November 2022

Nick Jones, equity research analyst at JMP securities, joins ‘Power Lunch’ to discuss Opendoor’s warning, the cash needed to navigate near term headwinds and forces needed to normalize the housing market.

Dave:
Hello everyone. Welcome to On the Market. My name’s Dave Meyer, joined today by Kathy Fettke. Kathy, how are you?

Kathy:
I’m doing great. Happy to be here.

Dave:
Good. Well, we’re going to do a new show format today where Kathy and I are just going to talk about a very important topic which is rent growth. I don’t know if any of you listened to this have heard or seen some of the headlines recently that rent growth is starting to stall out, and in certain segments, rent growth is actually starting to come down, or rents are coming to get them down, and there’s a lot of noise out there. So, we’re going to try and make sense of what’s actually going on in the rental market. How’s that sound, Kathy?

Kathy:
Sounds like a very good and important topic.

Dave:
All right. Well, let’s just start and recap what has been going on with rent over the last couple of years. How would you describe in some historical context what we’ve seen in terms of rent growth since the beginning of the pandemic?

Kathy:
Completely manic is the best way I can describe it. A frenzy, a lot of it based on fear that people won’t get anything if they don’t get it now. I’ve seen enough cycles now to know that people think the cycle they’re in will continue forever and don’t see an end to it, or that cycles change pretty regularly, especially when they are caused by something rare like a pandemic. This is going to obviously throw a wrench into typical cycles, and people started to think that maybe it was normal, that low rates were normal for home buying, and that the frenzy and the lack of supply would last forever. So, people act out of fear a lot of times.
So, there was a mixture of people acting out of fear that they would never have a place to live, and also people thinking that the good time, let the good times role forever, that there would be government stimulus forever, low rates forever, and that they could just live remotely and wherever they want and be in control of their employment, tell their boss, “Hey, if you want me, I’m going to work wherever I want.” I mean, it’s just been a very manic couple of years. That’s the best way to I can describe it.

Dave:
How do you think that translates to rents going up in the way that we’ve seen them going up? Because the housing market, that’s one side of it. We’re seeing a lot of people behave in emotional ways, but there’s also this element where seemingly from a renter’s perspective, there’s no winning. Right? You have to either go to a super expensive home or you’re facing super expensive rent. So, have you ever seen anything, or how do you explain why rent has gone up so much?

Kathy:
I have never seen rents go up the way they have over the last couple of years, but I haven’t seen anything like the last couple of years before in my lifetime. With the last couple of years, I would say the kind of mania and the kind of loss of reality that people are experiencing was that they could live anywhere. So, when you have people coming from a high priced market moving into say a vacation area, I mean, maybe not a typical vacation area, but something that they thought, “Maybe I want to retire there someday, but I can do it now. I could do it now. I can move to this area, and it’s cheap.” Right? So, when you have enough people from high priced markets going into more affordable markets, they can pay anything, and rents can go up, especially if that area hasn’t expected that kind of wave, that movement of people. I mean, there were certainly markets that didn’t experience double-digit rent growth, but the sexy markets really did.

Dave:
Oh yeah.

Kathy:
And that’s because a lot of people were migrating to those areas, and it looked cheap to them, and they’d gladly paid 20% over what the market rate was because it’s still cheap. Right? It’s still cheap to them.

Dave:
Totally.

Kathy:
Yeah.

Dave:
Yeah, it’s a great point. People just got in this frenzy where it’s like the desperation to get a place to live which is terrible, I mean, that’s just not a great place to be, but people were overbidding on rent. Just for some numbers here, on average, the rent in the US went up somewhere between 25 and 35% over the last couple of years which is much faster. I don’t know about you, but in Denver where I have some rental properties, it took 10 years to get about 50% rent growth and Denver was one of the fastest growing rent markets in the country. Now we’re seeing that nationwide, we got 30% rent growth in two years. It’s just something that doesn’t seem sustainable, and I’m just, I have some theories about what drove that other than the mania. But I’m curious, do you think there’s any macroeconomic demographic, any other issues that sort of drove this behavior?

Kathy:
Oh, absolutely. I mean, absolutely. After the last great recession when builders were wiped, literally just wiped out from that, they were a no hurry to go build more supply at a time when the demographics were really shifting, and this very large group of millennials, I know we’ve talked about this so many times, who are now 29 to 34 and forming households, that’s the largest segment of the millennials were just coming to household formation age starting in 2020 right when kind of everything shut down. They were given a whole bunch of stimulus checks and didn’t have to go to work. You know what I mean? So, it was a blast. I mean, not for everybody, but for a lot of people, they got to go live in Colorado and ski, or they got to go to Florida and live by the beach and things that they normally wouldn’t get to do. Right?

Dave:
Sounds pretty nice.

Kathy:
I know, right?

Dave:
Yeah, I think it’s a good point. I feel like household formation is one of the most underutilized metrics in economics or at least specifically housing economics, and we’ve talked a lot about that to your point about how millennials, not only are they a big demographic, that matters, but how many of them are going out and trying to start their own home or their own family is equally if not more important because I know for example, for me, I’m a millennial, and for the first many years I was out of college, I live with a roommate or several roommates. And then at a certain point when you reach the level of financial stability or capability or need because you start a family or something, you form a new household, and we’ve talked a lot about that in terms of how that’s driving home prices.
But that’s a great point that it’s also probably driving rent because not only are people more households, they were flush with cash, and so they’re like, “I’m going to form a household, and I’m going to do it with style, and I’m going to go and pay for something,” that maybe they previously couldn’t afford.

Kathy:
Yeah, most people aren’t really thinking long term. And so, if they’re suddenly given a big stimulus check and have some freedom, they’re going to go live their lives and try new things and that’s great. I think there was a record number of new businesses that were created over the last two years. There’s a lot of good that came out of it and a lot of bad, and personally, the bad is something that none of us can really fight against because we have zero control over it. And that is the manipulation of the markets that we’ve talked about with the Federal Reserve who is now, I think it’s pretty common now, I think a lot of people didn’t even know what the Federal Reserve was until now. I’ve been studying for years kind of the control that they have over the economy and over us, and I’ve based a lot of my investing decisions on what they might or might not do.
So, basically, when they’re going to stimulate the economy, you can pretty much count on the economy being stimulated and growing. When they decide to pull that back, you can pretty much count on things reversing and that’s all it is. That’s all it is. When you boil it down, you go up to a bird’s eye view and look down, all it really comes down to is the manipulation of the market from the Federal Reserve. And when we could follow that and follow whether they’re pouring money into the economy or pulling it back out, you can either make a lot of money or you can prepare and get out before they pull the money back out.
It’s really like a gamble, and I hate to say that, but in February when we’re all scratching our heads going, or at least I was, like, “Why are they still stimulating the economy? Why are they still buying mortgage backed securities to keep mortgages low at a time when the housing market did not need stimulation?” There was already lots of reports on the massive price growth and rent growth. Why would they keep stimulating? Why would they keep printing money? You only do that in a downturn. And we were up and we were up high. The economy was booming.
So, in March when they made it real clear, oh, well, we got to stop this train that we put the gas on, we got to slow this train, and they made it real clear early on this year that there would be seven rate hikes to slow it down. That means they’re going to take that money off the table. I’ve said this before and people don’t like to hear it, but the way that that happens is usually through stock market crashes which is what we’ve seen. That’s if that you pull it, there’s a lot of money that’s been pulled out there, a lot less money that people can spend.
I’ll tell you what, we didn’t bring this up yet, but with young people being kind of super savvy now, and I don’t know about savvy is the right word, but able to invest in the stock market just on their phone and play it like it’s a casino, and you’re watching your money grow, and you take some of that out, and you spend it, and you live big. Right?

Dave:
Mm-hmm.

