Jul 18, 2022
Hi, everyone. It's great to be back in this show. We're gonna answer this burning question. Greetings I'm bill Fairman I'm with Carolina capital management and welcome to the real estate investors. Show hard money for real estate investors. If you are in the market for a loan for one of your projects, go to Carolina, hard money.com and click on the applying L tab. If you're an investor looking for passive returns, go to Carolina, hard money.com and click on the accredited investor tab. Don't forget the like chair subscribe, hit the bell. And don't forget about Wednesdays with Wendy,
Wendy devotes, 30 minutes per person on Wednesdays to talk about real estate. Well, she'll talk about anything, but you're smart if you'll choose the real estate thing, because that's where all the value is. Anyway, she's usually booked up a couple of months in advance. So go ahead and get on her calendar. It's also gonna be over in the comment section. Speaking of comments, sections, we have comments, questions that you can answer on the right side of your screen or underneath, depending on the platform that you're viewing us from. And one last little bit I want to talk about is the upcoming quest expo in September
Quest expo is excellent event. It's all education on real estate and investing and how you can invest yourself directed to IRAs. We have a coupon code, Fairman 30, get you 30% off. It's like I said, it's an awesome event. It's three days wonderful place to network and learn about how to invest that self-directed IRA. I can tell you that most people go through the hard part of getting their money rolled over into a self-directed account, but they fail to invest enough of the money and it just sits there. That's not helping you at all. So it's a great place to go okay. To our show. Well, I have an investor that sent me a video a few weeks ago. His name is Steve. I'm not gonna tell you his last name, cuz I didn't get his permission, but he sent me a video of, of a fella. His name is Nick Joley. He runs Reveture consulting and he's a data guy. And the big headline was wall street, landlords taking huge, huge losses and is gonna be forced to do liquidation. So I wanna kinda go over his data and I'm not arguing with his data. I am just, I don't agree with his conclusions. So let's start with this first clip
Market. Redfin just reported a couple days ago that investor home purchases crashed by 17%. In the first quarter of 2022, they quoted a realtor in Nashville who said that a few months ago, 95% of homes for sale in Nashville would get at least one cash offer from an investor, but not anymore folks because today most homes aren't getting any investor offers. The realtor went on to say that this is good news for regular home buyers, regular home buyers. Like you all watching this channel are gonna have more inventory and cheaper home prices to choose from. However you need to note this investor fire sale and crash is gonna be most severe and specific cities and neighborhoods around America in 2022 that I'm gonna reveal to you later in.
Okay. So a couple of things I wanna address with that, yes, investor purchases have dropped and you know, for a couple of reasons, number one, lack of inventory, it it's harder and harder to find inventory out there. Another reason is the prices have gotten too high for investing numbers to make sense. So if the numbers don't work as investor, why are you gonna be buying properties? When Redfin is interviewing realtors about investor offers, I always take that with a grain of salt, most investors, professional investors, number one, they don't buy retail. They don't buy off the MLS. So let let's face it. Those Redfin and the realtors don't do anything about those purchases. They're they're buying off market properties. That the only way they would know about those purchases, if they did a search on title transfers in the area and yeah, the hotter markets are the ones that are gonna have investor purchases dropping the most. And because like I said, the prices are too high. Investor purchases are not emotional. They're they're about the numbers. And if the numbers don't work, they're not gonna purchase. Now. Of course he, he calls it crashing 17%, but they were all already way up there. Now the ones that bought early enough in a lot of these markets, when the prices were relatively low, they could still buy stuff off the MLS and still make the numbers work. But not anymore. The prices have just gotten too high. Scott let's do the next, but
First I need to address a question that I think is already brewing on a lot of your minds. You guys are probably San to yourselves. Wait a minute. All we heard about for the last six to 12 months was that investors were taking over the housing market. Why are they now all of a sudden bailing out what's going on? Well, folks, the answer to this question has everything to do with two main trends that are developing right now in the housing market. Number one is increasing mortgage cost and cost of debt. Well, number two is declining profitability for landlord rentals. And that second point on declining profitability is a key one that a lot of people don't understand because if you look at the last eight years of data on investor cap rates, AKA the rental profit that comes from buying and renting outta house, we can see that the cap rate is all the way down to 4.4%.
