institutional investors are leading the way back into the arena—investing in U.S. housing in a fashion and to a degree never before seen. Perhaps you are considering a reallocation away from stocks to housing. Is now the time to shift? Let’s review the facts.
A New Trend
Single-family home prices in Atlanta were up 10% in December from a year earlier. Other major cities have experienced similar price increases. Nevertheless, national home prices are still 29% below their 2006 peak, according to Yahoo! Finance. One major factor underlying recent robust price increases has been the Fed’s efforts to drive interest rates as close to zero as possible. As a consequence, traditional bond portfolios no longer provide adequate yields to meet the minimal income needs of virtually any investors (institutional or retail).
The desperate search for income by the more forward-thinking investors has led to a powerful new trend, according to The Wall Street Journal—that of large institutions seeking income by purchasing single-family dwellings and subsequently renting them (generating a higher income stream).
For example, the U.S. Masters Residential Property Fund, a real-estate investment trust that has raised $276 million, is betting on the U.S. housing recovery by buying houses at discount prices. The business of buying and renting houses has morphed over the past two years into one of the hottest investments on Wall Street.
“Dozens of pension investors and private-equity firms, such as Blackstone Group LP and Colony Capital LLC, are clamoring to buy homes in beaten-up markets,” writes Robbie Whelan in the Journal, in a story called “Foreign Buyers Hop on Rental Trend.” “In January, investment bank Keefe, Bruyette & Woods estimated that institutional investors had raised between $6 billion and $9 billion to buy U.S. houses and convert them into rentals.
“In December … Silver Bay Realty Trust Corp. became the first U.S.-based single-family rental company to go public as a REIT,” he continues.
These behaviors have the potential to feed on themselves, delivering an extended rally in housing prices. The current housing inventory-to-sales ratio (the supply/demand ratio for housing) is the tightest it has been since the beginning of 2005, according to Ned Davis Research in Atlanta. This ratio could serve as a strong driver for future house price appreciation.
Interesting points on the history of housing prices.
From an investment standpoint, the author omits some of the greatest benefits of investing in rental housing-tax benefits, cash flow, equity capture and leverage.
From a tax standpoint, the cash flow is almost tax free due to the benefits of the interest expense and depreciation. Moreover, unlike stocks, you can sell your rental and avoid capital gains via a 1031 exchange.
Unlike mutual funds, you aren't forced to pay taxes in the form of capital gain distributions even though you continue to hold your investment over the long term.
From a cash flow standpoint, real estate investors can realize rental yields from 8 to 12 percent after operating expenses just from the rental component alone.
Right now, buyers are purchasing properties way below replacement cost and with capital improvements can force the value of the property up to market price. This is called equity capture.
Lastly, all of these properties are being purchased via loans at less than 50% loan to values. Due to the power of leverage, the returns will be amplified further.
As a decade++ owner of a multi-family income property business and a fee based investment advisory practice, I find managing a portfolio of cash flowing rentals hardly "back-breaking."
In fact, if you treat rental properties like a business, it's actually easier than running a financial practice.
Bottom line, everyone needs a place to live, but not everyone needs or can afford financial advisor.
Cory P Binsfield, AAMS, CRPC
Structured Wealth Advisors
www.retirementpilot.com