Kathy:
I had a friend that I surf with who was like, “I want to invest in real estate, but I only have 40 grand,” and I was like, “Well, you can do that.” But then I was kind of telling them the returns you can usually get from a $40,000 cash investment, and he’s like, “Nah.” He put it into Tesla stocks. I saw him a year later and he’s like, “I made 400,000.”

Dave:
Oh my god. Yeah, but now, yeah, now where is he?

Kathy:
He’s still-

Dave:
He’s probably still up a lot. I mean, it’s still up way before where it was.

Kathy:
Yeah.

Dave:
I sold Tesla stock in 2020, not all of it, but way too much of it. That is a very big regret of mine.

Kathy:
Yeah, I mean, that’s the kind of mania we were experiencing over the last two years, and it was exciting, and there was money to go do these things and to get these air Airbnbs up and running. That’s part of the reason why rent growth went up is when you have that much money circulating, and it was 7 trillion extra dollars. Right? The amount of money circulating in the last two years, the extra money, was 50% of what had been there, and it was the amount of money that was circulating completely, entirely in 2007. So, $7 trillion added and people were having a good time who could get their hands on that money, and like I said, just invest in something and have it go up 10 x. I mean, that’s amazing. Why would you not gamble it?

Dave:
Yeah, I think it’s interesting because we associate Fed action with housing prices but not necessarily always with rent, but if you look at the pace of rent growth over the last couple of years, it follows the stimulus pretty carefully. At first, even though rents went down, rent actually dropped for the first few years of COVID, but then it just kept going up linearly like a true hockey stick. If you’re watching this on YouTube, it just went straight up the charts. But then when they started to pull off the gas, you see that rent growth started to peak around February/March when people started to realize that the party was coming to an end and we were no longer going to be in this crazy accelerated economy where money was flowing around, and people could pay for everything because their crypto or their stocks or their stimulus checks or enabling them to pay more for rent, and I think that’s what we’re starting to see.
So, as of now, we are starting to see rents, the pace of growth for rent really start to come down. Back in February, it was up 17% year over year which is just insane, but now we’re still up 11% year over year which is still really, really high. But what’s sort of the impetus for this show and why we wanted to talk about this now is because some data has come out that rent is starting to go down. I got a lot of questions about this, like oh, is rent crashing, and let me just first explain that rent going down in September is normal. That is what’s supposed to happen. Just like in the housing market, this type of pricing is seasonal. It always peaks over the summer. That’s when most people are moving. That’s when there’s the most demand for apartments. And then starting in September, October, things trail off. If you’ve ever tried to lease an apartment over the winter, it’s pretty tough. There’s not a lot of tenants looking to move at that point. So, you know you might have to drop your prices.
So, seeing rent come down in September of 2022 is actually, in my mind, it’s kind of a good thing. This is a sign that we are actually returning to normal seasonality and it’s still up 11% year over year. So, Kathy, what do you make of it? Does this worry you or are you sort of on my side of things here thinking that this is actually maybe a great thing?

Kathy:
It’s a great thing. It’s a great thing. Homelessness has increased, and people have been complaining about rents going up 20% in certain areas, 30% in some areas. Absolutely unsustainable, not healthy. Again, a lot of that, like let’s take Phoenix or Austin, a lot of that was California money that, hey, you could double the rent. It could have gone up a hundred percent, it’s super cheap for people coming from California. So, I will blame a lot of it on Californians taking their money and going to a cheaper market.

Dave:
It’s always you guys. It’s always the Californians is just screwing things up for everyone else.

Kathy:
New Jersey and New York helped a little too, but it’s, again, these areas where someone your age is like, “I could live in San Francisco where they have apps showing the poop on the street.” Right? Has it become kind of a dirty city? Or you could move to Phoenix or Austin, I mean, where a lot of millennials are moving. These are the places they’re moving, they’re cool, they’re fun, there’s things to do, there’s young people. You’re not going to probably move to, I don’t know, I’m trying to think of a place, Jackson, I always pick on Jackson, Mississippi, but that’s not on the map. Right? That’s not the city that you’re hearing about. Not a lot of young people are moving there.

Dave:
Never makes one of the lists. It’s never on the top migration lists, yeah.

Kathy:
Never going to make the list.

Dave:
Never been to Mississippi.

Kathy:
People invest there because it’s stable. It’s stable. Right? Doesn’t really change at all no matter what’s going on.

Dave:
Yeah, I don’t know. But yeah, so I think I’m with you. I mean, obviously it makes sense that things are starting to cool down now. Do you worry though that rents are going to start going down in some nonseasonal way where we actually are going to see cash flow for existing properties start to decline?

Kathy:
I’m not worried. I welcome it. I have to look at this data as a human versus an investor because what matters most is the health of our country and of the families that live in this country, and rent needs to stabilize. It can’t keep going up like that, just like home prices can’t either, and it was definitely stimulus based. So, we’re just coming back to where we should be.
Now, at the same time, wages have gone up, wages have gone up in I wouldn’t say an equal rate, but based on the data that we’re seeing, the wages went up enough that some of these higher rents are still affordable, even in the C Class. I kind of was shocked to see that in the data. C Class apartments tend to get hit hard during recessions because that tends to be a group of people that are more transient. Yeah, well, look at what happened during COVID. It was those jobs that got hit the hardest, for sure, anything in hospitality. Of course, they were helped out through the stimulus. But now that those jobs are coming back and wages are up for a lot of people, surprisingly, they’re able to afford rents in a lot of markets because of the higher wages.
But seeing the rent growth slow down is a wonderful thing. It’s a good thing, and we should be rejoicing over that for our country. We should be rejoicing that home price growth has slowed down because a year ago we had a different conversation about that. We didn’t know when it would slow down, and people were scared they wouldn’t have a place to live. There was nothing on the market in some areas. When my daughter bought, she’s a typical millennial, aged 30 with a baby and a husband and two dogs, and there were two properties available in the area that she wanted to live. Two, two, and maybe two for sale and two for rent in the price range she could afford. So, that’s a scary time. Right? It’s like are you going to live with Mom and Dad with your two dogs and your kids? I mean, what are people going to do?
So, that was the story last year. The Fed came in, turned on the lights, took the stimulus away, and here we are going, “Oh, okay, things are going back to normal.” The headline is different. It’s a better headline. It just depends on how you want to interpret that. As an investor, you better be playing defensively. You better not be writing up your pro formas thinking that it’s going to be anything like the last two years. It’s not. Same with home prices. There are going to be areas where there’s still just not enough supply for demand and where it’s still affordable enough because people moving there or living there still have high salaries. Like North Texas, that’s one of the areas we’re looking at, $100,000 jobs moving there. We’re still buying homes for 200,000. So, the numbers work. The numbers work. But as an investors when you see these headlines, you need to be careful, you need to be cautious, you need to make sure that your pro formas makes sense and that the average person in the area can afford your rent.

Dave:
Yeah, that’s a great point. I think that when investors who are looking for existing properties see this, they think that their rents can decline, and that might happen, to be honest. I think there’s a chance that that happens. But just to ease people’s mind, if this is one of you, it is unlikely that rents will fall that far. Unlike housing prices, rent prices are pretty sticky. If you looked at what happened in the Great Recession, housing from peak to trough, so the highest it was during the mid-2000s to the lowest it went where it bottomed out in about 2011, housing prices dropped 27%. Very significant. That is a genuine crash. Rent prices during that time, the worst they went down was 6%. So, we’re talking about a whole different scale here.
I think most people don’t believe that even the price correction for homes will be 27%, but even if it were that bad, rent might only go down a couple percentage points. It’s probably very unlikely that we see double-digit rent drops because like we were saying, people formed new households, and although there was actually an article in the Wall Street Journal yesterday talking about how some people are moving back in with their parents or moving back in with a roommate, they didn’t really provide any data about that, so it’s hard to know, but just knowing from personal experience, I think people are very reluctant to go back and live with their parents. That’s sort of like a thing of last resort right now, and right now people are still employed. We haven’t seen an uptick in job losses. So, I think inflation is hurting people’s spending power, but I think it’s unlikely that we’re going to see just a very significant drop-off in demand for rentals at any time soon.