Meaning that if a wall street investor bought the typical priced home in America of 350, 2000, they would earn about 16,000 a year in net rental income. After deducting expensive. This cap rate in investor return has been on a consistent downward decline over the last eight years, forcing many investors to accept lower profits in order to buy into the housing market. Now here's, what's interesting, accepting lower profits made sense for a while because these wall street investors could borrow at very cheap costs of debt. Especially during the pandemic. You can see if we add the orange line to this graph 30 year mortgage rate in America during the pandemic that cost of debt went down to 2.7%. Meaning that even though the profitability of the rental was declining, the cost of debt was declining by more, which meant that there was still an incentive to buy.
However, this incentive no longer exists today. As the mortgage rate has shot all the way up to 6% well above the income potential of the property. And this is a huge deal, everyone because the fact that the mortgage rate now the cost of debt is above the rental profit yield. That means that any investor buying into the 2022 housing market with debt is likely losing money after they rent the house out to a tenant and then pay their lender, which is why way fewer investors bought homes in the first quarter of 2022. And why fewer are buying homes this quarter and why by the end of the year, we're gonna see a big real estate investor sell off, especially in certain cities, cities.
Okay, let yeah, let's stop there. All right. So there's a lot to unpack here. First of all, the big wall street landlords that you talked about earlier have less than a 7% market share on single family homes nationwide. So it's really the mom and pops investors. The PE the people that have probably five to seven houses are the ones that have most of the single family homes in the us as investment properties. By the way, they're not losing money because interest rates are going up. They're, they're not buying properties. You're not gonna sell off a bunch of properties because interest rates have gone up because you already have locked in the nice long, low rate mortgages, just because rates are going up. Doesn't mean your're losing money. You wouldn't buy. If your rates are too high, you'd have to buy at a, a lower price.
I don't know anybody that is buying single family rental properties in a four cap, a four and a half cap. If, if you're investing in single family homes, you're gonna be at worst a seven or an eight. And again, you're buying off market properties. So in the end, you're probably more at the eight or a nine cap rate in those areas, the, the 4%, four and a half percent cap rates. Those are class, a apartment complexes and self storage type properties. Those are not single family homes. That makes no sense. And he is correct. Those cap rates are way too low, but in my opinion, it's not on single family homes. Okay. Now Brian is correct. One of the benefits of a 6% rate now is that we currently have a 9% inflation rate. So as you're paying these mortgages off over time, you're paying it with dollars that continue to be worth less and less and less.
And then your values of these properties will continue to go up and then rents will continue to increase, but you're not gonna buy a property that you're losing money on. So yes, he's correct that the, the purchases are gonna slow down, but there's not gonna be a big giant sell off because those properties aren't losing money. Of course, I'm gonna address that later with some occupancy issues. But then again, there's a lot of tools in the toolbox for that. So the slow down and investor purchases, in my opinion, is not gonna be a crash. We actually need a slowdown in purchases overall, a normalized market. Since the fifties has been three to three and a half percent appreciation, we've been at 1720 or higher in some markets. And that is just not sustainable. Yes, things are slowing down. They should, they need to, in order to have a healthy market, it has to get lower because we can't sustain that type of appreciation. Scott, you wanna go to the next clip
Where companies like progress, residential operate progress. Residential is the largest private landlord in America. They own over 80,000 housing units and they've been very active in buying up single family homes during the pandemic, and then trying to Jack up the rent on prospective tenants. You can see this very clearly on a property that progress residential owns in Phoenix. They bought it for $427,000 in early April paying 200% over the previous sales price. They then listed it at 24 50 a month for rent a sky high rental rate for this market. However, they haven't been able to find a renter and they've been having to cut the rent ever since. And it's likely that progress residential is gonna need to cut the rent even further on this house in Phoenix, in order to attract a tenant, which is gonna be an issue, cuz it means that their income yield and their return is gonna go even lower just as progress residentials cost of debt and borrowing is surging.
Cuz over the last 12 months, we can see that the interest rate progress residential is having to pay on its mortgage back security issuances, which it uses to finance these acquisitions. Well, the interest rate's gone from a minuscule 2.2% in the summer and fall of 2021 all the way up to 5.3% in June of 2022. So this is the explanation for the data we looked at in the beginning of the video that 17% slump in investor home buying it's all related to increasing interest rates and declining profitability. And I believe when Redfin's second quarter investor home buying report comes out. We're gonna see an even bigger crash in purchases, which already is dramatically pushing inventory up in certain cities around America and pushing prices down, particularly in a Metro like Phoenix, where investors have purchased nearly 30% of all the homes on the market. In the last 12 months, I predict home values in Phoenix are going to plummet over the next six months as this investor fire sale takes hold, particularly in certain zip codes to the Southwest, into the west of the Metro where nearly 50% of all the homes in certain neighborhoods are being purchased by investors.
