Are Your Investments At Risk?

Note: I am not a financial advisor, economist or accountant. Consult appropriate experts before making any financial decisions.

Jerome Powell, Chair of the Federal Reserve, presented the Federal Reserve's new direction in a speech on August 27th. After reading his presentation, discussing it with a financial advisor and reading other people’s reviews, I believe there has been a significant policy change that will negatively affect many people. Summarizing the new direction of the Fed:

  • Keep interest rates low and focus on maximum employment.
  • Increase the rate of inflation through monetary debasement (printing money, which lowers the purchasing power of the currency making it less valuable.)

The new policy will have a negative impact on anyone holding interest-sensitive investments including: CDs, money market, savings accounts, bonds, interest sensitive stocks, fixed-income instruments, dividends and others. According to Bank of America, “...investors should expect smaller gains and rising inflation over the next decade...“ So, what can you do when inflation is high and interest rates are low? One answer is to diversify your portfolio with real estate.

Real Estate - The Easiest Path to Financial Independence

Many people diversify their investment portfolio with real estate for one or more of the following reasons:

  • Income increases over time - Rents typically rise faster than inflation, while operating costs are almost flat. - “CoreLogic Reports Single-Family Rent Price Increases Double the Rate of Inflation“. This means your monthly income will likely increase over time.
  • Tax advantaged - With financed properties, many investors have a taxable loss while receiving a significant positive cash flow. Plus, you can exchange one income property for another or more income properties with no tax consequences. Also, rental income is not subject to self-employment tax. Real estate is the most tax advantaged investment.
  • More consistency, less volatility - Good rental properties provide a reliable income stream you will not outlive. And as you accumulate properties, you spread your risk. Plus, good times or bad, having a place to live in is one of our fundamental needs as humans. The demand for housing will always be there and rents typically increase as population grows.
  • Long-term gain - The market value of residential real estate in the US increased by 26% over the ten-year span between 2008 and 2018, and by 96% between 2000 and 2018. Appreciation is not taxed plus you can borrow against that appreciation.
  • Leverage - Real estate is the only asset where you can get low interest, fixed rate 30 year financing. This enables you to add cash flow properties to your portfolio at a fraction of the total cost.
  • Transfer wealth through generations - When your beneficiaries inherit a property, the cost basis is stepped up to the current market value and all capital gains are wiped away.
  • Forgiving - As long as you buy a property in a good location, all but the worst mistakes will be corrected over time through inflation and rent increases.

Market Update

Below are charts from our latest trailing 13 month market report, which includes August data. Remember that this data is only for the property profile that we target, not for the entire metro area. To see all the charts please click here.

Rental Statistics

Rental rates increased significantly in August, now at the highest level for the last 13 months. Both property managers that we work with are reporting extremely low inventory and multiple applications for most properties.

Rentals - Median $/SF by Month

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Rentals - List to Contract Days by Month

The time from list to contract is below 10 days. An amazingly short period of time. There is a lot of demand and little inventory.

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Rentals - Availability by Month

This chart shows the average daily number of properties that were for rent in a particular month. As you can see, rental inventory has continued to fall since January.

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McKenna Property Management provided us the historical data of number of single family homes for rent at the last day of each month since August 2017. As you can see, the inventory level today is unprecedentedly low. Today (9/2/2020) the number is 556.

Sales Statistics

Prices have risen 5% compared to the same time last year.

Sales - Median $/SF by Month

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Sales - Median List to Contract Days by Month

Medium days on market remain amazingly low, reflecting strong demand and limited inventory. Properties that we target are typically going under contract in 2-3 days and with multiple offers.

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Sales - Availability by Month

This chart shows the average daily number of properties that were for sale in a particular month. Sales inventory increased slightly in August, still well below levels a year ago.

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Sales - Closings by Month

Transaction volume decreased in August compared to July, but still higher than a year ago.

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Take Action Now

The news about layoffs may be concerning. The picture painted by actual data is completely different. I do not see any signs of pending price decreases. Given the extremely low rental inventory and strong demand (rising rents and low time to rent), now is actually a good time to acquire properties since you will be able to command higher rents and select the most qualified tenants. The tenant pool we target has been very reliable. Even during the 2008 crash, our clients had zero decrease in rent and no vacancies. Today, out of the +160 properties our clients own, 10 tenants have had problems paying the rent at some point during the last 5 months. This is worse than normal times but is nothing compared to properties that target workers vulnerable to layoffs.

Contact me today if you would to discuss how diversifying with real estate will benefit you.