In my blog on May 27, I discussed types of real estate supported by large demographic shifts and one of the types I discussed was residential housing.
I don’t want to flip houses
Because of HGTV, a lot people know about the opportunity to find single-family houses that are in need of repair, buy them at a discount, fix up the house and then selling for a profit.
We commonly refer to this as flipping. This does not interest me.
When I look at this opportunity, this just looks like a very hands-on job, not an investment. And that is not what I’m looking for.
So, What am I looking for?
I am interested in creating long-term investments that generate passive cash flow and have an opportunity to appreciate in value such that the extra value created by appreciation can be invested in more properties.
It’s similar to investing in dividend-paying stocks and re-investing the dividends.
As you’ll learn through my writings, the total returns of the right real estate investments are way way better than the stocks. Watch for future posts when I will discuss in more detail all the ways to profit from a rental property.
Ways to Profit from Single-Family Housing
Flipping houses is a lot like day-trading stocks.
Building new houses is really just a construction business.
Owning single-family rentals is like a staple of real estate investing to me. And, because it’s real estate, there are several ways to profit from the investment.
What drives Demand?
On the demand side of the equation, there is always a need to housing.
In my previous blog referenced above, I talk about the generational demand that ensures there are periods of time (usually for a couple decades long) where demand increases.
In a future post, I plan to dive into demand drivers and how I use them to filter cities and neighborhoods to find the right places to buy and invest.
Supply Shortage
On the supply side of the equation, construction of new affordable housing, whether its single-family houses or apartments, has not kept up with demand for the last ten years or so.
One of the reasons for this has been a shortage of labor. Jobs were plentiful in the U.S. during this period and many people were choosing other types of jobs, more desirable jobs than construction jobs.
With a shortage of construction workers, builders were choosing to only focus on high-end homes where the profit to them was better.
This led to the shortage of construction of new affordable housing.
And this occurred while demand for affordable housing was increasing due to a demographic growth of people in the prime home buying age groups. And this demand continues to grow today.
I’ll discuss this more in a later post, but I think the high level of unemployment in the U.S. due to the effects of COVID-19 could allow builders to return to building affordable housing because there will be a large available labor pool to hire construction workers from.
Why am I more interested in single-family rentals more than multi-family apartments?
I have several reasons.
One, after the last recession in 2008-2009, the big Wall Street funds that are investing in housing have focused more on apartments where they can put large dollar amounts to work more easily. This includes hedge funds, private equity and pension funds.
They have tended to avoid single-family rentals because these require small amounts to invest in relative to the size of their funds.
By focusing on multi-family apartments, they have driven down the cap rates of multi-family investments relative to single-family investments.
Two, I can move faster from one marketplace to another depending how different markets change over time due to demographic shifts and changes in job markets.
By this I mean one city versus another city and one neighborhood versus another.
I am not tied to investing near where I live. My view is live where you want to live and invest where it makes the most sense.
Future Blog Posts on Single-Family Rentals
In some future blog posts, I plan to dig into different aspects.
I plan at least one post soon on demand drivers and where that is leading me to look for investments currently.
In another post, I plan to go into more detail about why there is a shortage of housing in this country.
I will also discuss the economics of investing in single-family rentals and all the different ways to profit from this investment.
So, if this topic is interesting to you, watch for future email notifications of these posts.
Questions?
What questions do you have about single-family rentals?
Have you invested in single-family rentals?
What do you think are the pros and/or cons of this type of investment?
What else can I answer and discuss? Please comment below.
Let’s talk…
If you’d like to have a conversation about single-family rentals or any other type of real estate, feel free to email me or set up a call with me or just call me if you already have my phone number. I’d love to hear what you think.
For now, be safe and take care of your family.
Mark