Kathy:
Yeah, at the end of the day, it always comes down to supply and demand, even when the government is stimulating the economy, and even if mortgages were still at 2%, but we had a glut of inventory. Let’s just say that we had the amount of inventory we had in 2007 which is three times, nearly three times what we have today, it was over 3 million, and mortgages were still at 2%. There might not be the kind of price gains that we’ve seen there. There still would be, right, because people decide, “Well, if mortgages are 2%, I’ll take three, I’ll take four houses, I’ll have one in each city.” So, people get greedy and want more than one.
So, it comes down that we still have a supply issue. We still had a decade of slow building because like I said earlier, builders got wiped out. That is how I got started syndicating. Back in 2009, I had a 40-year veteran developer come to me and say, “Do you know how to raise money?” I’m like, “No, I’ve never done it.” He’s like, “Well, figure it out,” because he would walk into B of A, he would literally walk into the commercial division of B of A, I don’t know if I can, I guess it’s public news now, that he would walk down the aisles and it was boxes to the ceiling of foreclosed subdivisions and foreclosed land, and it was an unbelievable time. So, we were able to buy up all the stuff that builders had lost during that downturn, and it made sense for us because we were paying 10 cents on the dollar.
But you could see why those builders weren’t in a hurry to come back. So, building was so slow over the last decade while our population grew, and this group of millennials that have been given such a hard rap over the last 10 years, basically saying, “Oh they’re just sitting home on Mom’s couch smoking pot.”

Dave:
They’re [inaudible 00:24:21].

Kathy:
Yeah, maybe. But now they’re older. I think anyone who was judging them should ask what they were doing when they were in their early twenties. Now this millennial group is older, and it’s a huge demographic, and there just simply wasn’t supply created for them. Add to it, the baby boomers living longer, feeling healthier.

Dave:
Totally. It’s a really, yeah.

Kathy:
There was all this media headline about boomers dying and of course there’s a segment that are, and that they were going to leave their homes, there’s going to be this glut of inventory from all these old people that die, and that just hasn’t happened. They’re living longer.

Dave:
There’s a very famous real estate person I won’t call out but who has been predicting a crash for years based on this theory that boomers were going to all die off and leave just a huge glut of supply, and clearly that’s not happening.

Kathy:
Just hasn’t happened. So, with those kinds of headlines and that kind of lousy data that was being shared and that I guess builders were listening to, they’re not going to take risks again. They were going to build spec. And so, it’s just we’re behind on supply. I see comments a lot of times on the On the Market podcast of people saying, “What do you mean? Now there is more supply. Thank goodness there’s more supply.” But kind of not really. It just moved down again. Right? At least in home sales, the inventory just went down again. So, it’s not better. There’s a little bit more inventory in rentals, and I don’t know what you saw in that data, but actually absorptions and occupancy is… Wait, let’s see. Vacancy is rising in apartments so it’s something to pay attention to, but home sales and homes on the market, that’s declining again. It’s just, it’s incredible. So, this is still an issue. Inventory is still an issue, not in every market and maybe not in your market, but overall, nationwide, it’s a problem.

Dave:
Oh absolutely. Yeah, just to speak, I do want to get back to the multifamily thing in a minute, but just if you didn’t see the show a couple months ago with Caitlin Walter who’s from the National Multifamily Housing Council, their organization showed that by 2035 we need 4.3 million new apartment units just to keep up with demand. So, yes, I think there might be some short-term things which I do want to talk about in terms of more supply coming on at a time where we might be entering recession, that could create some short-term stuff. But long term, demand for rent is going to be huge. I mean, to your point, we just don’t have enough supply.
The other thing you mentioned quickly that I want to talk about first that bodes well for rents being sticky is that lack of vacancy. Right? We’ve seen in the US that we are now at the point, vacancy’s the lowest it’s been since 1982. So, we’re talking about 40 years since we’ve had vacancy as low as it is now. That’s not just multifamily. That’s across the whole economy. And so, when you’d have rent that, I mean, vacancy that low, it’s kind of hard for rents to fall that much, and yeah, we could see vacancy start to tick up, but at this point there’s not really a sign that we’re going to start seeing this just lack of demand for rentals.

Kathy:
Yeah, my hope is that it just stabilizes and balances out what it did over the last two years so that the next couple of years it’s just flat, and that’s just kind of what we’ve been seeing in the last month that it’s flattening. I don’t think there’s any chance that rents will just collapse or that we’ll have a ton of evictions. That is again, unlikely, although it is very sad that homelessness has increased, and I will 100% blame that on the Fed, I will, for all the stimulus because that really separate the haves and the have-nots. Those who do not own hard assets, like real estate are just, it’s going to be hard to keep up. It’s going to be hard to keep up with inflation. Inflation, they will never tame it. It’s never been tamed. Just look at prices of anything.

Dave:
Yeah, They target 2 to 3%. They want some inflation.

Kathy:
They want inflation.

Dave:
Yeah.

Kathy:
Yeah.

Dave:
So, I totally agree, yeah. A low interest rate environment like this, it inflates asset prices. It’s just a fact. And so, to your point, we’ve been in, what, a 12-year low interest rate environment, 15-year low interest rate environment. That’s going to really create a lot of wealth inequality for the people who do own assets like real estate and the people who don’t.

Kathy:
Yeah, and I imagine those people will start to move to more affordable areas which is again why one of our strategies right now is to focus on those markets, just steady Eddie markets, the markets that don’t do too much. That’s kind of my safe place during times like this.

Dave:
Jackson, Mississippi.

Kathy:
Well, maybe not Jackson. I still want to see growth. I want to know something cool is happening in that area. There’s got to be a big university or big hospital. Like again, Cleveland is a market that we talk about sometimes, huge medical industry. That’s important. We know we do have aging baby boomers. They won’t die, but they’re going to stay alive forever and want hospitals.

Dave:
Exactly. Well, no, I totally agree. We don’t just want to go anywhere. But I think part of the challenge here is that the demographic shifts are creating, everyone wanting to move to Austin, to Portland, to Boise, rents going up crazy there, and a lot of these markets, it’s been above the normal level, but it’s not been double-digits every year for the last two years. I don’t know what Cleveland was off the top of my head, but it wasn’t 30% a year. I can tell you that much.

Kathy:
Exactly. It did go up, definitely, and it was already cheap. Right? So, going up 10% in a market like that is still pretty darn affordable.

Dave:
Yeah, that’s probably not so different from wage growth over the last few years.

Kathy:
True.

Dave:
So, before we move on to the multifamily stuff because I want to pepper you with some questions there because I’m curious, but just so people know, I did do some analysis and we have a data drop for you guys. So, if you’re curious about what rent is doing in your market, we have a data drop that shows for the top hundred markets, largest markets in the US. It’s going to show you how rent has performed over the last five years. We’re going to talk about… It shows you month over month and year over year changes. You can get that by going biggerpockets.com/rentaldata. Again, that’s top hundred markets, all this amazing data for you. Definitely go check it out. It’s free, there’s no reason not to do it, biggerpockets.com/rentaldata.
But I wanted to see if there are any markets that are actually declining, not just month over month because remember, seasonality, not surprised things are going down month over month, but year over year, and there were actually four markets that were. I think I made you guys guess on a recent one, but the number one was Spokane, Washington, went down 6% which I don’t know much about Spokane, but I know it was one of those crazy boom markets over the last couple of years. Reno, Nevada is the second one which I have a friend who bought there at the peak and is very much regretting it right now. And then we have St. Paul and Minneapolis which are kind of interesting because they implemented a couple of rent and price control things and we’re seeing rent start to fall down. So, it’s just those four cities. So, four out of a hundred. Personally, I wouldn’t be too concerned about big drops.

