From your financial advisor to your buddy in the next cubicle over, how often do you hear the advice, “Don’t try to time the market”. This statement is typically directed towards investing in blue chip stocks listed on major exchanges or mutual funds with broad diversification… but it begs the question: why not do the same with real estate?
That’s exactly what we are trying to do at Belz Living. Signs are pointing to the real estate market softening: SFH inventory is rising, 46% of SFHs have reduced their price this month [1], and interest rates are forecasted to go up through the remainder of the year [2]. Yet no matter where real estate prices go over the short term, we believe the long term macroeconomic trends in both multifamily housing and the state of Utah will yield better returns than other investments, helping create long term wealth for our investors.
Fortunately, the macroeconomic trends are still promising: both SFH and MFH inventory is still near all time historic lows [3], Salt Lake County’s rental vacancy rate is hovering around 2% [4], and rising inflation continues to put upward pressure on rental prices. This begs the question, if you’re bullish in the long term, how do you adjust your underwriting to ensure you’ve found a deal during a ‘softer’ real estate market cycle?
For starters, buying on cash flow for equity growth is a must: your investment must service the debt as well as routine expenses. Additionally, purchasing a real estate investment solely on appreciation is now a much riskier bet, as there is still uncertainty in where prices are headed in the short term when facing rising interest rates.
This forces investors to conservatively adjust underwriting. For example: did you buy at a 4% cap rate? MFH cap rates have been at historic lows for a number of years now. Consider underwriting your exit, or when you sell, at a 5% cap rate. How is the forecasted rent growth? Ignore the past two years of volatility and look at the historical trends. Typical rent growth is 3% [5]. Finally, with market uncertainty comes the need for increased cash reserves. Cash reserves gives owners options in the event of the unknown, especially when faced with decades high inflation.
In summary, Belz Living is not attempting to time the market. We’re making offers and underwriting deals that fit the current climate.
SOURCES:
- Utah Business. “40 percent of home sellers are dropping prices in Salt Lake City 1. and other hot spots https://www.utahbusiness.com/40-percent-of-home-sellers-are-dropping-prices-in-salt-lake-city-and-other-hotspots/CME
- Fed Watch Tool “Target Rate Probabilities for 21 Sep 2022 Fed Meeting.” https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
- Federal Reserve Bank of St. Louis. “Housing Inventory: Median Days on Market in Salt Lake City, UT.” https://fred.stlouisfed.org/series/MEDDAYONMAR41620
- Kem C. Gardner Policy Institute. “Salt Lake County’s Historic Apartment Boom: Past, Present, and Future” https://gardner.utah.edu/wp-content/uploads/AptMrkt-Zions-Mar2022.pdf
- Bureau of Labor Statistics. “Consumer Price Index, Calendar Year Historical, 2017-2021 https://www.bls.gov/regions/southwest/data/consumerpriceindexcyhistorical_southwest_table.htm
