The reports and surveys are still coming in and they’re telling us that in record numbers the millennial generation is staying at home with their parents. The latest number I heard was 32% of this generation are still at home. This hasn’t been the case for around 100 years, but what’s the problem?
Well, if you’re parents who would love to have your children live with you forever, then there’s no problem at all. If you had dreams of downsizing the empty nest, then it’s not so great. It’s not like it’s the dream of the younger set either. They would probably for the most part want the freedom and privacy of their own digs.
So, what is causing this huge divergence from the historical younger generational “leaving the nest” trend? There are a number of factors:
• There is a lasting suspicion of past housing appreciation trends and a fear that they’re gone for good. It’s no longer the shining American Dream for many.
• Student loan debt is reducing this generation’s ability to qualify for or pay off a mortgage.
• The economy and their job prospects are anemic and they aren’t confident enough to take on a long term commitment.
• Social and moral trends are allowing them to put off marriage and a family indefinitely while still being “couples” not married.
• Some just love the fact that mom and dad are willing to take on the chores of home ownership and leave school, work and fun to their children.
This is interesting, but it’s also pretty damaging if you think about home sales statistics. Its impact is in two areas that previously fueled a more normal market.
First Time Buyer Demand WAY Down
The graduating students and younger generation have been the fuel for entry level home purchases in the past. Home builders now are not constructing entry level homes at anywhere near previous levels, simply because there is little demand. There is little reason to believe that this trend is going to change soon.
Boomer Generation Isn’t Selling or Buying
Those in the Baby Boomer generation who in the past would have been downsizing, selling one home and buying another, simply are not doing so now at anywhere near past levels. Some of them can’t get their children to leave. Others are simply not thrilled with what’s on the market and prices.
It’s interesting that the current rising prices are a whole lot about lack of inventory and not so much about demand. So, when Boomers do not sell, the inventory is further depressed. Supply and demand takes over, as it always does, and prices rise when fewer homes are available to buyers.
Investors are Loving It
So, fewer homes for sale, prices rising, rental demand up, rents rising, so what’s not to love? Sure, it’s more challenging to find a really great deal, but rising rents help in that regard. Let’s take the news with the knowledge that there is always opportunity in real estate investment, no matter how strange the market.
It’s popular in writing business content to use the “toolbox” concept for things we use to conduct or market our business. You’ll see, put this real estate valuation tool into your toolbox to get to the right value of your next investment purchase. Or, your marketing toolbox isn’t complete without a Facebook Business Page.
I choose a different container when it comes to the big picture of my real estate investment business when it comes to management, marketing and sales. Call it my real estate investing “briefcase.” When I open my briefcase, I want to find all of the resources I need to operate my business. Even more, I want to find what I need to supercharge the referrals that are the best source of business, no matter which investing niche I’m working in.
It’s probably not the best approach to refer to your accountant or a real estate agent as a “tool” anyway. Let’s take a look at the resources in my business briefcase and how each is of value and important to my success.
Real Estate Agents
Yes, even though I don’t buy at retail often, real estate agents are quite important to several of my investment strategies. As far as referrals, there are times when a distressed homeowner wants to list their home for sale but the numbers don’t work. The real estate professional can send them my way to see if I can be of help, perhaps with a short sale.
I also have an early warning system made up of real estate agents who do BPOs, Broker Price Opinions. These come very early in the foreclosure process, and getting a heads-up to a nice property well before the bank puts it on the market can be of real value. Every now and then I can even bid against the bank and pick it up at auction.
Real estate agents can deliver a rental property bargain now and then, so I never tell them not to send what they consider good deal listings my way.
While this team member may not ever send me business, they will certainly save me huge sums of money over the long haul through tax planning and legal tax avoidance. I rely heavily on my accountant for advice and trust them to keep me on the edge but out of trouble tax wise.
Most of the time, not needing my attorney is a good thing. However, sometimes it’s good to have them take a look at a new lease I’m putting into use to see if I am jumping through all of the legal hoops properly. You want to do the due diligence to have a good attorney on your team before you need them.
Sure, you want to know a great mortgage broker if you’re seeking funding for rental properties. But, you also may want an aggressive broker if you’re selling properties, especially at retail. Helping your buyer to get a great mortgage can get you a higher price at the closing table.
While some mortgage brokers dabble in this niche, the specialty transaction lenders do only short term or specialty real estate investor lending. Unless you’re already cash fat, you’re going to need this type of funding for wholesaling and fix and flip. It’s not a cheap source of funds, but without it fewer deals would get done.
Title Company or Title Closer
Title companies have the information, or can easily get it, about what’s happening in relation to the ownership of real property. While they may not be able or want to do free property searches for you, often you can ask a question and get an answer that will help you in making decisions. An example was when I asked a title closer if there were any problems with a particular condominium project.
Based on their recent title searches I learned that the ratio of rentals to owner occupants was too high for Fannie Mae or Freddie Mac loan guarantees. I passed on the deal I was considering, as selling it would have been tough, and rental competition was too great.
Of course, if you’re doing any type of fix and flip or fix to hold investing, you want some strong contractor relationships. The right contractors can make you a lot of money. They can at times refer business to you as well. I had a contractor send me a deal where the homeowner found they needed a new roof and couldn’t afford it. I got a good deal on the home, used the contractor to replace the roof, and it’s a great cash flow rental property.
All of these are important and valuable relationships that I keep in my real estate investment briefcase.
Foreclosure inventories are down, and many of those that are available are in pretty rough condition. The good news is that this situation is helping to reduce investor competition, as fix-to-rent is costlier and requires a lot more involvement on the part of the investor.
Sure, you can turn over a rundown home to a contractor with an all-inclusive bid and hope for the best result. However, this usually runs up the costs and can deliver results that don’t meet your expectations. The investors who are willing to get out of the passive role and control the project and costs can still end up with some really great rental home investments.
What it is Isn’t What it has to Be
Start your next fix-to-rent home search with a different plan. Don’t just find one that you can repair and rehab and take to the rental market as it is. Find one that you can make into the perfect rental home for your market area. The beauty of taking this approach is that you’ll have choices in homes with less competition because they’re not what other investors are seeking.
Maybe you find a small 3-bedroom foreclosure home in a great neighborhood, and of course it needs some work. Small is the keyword, as the three bedrooms are all pretty small. This neighborhood is sought out by millennial renters due to its location near downtown and high tech employment. These aren’t families with children, and a house with three small bedrooms and an overall small room floorplan isn’t really that appealing to this group.
They like room to entertain, and they want what buyers want, a large master suite. So, why not give it to them and create it with this home? Strategically remove one or more walls to create a large master bedroom and increase the size of the bathroom as well. Reduce the home to a two-bedroom plan, and they can use the second bedroom as an office or for guests.
These are renters who have good jobs and can afford to pay the rent you’ll need to create the home in which they want to live. The increased costs of doing the major renovations may be partially offset by buying this home with no competition at a better discount to its ultimate value.
Another example might be a larger home with 4 or more bedrooms in a community where renters want to be. Instead of just fixing it up, you see the opportunity to create a separate entry and a mother-in-law suite or separated rental unit. Your added costs are not that great, but the rent you can charge can take a nice jump. Potential tenants can rent out their other unit to cut their costs.
The key is to look at a property not as what it is but as what it could be. If the numbers work, why not create the perfect rental home?