Kathy:
Yeah. I went to school in Spokane.

Dave:
You did?

Kathy:
Whitworth College. Yeah, I know the area.

Dave:
What school?

Kathy:
Whitworth College for two years, yeah.

Dave:
Oh, cool.

Kathy:
It was a small Christian college because I’d partied enough in high school that I just wanted to go to a college that didn’t have it.

Dave:
Wow. Wow. I want to know high school Kathy.

Kathy:
But I know Spokane. It’s just not high income growth area, but I think that nearby in Coeur d’Alene and-

Dave:
Which has gone nuts too.

Kathy:
… went crazy, so Spokane is really just not that far from there, and there were definitely some new businesses moving into Spokane, but I think it was more of a investor frenzy would just be my guess there.

Dave:
Totally. And one of the things I think people get wrong sometimes is when we see, oh, people are leaving big cities like Seattle, the vast majority of them stay within the state, we assume, and you do see people moving to Austin or to Las Vegas or whatever, but most migration is intrastate migration. And so, I’m just guessing, but I would think people are tired of Seattle prices, making a great income. I’ve heard that area of Washington’s really beautiful. So, maybe people are just moving there with their Amazon salaries and moving to Spokane like you’re talking about.

Kathy:
Yeah, yeah. I mean, it’s a quick drive over to Coeur d’Alene. You can still enjoy that, not have to pay those prices. But I think it’s really the millennial cities that pops the most because again, it’s such a big demographic and so high paid. So many of those young people have really high salaries and could go live quite a nice life in some cool, hip areas.

Dave:
Totally. So, those were the only, the four markets that went down, but 96 are still going up at least on a year over year basis. And if you’re curious, do you have a guess about… I wrote out the top three, one of them is kind of obvious, two of them are sort of obscure. Do you have any guesses? Still growing very quickly.

Kathy:
I’m looking at my notes and I’m not sure. Miami?

Dave:
Ah, that’s number three. Very good.

Kathy:
All right.

Dave:
27% still, 27% year over year, Miami. That’s crazy. But that was actually three. So, Lubbock, Texas. You know a lot about Texas. Where’s Lubbock?

Kathy:
I actually have a good friend who owns a ton of rentals in Lubbock. I’ll have to ask him. It’s kind of I think oil related which is not surprising.

Dave:
Oh, okay. West Texas, I don’t know. I’m not good at geography, but your friend is probably enjoying 31% year for year rent growth which is absolutely wild.

Kathy:
Oh yeah. Yeah, I should have listened to him.

Dave:
The second is Jersey City, New Jersey which I’m familiar with, not so far from where I grew up. But I think that’s one of the big stories too is you see cities like Jersey City, which is right across from Manhattan, going up a lot because it was one of the places where rent actually fell in the beginning of the pandemic. So, it’s recovering and then some, but it sort of distorts the data a little bit. But you do see at least the New York metropolitan area rent has recovered and then some at this point,

Kathy:
Yeah, I think in these areas where we did see so much rent growth, what’s important to focus on is which businesses moved there versus which people moved there because that’s what’s going to keep it sticky. And that’s the thing about Miami, that’s why I guessed Miami is I know that many New York financial firms moved to Miami. I’m surprised it took up so long because it’s like-

Dave:
Yeah, Wall Street South.

Kathy:
Exactly. Why would you not choose beaches over snow? I don’t know.

Dave:
And no state income tax.

Kathy:
And no state income tax. So, that to me is an area that I don’t see it dropping substantially because of that. You’ve got New York financial giants moving there and they still think it’s dirt cheap.

Dave:
Totally. I moved out of New York because I always thought it was a little bit of a scam. I love New York, I love visiting there, but people put up with a lot there because they’re like, “Everything’s happening here,” and you have this small apartment that’s super expensive because there is a lot of culture, there’s nightlife, there’s great food, there’s a lot. But I think some people moved during the pandemic, they’re like, “There’s also stuff elsewhere.”

Kathy:
There’s some good food here too.

Dave:
There’s a lot going on in Miami too, and you get a lot more for your money.

Kathy:
Oh, that’s so funny. I’ve been doing this for 20 years. I would bring kind of California snobs, no offense y’all, but you know what I’m talking about, and I would take them to Birmingham or something, and take them to an amazing restaurant where they couldn’t read, they didn’t know what was on the menu, they didn’t know what it was. I was like, “If I blindfolded you, would you think you were in California based on what we’re seeing and the buildings?” And they were like, “We wouldn’t know the difference.”

Dave:
Yeah, exactly. There’s great stuff everywhere.

Kathy:
But they just don’t know. They just don’t know because they hadn’t been. Yeah, and I think people got a chance to go travel a little bit.

Dave:
Yeah, it’s great. So, the last thing I want to talk about before we go is about multifamily rent. So, you have experience with this, but the data I’ve seen is a little bit contradictory. Right? So, we’re looking at some of the similar data. So, one thing that we’ve seen is that occupancy levels in multifamily have gone down. There’s still really high. They’re still like 95%. Just for context, they usually hover between 93, 95 and we’re still at 95%, but they had shot up to like 98% for a couple months now. So, that suggests that there could be an increase in vacancy. When vacancy goes up, rents tend to go down. But at the same time, we’re also seeing that the number of lease renewals, people who are choosing to stay in place has also gone up for multifamilies. So, these are sort of contradictory data points. So, we’d love to just get your read on the multifamily rent market.

Kathy:
You know, I just spoke at several conferences and got to hear and interview a lot of investors. In fact, I’m going to give those interviews to you guys and see if we put together a YouTube video on that-

Dave:
Oh, that’s great.

Kathy:
Yeah, just to hear what people are thinking and what they’re doing in the multifamily space. So, one of the big things I took away from the conference was that we’ve got to compare today’s number to pre-COVID. Every city’s different. Right? Every city has different dynamics, different employers moving into the area, different employers leaving the area, and different dynamics because people are moving in, and they have different political views, and so forth. So, there’s been lots of change.
But to try to guess what’s going to happen when you’re underwriting a deal, especially in multifamily where the difference if you get it wrong could be millions and millions of dollars. We know that. Jamil shared that with us. You do not want to make a mistake in your underwriting with multifamily. So, use numbers in that market. 2018, 2019, you’ll get a better idea of what a typical vacancy rate would be in that area, and even better, take the decade, take the average of the decade starting with 2012 up to 2020, and that will give you a good idea of where we might land in that market.
Now, if something really major changed, and that would be really in Florida and Texas, because the big thing, the major things that have changed in those states is so many businesses moving to those states for, what you just said, the tax benefits, but also they learned a lot during COVID. They learned that there are certain markets that are more job friendly than others. This is something I’ve been focused on for years, I’m sure you have too, because it matters if you’re a landlord. You want to be in a landlord friendly area. So, it’s easier that laws are in your favor, and that’s when a lot of businesses realized, “I want to be in a state where the laws are in my favor and where I can keep my doors open.”
Those two areas, I think you’ve got to taken into consideration the amount of new jobs that have come to the area that are permanent, that are not leaving, factories that have been built and so forth and headquarters where it’s probably not changing anytime soon. But other than that, I would look at the last 10 years and pre-COVVID and just take the average, the vacancy rate, occupancy absorption.

Dave:
Yeah. I mean, I think it’s a great point we don’t talk about that much, but if you miss rent estimation by let’s say 50 bucks on a single family home, you’re going to be fine. It’s not that big deal. Right? I was thinking about this the other day, if you miss rent by 50 bucks on a 300-unit syndication, that’s 600 bucks per year per unit, that’s $180,000 per year in revenue which is a lot, but not crazy. But when you consider that the way that multifamily units are valued is by cap rate, if you then sold that or if you’re selling at a 5% cap rate, that’s $3.6 million in value that you’re wrong by just estimating $50 off on your rent.
So, I think that’s very wise, very wise advice, Kathy, that to be extra conservative right now because there is sort of contradictory data, we don’t know exactly which direction it’s going to move nationally. If you study your market, hopefully you have a better idea of what’s happening locally in your market, but I think it’s true just of generally anything right now. I would personally underwrite anything single family with little to no rent growth for the next year or so.

