Buy a Home

The idea: Investing your money in a home is a great way to build intergenerational wealth. It’s the single largest purchase most Americans make and, with the right planning, it can be an incredible asset. Unlike a stock portfolio, you can actually get tangible use out of your home. You can either live in it or rent it out and collect income while you wait for the asset to appreciate.

The strategy: The current climate is challenging. Covid kicked off a real estate buying frenzy. The Fed lowered rates to zero and mortgage rates became incredibly low. Today, mortgage rates are higher and sellers are still holding onto aspirational pricing. But we are on the cusp of a sea change. High-priced homes aren’t moving. We are seeing buyers negotiate more and sellers meeting them to get deals done. Buyers with enough liquidity are making competitive offers in cash because they don’t want to deal with higher monthly mortgage payments. This is an opportunity market for buyers, you just have to do your research.

I would encourage investors to consider the two “Ls” — light and location — instead of looking for a huge space. A better location is likely going to bring better appreciation. Also, for those fortunate enough to have the resources, I see opportunities in stretching a little for that reach property. A lot of people right now are worried about inflation, their stock portfolios, cutting costs. If you’re willing to take a risk now, I think you could have incredible upside. Listen to your circumstances, stick to that general 20% to 25% down payment guide if you’re using a mortgage and don’t be afraid to negotiate.

Invest in Rentals

The idea: We’re in a time of significant inflation risk and I like to think about a single-family rental home as something of an inflation-indexed bond with an equity kicker. A bond typically has a fixed coupon. A single-family rental home, with its rental stream, has a fixed flow of payments. But every year you could reset it to a new rate to compensate for inflation. Then the equity comes from your appreciation over time. The idea of renting is also changing. People are waiting longer before buying. Higher interest rates are preventing many people from buying. So this creates a real place in the housing market for high-quality rentals.

The strategy: Typically when people want to buy rental properties, they think they should invest near where they live. But it’s unlikely that the best rental markets are near you. And it’s not a very good diversification strategy. I encourage people to think more broadly about areas that might be in the path of job and population growth. You’ve got a lot of interest in places like Texas, Florida, the Carolinas and Atlanta and I do think those places all make a lot of sense for the long term. You also have to look at the supply side. Ideally it’s a place with good economic growth factors and a high quality of life where it’s not that easy to add tons of supply relative to the demand. Good examples are Austin and Nashville.

I would also encourage thinking about multiple properties, not just one. The beauty of single-family rentals is these aren’t multi-million-dollar homes. These are $250,000 or $300,000 homes when you get to some of the lower-priced markets. You can buy several of them and get diversified exposure. One strategy would be to buy them all-equity, own them outright and wait for interest rates to decline. When they do, you could finance them, pull some cash out and then buy more properties. That’s a tried-and-true way to build wealth through real estate.

There is a case for buying a more expensive rental you plan to use occasionally and want professionally managed as a short-term rental when you are not there. It all depends on whether you want a utilization component of the property or you want it to be a pure investment.

As far as what type of property to buy, there are advantages to new builds. Your repair and maintenance costs are likely to be lower for a few years. But a lot of times older homes in more established neighborhoods might have the better location closer to jobs and amenities, because they were built first. A really good renovation up-front could save you on repair and maintenance costs later. 

Wait Out the Downturn

The idea: One of my friends is a jiujitsu guy and he has a quote I really like: “Don’t just do something, stand there.” As far as buying real estate in this market, sometimes life dictates that we need a house. Maybe you have a family on the way and need to buy now. But the substantial increase in interest rates from two years ago has significantly changed the calculation on buying today. If you can wait, the landscape ahead does look like it could provide a better entry point for a house later instead of now.

The strategy: It’s important to be mindful of downsides in the current market. The rise in rates makes mortgage payments more expensive, meaning you may be priced out of a house that’s right for your circumstances. There’s always inventory coming to the market, but what’s coming on now may require more repairs and maintenance. It all depends on your appetite for elbow grease. You have to have time and resources and access to labor to do major work. Especially now, I’d caution against buying for the short-term. If you’re only going to stay in the house a couple years, you’re flipping it, and timing the market rarely works.

If you have enough saved for a deposit and want to wait out current conditions, there is only one viable place for that cash: money market funds. Cash has become a viable asset class to deploy reserve assets in order to garner yield; it’s a more viable option now than it has been in the last 20 years. Let’s say you have $200,000 saved and can get 4% on that cash. You’re picking up $8,000 a year in interest. If you think about it, that’s at least a couple months’ rent, which should take some of the sting out of waiting.

One thing to remember — and this is where a financial adviser could come in handy — is that money you plan to deploy in the next five or so years does not belong in the market. I’m not saying the markets are going to go down 30% or anything, but if you’re investing that money, you need to understand that your hypothetical $200,000 deposit could shrink pretty quickly, limiting your purchasing power.

Waiting also gives you more time to adequately research where you want to buy. Check the area out not just at its prime (for instance, in the spring or summer), but at different times of year as well. Remote-work policies are changing, but they might also allow you to spend time getting to know a new area.

The Case for Commercial

The idea: We’re sitting in an historically uncertain position with respect to a lot of important economic factors. We don’t know when and where inflation is going to land or where the risk-free rate is going to land. What we do know is that this uncertainty has created a significant divide between pricing set by two distinct investor groups — private equity and the public markets. The opportunity right now is to find investments that are out of favor with the public markets but that other investors, such as private equity, would be willing to buy (and take private) at a premium. Hard assets are unloved now and often mispriced in the public markets, but there’s an unprecedented amount of private equity dry powder looking for real estate today. I see some real opportunities in that pricing dislocation.

The strategy: Ideally, I would invest in the public market and work with private investors to buy assets away. Theoretically, this might mean buying into a publicly traded real estate investment trust (REIT) at, say, $10 a share, and then compelling the company to sell to private equity investors at $20 a share. The public market generally doesn’t want companies with hard assets right now. It prefers cash-flowing companies and companies that can see major earnings growth. Plus, public shareholders largely have a very negative view on certain real estate asset classes, or REITS with multiple asset classes, and may be painting with too broad a stroke, discounting the value of the real estate assets in these companies. Meanwhile, what I see is an unprecedented amount of demand for hard assets from private equity, literally never seen before. That explains the pricing differential.

The play here would be to find an activist investor that you think is going to collapse that dislocation between the public share price and the true value of the underlying real estate assets. An investor may also be able to get some exposure to this phenomenon by investing in small-cap, diversified REITs. These are likely candidates for acquisition, so if you want to increase your “hit rate,” aim there.

Another option would be to invest in an index fund of REITs, such as the FTSE NAREIT All Equity REITs Index. Not every name in that REIT will be taken private at a premium, but because there are so many names in an index, there is a good chance you’ll have some exposure to the trend.