Today's Best Investment Strategy for Significant Value and Income Growth
Skyrocketing home values and limited supply of rental units have set up a fantastic opportunity for significant rental growth and valuations. Is your portfolio positioned to take advantage of this unique opportunity?
Markets that have experienced rapid home appreciation creating a housing affordability pinch have led to a flood of condo conversions. Homebuyers have chosen condos as a cheaper alternative to single-family housing.
Low Supply of Apartment Inventory
Apartment rental unit supply is low relative to historical patterns. With the heavy demand for condo conversions, a huge chunk of supply has been removed from the market setting up favorable supply and demand dynamics.
In addition, high land costs coupled with high construction costs have made it more difficult to build new apartment units. In fact, much of the new construction of apartments has been allocated to condo conversions.
Over the next couple of years, there will be low supply of apartment units with increased demand from renters searching for affordable housing.
This supply and demand dynamic will put upward pressure on rents creating sizable rent growth.
Low Affordability
National housing prices have increased 50% in the last five years with some markets seeing 100% plus hyper appreciation.
In markets that have experienced skyrocketing home appreciation, a huge gap exists between rents and housing valuations. This gap will be narrowed over the coming years as rents go up and mortgage payments come down.
Let’s take an example of the Orange County California market that has experienced significant home appreciation over the last few years, and has a low supply of apartment inventory.
The median sing-family home price in Orange County California is $690,000. A monthly mortgage payment on 30-year mortgage using a 6.5% interest rate including principal, interest, taxes and insurance with a 20% cash down payment is approximately $3,900 per month.
The average monthly rent on two bedroom / two bath apartment units in Orange County is $1,500.
Let’s compare the average monthly house payment to the average monthly rent payment in Orange County. The average monthly mortgage payment is $3,900 and the average monthly rent payment is $1,500 creating a gap of $2,400 - a huge gap!
Look for this huge gap between rents and mortgage payments to narrow. Rents have generally been low for years due to a higher supply of apartment units because of the booming housing market. But these dynamics have changed so rents are expected to increase - and in some cases, a lot.
In fact, the gap between rents and mortgage payments is already starting to narrow. The Orange County Register reported on January 19, 2006 that “Orange County rent increases at big complexes averaged 5.9% for all of 2005, the biggest annual increase since 2000.”
Strategic Positioning for Significant Value and Income Growth
Unlocking value and income by repositioning apartment assets in markets with favorable supply/demand dynamics and low housing affordability is a successful apartment strategy that has limited downside and significant upside.
Here’s an example a successful business model. Buy or redevelop apartments in markets that exhibit these characteristics.
1. Heavy condo conversions
2. Low affordability due to skyrocketing home prices
3. Low supply of existing apartment units
4. Strong economy creating high demand
5. Big gap between average rent payment and mortgage payment
6. High land costs
7. High barrier to entry
A value add play could be to buy older “B” and “C” properties that can be repositioned and renovated to command much higher rents.
There are many varying business models that can be created and implemented to take advantage of the significant rent growth in the coming years.
Invest in markets that offer limited downside risk with solid upside growth potential. These markets should contain many of the seven characteristics mentioned above.
Make sure you are strategically positioned to benefit from this limited time rent growth opportunity. Take advantage of today’s best investment strategy for significant value and income growth.