Kathy:
Absolutely. And I would assume that cap rates are going to increase which generally means that the price is going down.

Dave:
Yeah, definitely. Yes.

Kathy:
Which is great if you’re buying. Right? If you’re buying, that’s great.

Dave:
Right. I mean, I think James said in a recent episode when we were all chatting, he thinks there’s going to be a lot of these opportunities coming on the market too because people are going to be defaulting. So, it does mean there could be opportunity there.

Kathy:
Or just even if they’re not defaulting, just the values are down. If your expenses go up, and again, it’s coming back to the nuances of multifamily and anything commercial, it all comes down to NOI, and so, what is your net operating income, what are your expenses, and that determines basically the value of the property. And so, if the goal is always decrease expenses, increase income, even by little tiny amounts like you said, and that can increase the value by millions. But the reverse is true too. It just goes down ever so slightly if your expenses go up, your rents, your insurance, cost of money.

Dave:
Yeah, cost of debt.

Kathy:
Exactly. That is going to affect the NOI. It’s going to affect the price. So, again, it could be a wonderful opportunity as a buyer and really tough if you’re a seller.

Dave:
Yeah, absolutely. Well, I think that’s really, really good advice. Just generally speaking, just to sum up sort what we’ve talked about today, rents are starting to come down on a month over month basis. That is normal. This is seasonality. This is what we would expect in a normal year. In 2021, that didn’t happen and that’s what’s not normal. That’s the concerning thing in my mind is that it didn’t follow the pattern that exists every other year. But on a year over year basis, rents are still up 11% year over year nationally, and out of the top hundred individual markets, only four of them have seen individual declines. Vacancy is still really low.
But I think anyone who’s following the market understands that there is downside risk right now, and that you should be careful. If you are underwriting any sorts of new deals, you should be very conservative in what rent estimations you’re making, and I think for a couple years honestly, people were buying a deal being like, “Oh, it’s not going to cash flow this year, but next year it’s going to cash flow.” And that probably actually was true for one or two years, but I would not do that anymore. That is not wise. I would personally recommend being conservative because you probably can be because home prices are probably going to come down in many markets and rents are a little bit stickier. So, cash flow prospects are going to be better, and I would recommend just being patient for that. Any other advice you have, Kathy, before we get out of here?

Kathy:
Yeah, I mean, this is really going to be a good opportunity to get into multifamily. I would just be very cautious if you’re investing in somebody else’s syndication or if you are embarking on it yourself that you have somebody on your team that’s been through a down market because most of the people that I meet at these conferences have only been doing it for a few years.

Dave:
Like me

Kathy:
Yeah, maybe the last eight years and haven’t experienced a real recession. We may or may not have a tough recession ahead of us. We don’t know. It could be awful. It could be barely a blip. We just don’t know. It depends a lot on what the Fed is going to do and we have zero control over that, like zero. It’s going to do what they’re going to do. So, just have someone on your team who’s been through a down market and who knows how to navigate that and knows how to underwrite with that stress test in mind.

Dave:
That’s great advice. And again, we don’t know what’s going to happen and no two recessions are alike, but history is your friend too. If you go and look at what happened in previous recessions, in previous job losses, the last time the Fed raised rates like this, you can learn a lot about what might happen and how you can protect yourself and be conservative but still be opportunistic. I think that’s sort of the name of the game. Right? It’s like don’t get ahead of your skis. You want to be careful right now, but there will be opportunities if you’re informed and know how to buy correctly in this market.

Kathy:
It would be really cool, here’s just a little idea for BiggerPockets, but it would be really cool to have some kind of mentorship program where you take these people who have been investing in multifamily for 30, 40 years and are maybe all set. They don’t need to do anything else. They’re raking in the dough from their acquisitions from years ago. But to come and just give some mentorship and advice to people getting into it, it would really help to bring in that wise counsel.

Dave:
Definitely. Well, we do have the bootcamps if you haven’t, I don’t know if you’ve seen any of those, but we have bootcamps where people who are more experienced. I know we have a multifamily bootcamp. Do you know Matt Faircloth?

Kathy:
Yes, of course.

Dave:
Yeah. So, Matt and Liz who host the BiggerPockets InvestHER podcast are both doing those bootcamps and they’re super experienced. But yeah, I think that’s great advice. We’ll have to send those to the higher ups.

Kathy:
Well, it’s just one of the benefits of BiggerPockets is there’s just so much wisdom on the website of people willing to help you and kind of mentor you, sometimes just for free. But yeah, we love Matt, we love the Faircloths. They’re the best.

Dave:
They’re the nicest people. But yeah, honestly, so many people, I don’t do any mentorship or coaching, but people reach out to me on Instagram and they’re like, “Hey, can you answer this question for me, or will you mentor me?” And I’m like, “Did you just ask this on the BiggerPockets forums?” You can for free get dozens of super experienced investors can answer these questions for you and will, and honestly it’s better than having an individual mentor. You’ll get a lot of opinions which is really helpful. So, if anyone’s listening to this, I think a lot of people who listen to BiggerPockets podcasts don’t know we have a website which we need to work on, but if you don’t know, go on the forums and ask questions. It’s an incredible resource for investors, and to Kathy’s point, you can ask people who have been through these types of situations before how they would handle your circumstances or just approach this type of market. Very good advice.

Kathy:
You can even just put the deal that you’re thinking about getting, maybe not the address because someone might snatch it from you, but just you’ll get so much input it. It’s a really an incredible resource.

Dave:
Absolutely. And also, if you’re on the website, download the free data drop that we’re given out this week. It is biggerpockets.com/rentaldata. It’s free and you should absolutely do it. Kathy, thank you for being here. If people want to reach out to you for your sage advice, where should they do that?

Kathy:
Oh, thank you. You can always reach me at, well, @kathyfettke is my Insta, but also realwealth.com is our company where we help people acquire investment property nationwide, and my syndication company is growdevelopments.com.

Dave:
All right, great. And I am Dave Meyer, and @thedatadeli is where you can find me on Instagram. Thank you all so much for listening. This has been On the Market, and we’ll see you next time.
On The Market is Created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, research by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Despite new language in the Federal Open Market Committee statement that suggested a potential slowdown in curbing inflation, Federal Reserve Chairman Jerome Powell maintained a hawkish tone on raising the federal funds rates during Wednesday’s press conference.

And with Fed rates expected to rise even further, industry experts and economists don’t expect mortgage rates to stabilize for at least another year.

“Even with the Federal Reserve raising its short-term fed funds rate by another large amount, longer-term interest rates look to move only slightly,” Lawrence Yun, chief economist at National Association of Realtors, said.

Mortgage rates, which are currently near a 22-year high, declined slightly from last week ahead of the Fed’s sixth rate hike announcement. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 7.06% on Wednesday from last week’s 7.16%, according to the Mortgage Bankers Association. 

The Fed’s short-term rate does not directly impact long-term mortgage rates, but it does steer market activity to create higher rates and reduce demand. 

“While the mortgage market has already priced in the latest Fed move, mortgage rates are still at 20-year highs that hurt homebuyers. Once inflation is contained, mortgage rates will start to drift lower. It may be another year or two before that happens,” Yun said.

The fresh language in the policy statement noted that the Fed is considering the “cumulative” impact of its hikes so far when determining future rate increases. Still, Powell presented a different tone in his press conference, indicating that thoughts of a potential pause would be premature.