We could see massive paying 20, 30, even 40% price decline. Another Metro that's in the crosshairs is Charlotte. North Carolina, over 30% of home sales in the last year were to an investor and amazingly there's certain zip codes were over 60% of sales were to investors and in just one second, I'm gonna reveal even more cities that investors are gonna crash cuz you folks need to understand.
All right. Thank you Scott. So again, a lot here to unpack that specific example of a house in Phoenix is they obviously just paid too much for that house in the first place. And that market is, and I agree that market is slowing down and is overpriced. That's one of the markets where things are gonna slow down, but we need that additional inventory to bring the market back to normalcy again. Okay? Yes. They, they overpaid for that house. It has nothing to do with their, the financing or the leverage that they used. They just paid too much for that house based on the rents. As you can see it, they paid 20% more than it was worth a year earlier. So those are the markets that heated up too quickly. They own 80,000 units. They have, he showed one example of a house that was over bought at the wrong price and they're gonna have to lower the rents.
That's what happens sometimes. So you gotta be smarter about your purchasing now on the Charlotte side of things. Yes. There's certain zip codes that have a really high investor percentage of ownership, but these are the markets that people are continuing to migrate to. So I'm not very, I'm not too concerned about that. We still have some upside in the Charlotte market. Now here's the other thing he's talking about a liquidate. These people are gonna be forced to liquidate again. I said that you've already got most of these in place at, at lower rates. You know, you have more tools in your toolbox than just dumping your properties. You don't have to continue to raise rates. You should have had enough margin in there where you can keep your rental rates at flat or even lower it in, in some cases, if you need to, you should have enough margin in there he's predicting and you, you didn't get that part of the, the clip, but he's predicting an inventory surge similar to the crash of 2008, with all these people getting rid of these rental properties.
That's going a little over the top. I think because like I said, just now within the last probably six months or so is when the interest rates have gone up, that has nothing to do with the homes that have already been purchased and have already been priced appropriately. Your professional investor is not buying at retail. They're buying at wholesale. They're making sure that they're in it properly and they have good cash flow. The cash flow is going to continue no matter what the economy is, people always need a place to live. If anything would happen where they would have to get rid of some properties, it would be in the multi-family space because that's where most of the institutional investors own their rental properties is in the multifamily spaces, not the single family spaces. So in my personal opinion, I, I don't disagree with the data because he's just using raw data. I disagree with his conclusions. We are not gonna be into a crash. We do need some normality back into our market. What I said was earlier that what we had is unsustainable. It's gotta slow down at some point and it's, you know, market corrections, keep in mind if there's more inventory, anytime there's a downturn in the market, that is more opportunity for you to get properties at a lower price. At this point in the game, you guys should be holding onto your cash.
So you can take advantage of these opportunities that come up. It doesn't mean you crawl into a hole and not buy anything. You just have to be. You just have to make sure that the numbers work that's all. And again, you have plenty of tools in the toolbox. You don't have to sell a house because your occupancy drops. You just lower the rents a little bit. Those values on those homes over time are gonna go up. If you're invested in real estate, it's not a short term thing. It's a long term thing. It's just like investing in the stock market. If you're investing into different types of funds, they're all gonna be five to 10 years maximum or minimum investments, rather because of the liquidity nature of real estate. This is not other than your fix and flip. These are long term investments. And over the long term, the history is you're always gonna end up with, with good value in real estate. So thank you guys so much.
Lemme see. Do we have one other? No. All right. Thanks so much for, oh, our money is still a good source of funding deals. Yes, sir. Mr. J, that, that's another thing. If, and I'll, I'll leave you with this. When things start to tighten up, you need a network of people that you can get private capital from and it's getting more and more apparent right now as wall street is starting to get a little concerned. A lot of your short term bridge lenders are having a hard time getting securitizations now, and they're not offering the same deals that they did recently. And we'll, we'll do a show on that too. We had a big securitization that happened last week from some institutional lenders that are doing short term bridge loans, like what we do, but you know, they're selling it on wall street as securitizations and the securitization had failed.
So when I get some more information on that, hopefully we can add that on the next week's show. Thank you so much for joining us on the real estate investor show hard money for real estate investors. We are Carolina capital management. We are lenders in the Southeast for real estate and investors. If you have a project that you'd like us to take a look at, go to Carolina, hardman.com and click on the apply. Now tab, if you are a passive investor looking for passive returns, click on the accredited investor tab, don't forget the like share, subscribe and hit the bell. Have a great week. Talk to you soon.