“Bond yields fell after the Fed made their statements about raising rates and then shot back up after Jay Powell talked about higher rates for longer,” said Logan Mohtashami, lead analyst at HousingWire. “Tiny movement in bond yields from the start of the day but wild intraday action. Rates can end up slightly higher today if this slightly higher bond yield sticks.”

An occasional slip in mortgage rates is “inexplicable” on an upward trend that began almost a year ago, said Holden Lewis, home and mortgage expert at NerdWallet.

“The Federal Reserve clearly intends to keep raising short-term interest rates, which will raise the floor for mortgage rates,” Lewis said.

“A housing recession is here”

For home shoppers and sellers, mortgage rates have been quick to adjust higher in response to expected Fed moves, said Danielle Hale, chief economist at Realtor.com.

“In the last 12 weeks alone, mortgage rates have soared more than two percentage points, cutting significantly into homebuyer purchasing power and likely causing shoppers to revisit their budgets,” Hale said.

Existing home sales declined for the eight consecutive months in September, dropping to 4.71 million units from 6.18 million in September 2021. As of September, the median home price was $384,800 for existing homes of all types, an 8.4% increase year over year compared to September 2021, when the median home price was $355,100, according to the NAR. 

A housing recession is here, Marty Green, principal at Polunsky Beitel Green, emphasized. 

The swift jump in interest rates have dampened potential homebuyers’ willingness or ability to enter the market, and potential home sellers who are locked in to super low rates are not willing to reduce sales prices materially enough to motivate buyers, according to Green. 

“The question is, when will the Fed pivot and indicate a pause, or at least significantly reduce its pace of increases,” Green said.

Mohtashami also pointed in his recent commentary to a housing recession, citing falling sales, production, jobs and incomes in the housing sector. What the difference is in this “traditional housing recession” from the housing bubble years, is high household balance sheets and no credit stress. 

“They (Fed) know housing is in recession already, but they don’t care because they don’t see a credit bust or a job loss recession yet,” Mohtashami said. 

Goldman Sachs expects that the FOMC is leaning toward slowing the pace of tightening to 50 bps in December.

Roger Ferguson, former vice chairman of the board of governors of the U.S. Federal Reserve System, believes the Fed will raise interest rates by 50 bps next month, along with two 25 bps hikes at the start of 2023. 

Tables have turned for some sellers 

With mortgage rates more than doubling this year, and with rates expected to climb further in the coming months, sellers are becoming more realistic. Buyers, on the other hand, are more in tune with higher mortgage rates and have more leverage in the market, loan originators and real estate echoed.

“It is no longer a seller’s market,” said Nick Smith, founder at Rice Park Capital Management. “Days on market for homes that are sold, number of homes receiving multiple offers, mortgage applications, and actual home sales – they have all moved in a negative direction.”

“The good news is, sellers who are more realistic will try to beat the market,” Mitch Burns, license partner at real estate advisor at Engel & Völkers, said. “After 30 days, if the seller had not had an offer after maybe 10 showings, we’ll make an adjustment to drop the price.”

This translates to borrowers’ increased negotiating power, which they did not have when rates were in the low 3% levels at the start of the year.

If a home has been on the market for over a month, borrowers get quite a bit more flexibility, said Todd Davidson, LO at UMortgage.

“Sellers are willing to chip in for a 2-1 buydown or lower price or accept offers contingent on the sale,” Davidson said.

In a higher rate environment, buyers are increasingly opting for 2-1 or 1-0 rate buydowns to reduce their monthly mortgage payment. With the buydown, the borrower pays a lower rate during the first year or two, and after that, the full rate is paid for the remainder of the loan term.

While low housing inventory and sluggish new home construction still remain a challenge in the housing market, buyers are better positioned to negotiate contracts with contingencies, Davidson added.

“Six months ago, if someone would’ve given a contingent offer, they would’ve gotten laughed at,” Davidson said. “But now if a home is sitting on the market for 10 days, people are accustomed to homes selling so quickly (that) realtors and sellers would get a little nervous.”

Liberty McCoy was out Saturday urging voters to pass a Nov. 8 ballot measure to limit rent increases in Pasadena, California, because she’s afraid she’ll be priced out of the city where she grew up and where her aging parents live.

The librarian and her husband, a freelance consultant, received notice of a $100 monthly rent increase last year and another for $150 this year, bringing the rent on their home outside Los Angeles to $2,350 a month. They can absorb the increases for now — but not forever.

“A lot of times people are like, ‘Well, just try and pick up and move to someplace cheaper,’” the 44-year-old said. “But I have a job locally, my family, my friends. It would be a big challenge to uproot my entire life chasing cheaper rent.”

With rental prices skyrocketing and affordable housing in short supply, inflation-weary tenants in cities and counties across the country are turning to the ballot box for relief. Supporters say rent control policies on the Nov. 8 ballot are the best short-term option to dampen rising rents and ensure vulnerable residents remain housed.

Opponents, led by the real estate industry, say rent control will lead to higher prices for tenants in housing not covered by rent caps, harm mom-and-pop landlords relying on rental income for retirement, and discourage the construction of badly needed affordable housing. They have spent heavily to stop ballot initiatives, even going to court to halt them.

In Orange County, Florida, home to Disney World and other theme parks, voters will consider a ballot initiative to limit rent increases to the annual increase in the Consumer Price Index. But a court ruling last week means that even if it passes, it could be nullified.

Proponents in Orlando and other Orange County cities point to a population that has increased 25% since 2010 and rents that jumped 25% between 2020 and 2021 — and experienced another double-digit increase this year. The housing shortage was magnified by Hurricane Ian, with an estimated 1,140 rental properties suffering $44.5 million in damage.

“I’ve had a lot of constituents reach out to me, and they are fearful of becoming homeless. They don’t know what to do,” said Orange County Commissioner Emily Bonilla, who authored the ballot initiative ordinance after hearing from tenants facing rent increases upward of 100%.

Last year, voters in St. Paul, Minnesota, passed a ballot measure capping rent increases at 3% a year while residents across the river in Minneapolis backed a measure allowing the City Council to enact a rent control ordinance.

This summer, Kingston, New York, became the first upstate city to enact rent control. The measure means around 1,200 units — buildings built before 1974 with six or more units — must limit rents to a percentage set by a rent guidelines board.

Boston’s Mayor Michelle Wu was elected last year and made bringing back rent control to the city part of her campaign. The biggest hurdle to that proposal is that Massachusetts voters narrowly approved a 1994 ballot question banning rent control statewide.

“Rent stabilization can provide protections for everyone, but do so in a way that really targets benefits to low-income renters, renters of color, renters who are most desperately impacted by housing instability,” said Tram Hoang, a housing policy expert who was involved in the St. Paul campaign.

The fight over rent control has been most intense out West, where in 2019, lawmakers in California and Oregon approved statewide caps on annual rent increases. California’s annual cap cannot exceed 10% and Oregon’s is set at 7%, plus the consumer price index.

Both laws exempt new construction for 15 years, a compromise to encourage developers to keep building, and apply only to certain units.

But that hasn’t quelled tenant activism in California, where nearly half the state’s 40 million residents are renters. Advocates say the statewide law — which expires in 2030 — does not go far enough.

Voters in the San Francisco suburb of Richmond and Southern California beachside city of Santa Monica will consider measures to further tighten existing rent caps to a maximum of 3%.

In the city of Pasadena — home to the annual Rose Parade and Rose Bowl college football game — voters will consider a measure to create a rent oversight board and limit rent increases to 75% of the Consumer Price Index, which supporters say translates to 2% to 3% a year.

Rent stabilization advocates failed to collect enough signatures to qualify for the 2018 ballot, and they thought it would be hard this time around because the state had enacted protections. But campaign field director Bee Rooney said tenants financially wrecked by the pandemic were eager to back the initiative.

“Any amount when you’re not expecting it is a lot,” Rooney said. “Some people, their rent doubled or went up by 50%.”

Pasadena retiree Paulette Brown received the state-allowed increase of 10% in July, bringing the rent on her two-bedroom apartment to $1,175 a month. Budgeting will be tighter.

“I really can’t afford any mishaps, because I’m not able to save anything,” said the 64-year-old Brown, who lives with her daughter and grandson.

Opponents of the measure, which include the national and state Realtors associations, say curtailing rent increases to a fraction of inflation will result in property owners taking rentals off the market and doing minimal maintenance.

“What’s being proposed here is draconian and for the most part landlords who have good tenants aren’t trying to get rid of them,” said Paul Little, president and CEO of the Pasadena Chamber of Commerce.

Michael Wilkerson, senior economist at Portland, Oregon-based ECONorthwest, describes both the California and Oregon state laws as “anti-price gouging” measures aimed at protecting the most vulnerable tenants from exorbitant increases, while encouraging new housing development.

Rent-control policies have been around for decades, put in place after World War II in New York City and elsewhere to combat rising housing prices and again in the 1970s in the Northeast and California. However, the real estate industry has since succeeded in passing state laws that made it difficult, if not impossible, for many local municipalities to cap rents.

The data on rent control has been mixed. The policy, according to an Urban Institute report, was found to have reduced rent on covered units in Cambridge, Massachusetts, San Francisco and New York but resulted in no significant decreases in New Jersey cities.

Some studies, however, have shown that rent control can reduce the number of housing units available and discourage landlords from maintaining them.

Opponents also say rent regulation can scare off developers. St. Paul’s original ordinance, for example, applied to almost all housing and mandated landlords stick to the 3% cap even with new tenants.

Within weeks, council members were hearing from developers who blamed the new law for scuttling housing projects because they lost funding. Building permits issued for new housing through August plummeted 31% from the four-year average.

In response, the City Council approved amendments in September to exempt low-income housing as well as new construction for 20 years. It also allows landlords to raise rents 8% plus the Consumer Price Index after a tenant moves out.

Orange County’s ballot measure is up in the air after an appeals court rejected the proposal last week and suggested it won’t be certified even if voters approve it.

The court, which acknowledged the state law “set an extremely high bar” for local governments to pass rent control ordinances, said a consultant hired by the county didn’t identify a housing emergency — a requirement under a 1977 state law preempting local rent control.

The county plans to file a motion for a rehearing and with ballots already out, the Orange County supervisor of elections said it has no plans to issue new ones. Supporters of the measure said they will keep campaigning.

For tenants like Jessy Correa, the setback means she faces a 20% rent increase on her three-bedroom apartment in Orlando come January. The 44-year-old mother of six is already struggling to afford the current rent of $2,300.

A recruiter at a faith-based nonprofit, she was hoping the ballot initiative would “bring stability, give us a moment to breathe.” Instead, she is now forced to make difficult choices, like getting another job.

“Where is the American dream of being able to live, to enjoy?” she asked tearfully after learning of the court ruling. “What are we doing? It’s frustrating.”

A recession is a normal (some might argue), inevitable part of the economic cycle. Many factors influence the dynamics of one, such as decreased consumer spending, a rise in unemployment rates, lower wages, and declining GDP.  

With the economic instability and uncertainty that comes with a recession, one may question whether or not investing during such a time is a good idea. It is fair to assume that holding on to every dollar earned would be the wiser choice. However, with a well-measured and sensible approach, investing during an economic downturn can provide an excellent opportunity for long-term gains.

If you’re interested in keeping your portfolio alive amid a recession, here are a few things to consider before investing and some of the best assets to protect your money.

What to Consider Before Investing During a Recession

When facing a declining economy, investors should act cautiously but also remain vigilant by monitoring the marketplace for potential opportunities. There are a few key questions that you should ask yourself before deciding to invest. 

What is your current financial position? 

Don’t compromise your current financial security for long-term gain. In other words, only invest what you can comfortably afford.

Are you able to take a long-term approach to investing? 

Investing during a recession does come with more challenges and risks. Be prepared to let your investments sit for at least 5-10 years before selling them. 

What is your risk tolerance? 

During a recession, frequent fluctuations in a portfolio are common. When the market takes a nose dive, will you be able to keep your cool and wait it out? 

The Best Investment Options During a Recession

Deciding what to invest in during a recession depends on your goals. What do you wish to accomplish with your investments? Whether you want to minimize the risk of loss, create a fixed income, capitalize on low-cost stock options, or maximize long-term returns—a clear understanding of your goals will help you choose an optimal investment option.

If real estate is your preferred investment vehicle, you’ll need to know how to play safe during a recession. The real estate market has been considered an attractive investment during past recessions, but it can be tricky to navigate. The pandemic greatly impacted the real estate market, causing supply issues, rising home values, and super-high buyer demand. Now, interest rate hikes have started to lower the price of homes but increase the cost of borrowing. This turn of events has had a negative impact on affordability, which has made many buyers pause on purchasing at this time. With the seller’s market ending, it is an ideal time for real estate investors to pick up properties as prices and competition come down. Here are a few of the best options to invest in during a recession.

Commercial real estate

While some industries are highly susceptible to economic cycles, other industries fare well regardless of the economy’s performance. Investing in commercial real estate using strategies such as triple net leases (NNN) is an excellent way to decrease the chance of taking a loss. Although no industry is entirely recession-proof, these commercial properties tend to maintain success even during economic downturns. 

Grocery Stores and Discount Retailers – People will always need to buy staple household items such as toothpaste, toilet paper & soap, even during a recession. Grocery stores and supermarkets such as Walmart, Costco, and Kroger are dependable investment options, especially when using a NNN lease. 

Healthcare – There will always be a need for health services. People with chronic conditions will still need their medication, and people will still get sick. Properties that are a good bet in a recession are medical offices (doctor’s offices, dentists, etc.) and pharmacies such as CVS Health and Walgreens.  

Death and Funeral Services – Death is an unavoidable part of life. As the popular saying goes, only two things are certain in life: death and taxes. Funeral homes, companies that provide caskets, and funeral-related services are relatively safe recession-proof investment properties.

Manufacturing – Industrial properties such as alcohol manufacturing, wholesale distribution, construction, etc., are another recession-proof investment. Companies such as Anheuser Busch InBev SA, Heineken, and SouthernCarlson are all examples of single-tenant flex industrial properties. 

Residential real estate

In general, residential properties will begin to fall, and as sellers become more worried about not being able to sell their properties, the more leverage you have to negotiate. Single-family, multifamily, and other pieces of property will all be opportunities for you to take advantage of during a recession. However, it’s still best to keep these assets in the long term, as it’s likely you’ll need to ride out the recession. Therefore, flipping might not be your best bet.

Stocks/bonds

In most recessions, you can buy stocks at a lower price. Generally, the best way to approach stocks is with a buy-and-hold strategy and then dollar-cost average over time. Recessions offer the opportunity to lower your dollar-cost average and acquire more shares for less.

Bonds, on the other hand, are considered the safest investments in the world because the U.S. Treasury guarantees them. You need to be careful with bonds since the best ones have maturity dates that tend to be long-term, such as 10-30 years, but will offer predictable returns. You also need to be aware of the inflationary pressures that can affect the strength of your bond yields. During recessions, bond yields rise, so be sure to take advantage of them.

Investment Strategies to Avoid During a Recession

While picking the right opportunities to invest during a recession is important, avoiding certain behaviors can be just as important.  

Timing dips in the market 

Trying to time the lowest dip in the market is like trying to predict tomorrow’s lottery numbers. It’s important to keep an eye on the market, but don’t wait around hoping prices will substantially drop before you make a move, or you may miss out on prime real estate.

Don’t try to do a quick, cheap flip

Flipping houses as an investment strategy is risky, especially if you don’t have the cash flow to flip the house properly. Cutting corners won’t get you as much ROI as you think, especially during a recession. Investing long-term is a much more reliable way to earn a greater return. 

Ditching assets too soon 

The market typically becomes volatile during a recession. Unloading your investments when the market dips could ultimately hurt your long-term growth by selling at a loss instead of waiting for the market to recover. 

Not focusing on business trends 

It is common to see a few business closures during a recession, especially with smaller companies that were struggling beforehand. However, even prominent brand names and anchor corporations can face bankruptcy and closures. Make sure to keep an eye on business trends when investing in property. If you see a company struggling, it would be wise to hold off until they are in a more stable place. 

Failing to diversify

We’ve all heard the term, “don’t put all your eggs in one basket,” and this is especially true in the case of a recession. Diversifying your portfolio can help increase your ROI or at least mitigate losses in your portfolio. If you’ve previously stuck with single-family homes, branch out to multifamily and commercial properties. If you take a loss in one area, you still have the others to help keep your cash flow afloat. 

Don’t Let a Recession Scare You From Investing

Recessions can be nerve-racking because we’ve all heard the horror stories. However, understanding your options and making wise decisions during a recession can help you avoid major losses and potentially lead to significant gains.

Prepare for a market shift

Modify your investing tactics—not only to survive an economic downturn, but to also thrive! Take any recession in stride and never be intimidated by a market shift again with Recession-Proof Real Estate Investing.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

There is no doubt that the real estate market has been a wild ride since the pandemic changed the normal course of our lives over two years ago. Lending did not escape the effects of Covid-19, and many active investors have learned more about the loan process than they ever did before the pandemic.  

In the spring of 2020, some lenders left active investors in a bind, closing their doors or halting lending while they evaluated the new risks in the marketplace. Over two years later, the market is changing again, and investors need to know how to pivot to keep their pipeline flowing. While everyone is watching rates increase, they are taking their eyes off the real question right now: Can they close this loan?

Realizing a preapproval and rate and term sheet are not set in stone will go a long way in the current lending environment. Lenders are changing underwriting criteria, not making as many or any exceptions to lending guidelines, and lowering loan-to-value midstream in the escrow process. Most investors never thought about the source of their capital before March 2020. The most concerning part of the lending process was getting through underwriting and receiving the message that you were approved and cleared to close. Whatever happened behind the scenes inside the lending machine wasn’t a concern to an active investor. As long as money made it to the closing table, they were happy. This strategy worked until the capital never made it to the closing table. 

When lenders suddenly turned off the spigot to cheap capital, investors scrambled to save deals any way they could. This pushed private lenders with their own capital to lend to the forefront in the hunt for leverage. Active investors scrambled to find funding or negotiate contract extensions to restart the lending process.

Private lenders who lend their own capital have more control. Large nationwide or even regional lenders have significant strings attached to the capital they lend out, and those strings are pulled by forces outside the lender’s control. 

For example, large institutional lenders are often funded by lines of credit from banks or even selling their loans on the secondary market. In both of those cases, there is another entity establishing what they can lend out, where they can lend it, and the pricing of those loans. These lenders require the line of credit to stay open or the capital markets to continue purchasing loans so they have enough liquidity to keep new loans coming into the pipeline. 

What does that mean for you as a borrower? It means that the rates and terms you are quoted may suddenly change, or funding, in general, may be halted at a moment’s notice. So how can you protect your real estate investing business in this period of turbulence? 

Start asking questions about how the lender acquires their capital and diversify lending sources based on where they get their capital.

Need a lender for your next deal? Find one here!

The Four Types of Lenders

For the sake of simplicity, you can think of capital in one of four buckets for alternative lending: national lenders, regional lenders, local lenders, and private loans from a lender who lends their own capital, including seller financing. While there are many flavors and options within each bucket, knowing the general purpose of each can help you decide what type of financing to use for which project. 

Alternative lending automatically means it is not going to be the conforming conventional loans you may have used to purchase your own home. Since they are non-conforming loans, the variables offered are numerous and vary greatly. Having a conversation with your lender about the types of projects they fund and general guidelines for their loan products can go a long way to choosing the right lender for the right project. 

National Lenders

National lenders are pretty easy to locate. Their brand and names are spoken widely across online platforms, forums, and even REI meetings. Their business model has the borrower and decision maker for the loan the furthest removed from each other. To these lenders, every application and, ultimately, file on their desk is a series of numbers and check marks. A business model like this shows up to the active investor (borrower) with high single-digit interest rates and lower fees, but those come at the cost of higher documentation requirements, full third-party appraisals, and a longer closing time. This group of lenders is often very sensitive to changes in the capital markets or economic outlooks. If you need a deal to close super quickly with minimal documentation, this may not be the best tool to use. On the other hand, if you have time for the closing such as a refinance into permanent debt, this may be a great option to pursue.

Regional Lenders

Regional lenders may not have the brand recognition of “the big guys,” but within their markets, they can be relatively well known. Their mid-range interest rates and somewhat higher fees often come with lower requirements for documentation and longer financing timeframes than national lenders. Depending on the lender, they may require a full appraisal or may opt to do an online valuation through a third party. These regional lenders can be a great option for borrowers that have some unique borrowing challenges, such as new employment or acquiring financing as a new business entity. 

Local Lenders

Local lenders tend to be smaller asset-backed lenders or smaller bank/credit unions in the market. They tend to lend in just a certain area of a state or the entire state if it’s small enough (such as Delaware or Rhode Island). These local lenders usually have higher rates, especially if they are asset-backed, but also usually have low or no documentation requirements. This translates through to a borrower with higher rates and usually higher fees. These asset-based lenders can often close quicker and use some sort of in-house valuation methods for the real estate securing the loan. Credit unions may also use the same valuation tools but often want a higher level of documentation to understand the lending opportunity. For investors operating in one particular market, this classification of lender tends to be the most helpful since they are local. This class of lenders understands the market they are lending in and has experience with other lending opportunities in the same area.

Individuals

Lastly, we will look at loans that come from individuals, or what we term “private lenders .”These loans come from capital that an individual or their business entity has. These individuals are often seeking to have passive income or put their retirement funds to work in real estate versus the stock market. Depending on the amount of capital they have available to them, they may not always have the liquidity to fund a loan when the capital is needed. Many of these lenders work with established networks of borrowers, sometimes rolling capital from one deal to the next with the same borrower. These lenders may have very low documentation requirements, flexibility on the type of properties they are willing to lend on, and vary in terms of interest rates, fees, and length of the loan. They also can generally close very quickly, sometimes within a few days if needed. While they won’t be the cheapest or longest-term loan out there, the flexibility this type of lender offers more than makes up for it. 

The Type of Lender Determines the Variables

As you can see, there is somewhat of a correlation between the documentation and underwriting guidelines and the rate being charged. When you, as a borrower, can show the standards a lender believes are lower risk, you can then be rewarded with a lower rate. In addition, other value-add components can also increase annualized interest rates and fees being charged. If a lender can get a deal closed in three days with minimal documentation, that can be a more expensive loan because the borrower needs to move quickly or is unable or unwilling to go through a more thorough vetting process for the loan. 

Conclusion

Understanding what your needs are for financing each property really allows you to find not just a lender but the right lender for the job. The lender’s ability to close the loan is more important than rates and terms right now. Ask questions about the lender’s access to capital and if that access is likely to change in the next several weeks. Depending on the size of the lender you are speaking with, they may not be able to answer that question, but thinking about this as a borrower can never hurt to consider. Keeping another lender in your back pocket that may be able to close quickly, even if it is a higher rate, may be the difference between closing or not.

Find a Lender in Minutes

A great deal doesn’t just sit around. Quickly find a lender who specializes in investor-friendly loans that are right for you and your investment strategy.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

M. Ryan Gorman, Coldwell Banker CEO, joins ‘The Exchange’ to discuss the housing market as sales slow amidst rising mortgage rates.