The real reason there are less real estate investors today

This week, I came across a fascinating article on a significant shift in investment trends.

https://www.siliconvalley.com/2023/05/16/real-estates-popularity-as-investment-tumbles-to-5-year-low/

The article discussed the results of a survey which showed a decline in the popularity of real estate investing among 1,013 U.S. adults, falling from 45% in 2022 to 34% in 2023. It’s worth noting that similar figures are likely to be seen in Canada.

Real estate has historically held appeal for many investors, but its popularity can and will plummet when aligned with a cycle of rising interest rates.

Unpacking the Underlying Issue

Post-Covid-19 events that unfolded globally (including government stimulus packages, global lockdowns, and supply chain issues) triggered intense inflationary pressures. Central Banks, like the US Federal Reserve, responded with rapid short-term interest rate hikes to curb inflation.

For instance, the US FED Funds rate saw ten consecutive increases from March 2022, skyrocketing from 0.25% to 5.25% – a 2,000% increase over 14 months.

Given the size of the US economy, which represents 24% of the global economy (note 1), other central banks had to follow suit. The Bank of Canada, fearing capital flight and potential currency devaluation, mirrored the US FED’s strategy, pushing its policy rate from 0.25% to 4.25% – a staggering 1,700% increase in the same period.

These unprecedented short-term interest rate hikes significantly impacted bond markets and, by extension, mortgage interest rates for borrowers, affecting the viability of real estate investing significantly.

Consider an investor owning a building with a net operating income of $100,000. In February 2022, the property could support a refinance mortgage of $1,646,450. (Amortization 35 years, mortgage rate of 3.10%). Now, due to these changes, the property can only sustain a mortgage of $1,334,280 (mortgage rate increased to 4.66%) — a nearly 20% drop. This drastic decrease in refinancing capabilities significantly dampens the enthusiasm of real estate investors, explaining the dwindling popularity of this investment avenue, particularly in robust asset classes like multifamily properties, the situation is compounded. Sellers in these sectors are typically disinclined to part with their assets unless they are offered a satisfactory selling price.

Unearthing Additional Issues

Undeniably, there are other factors at play contributing to the current real estate climate. Certain real estate sectors, like office properties, have experienced a surge in vacancy rates over the past few years. The rise of remote work culture among many companies has dramatically altered the landscape of office demand, subsequently affecting investors’ borrowing power. Similarly, the retail real estate sector has long been grappling with its own challenges.

The escalating competition from online shopping, amplified by the impact of the recent Covid-19 lockdowns, has forced many smaller retail stores to shutter or drastically cut down their sales volume.

The Path Forward

Despite these hurdles, the solution for real estate investors remains straightforward. Real estate continues to be a powerful tool for wealth creation and inflation hedge.

Its unique appeal: banks can lend against it, providing investors with the leverage needed to grow their portfolios.

In our inflationary environment that has started climbng since 2021, it’s more important than ever for property owners to enhance their property’s financial health. Property owners must treat each property as an individual business entity. Just as public companies strive to generate returns for their shareholders, so should real estate owners view their properties. By providing superior services and amenities to tenants, property owners can improve their property’s financials. Each incremental increase in net operating income directly elevates the property’s value.

Thus, regardless of interest rates or wider economic conditions, a proactive property owner can still thrive.

Note 1 source: https://www.visualcapitalist.com/u-s-share-of-global-economy-over-time/

Mikael Kurkdjian, the broker of record (AEO in Quebec) with Baron Realty and licensed real estate broker in the Quebec and Ontario markets in Canada. Mikael is also a multifamily real estate investor himself.

Advice

The 6 Steps Before Making an Offer in Real Estate Investing

Par Mikael,avril 23, 2023

Introduction

At Baron Realty, we deal with a diverse clientele of buyers in the apartment building market. To help them be more efficient in their investment decisions, we’ve developed a step-by-step process for deciding whether to make an offer on a particular property. In this blog post, we will share six essential steps to consider before making an offer on a property.

The 6 steps before the offer process begins

Assess the Pricing First, determine if the asking price is reasonable based on comparable properties in the area. If the price is significantly higher than the market value, it may be best to move on to another property. This can be a quick 2 minute analysis to advance or not.
Evaluate the Location Consider whether the property’s location fits your investment criteria. For instance, if you prefer properties close to public transportation or within a certain driving distance from your home, make sure the location meets these requirements before moving forward. There is not point to make an offer on a property if the location was not satisfactory.
Understand the Demographics Consider the target clientele for the property, as different locations cater to different renters. Investors should know their preferred market, whether it’s students, downtown dwellers, or suburban families, and ensure the property aligns with their investment strategy. Different clientele needs different types and sizes of units and this must be assessed at this step 3.
Inspect from the exterior the Property Condition Before making an offer, assess the property’s condition in relation to its asking price. If a property requires significant repairs or maintenance, the price should reflect those costs. Avoid making an offer that will require renegotiating after discovering obvious maintenance issues during the property inspection stage.
Determine the Rent Upside vs. Cap Rate Compare the property’s current rent levels with the potential for rent increases. Properties with more upside in rents may justify a lower cap rate, while those with little to no rent growth potential should command a higher cap rate.
Conduct a Financial Analysis Lastly, analyze the property’s financials. This step should be taken after passing the previous criteria, as there’s no point in investing time in analyzing numbers if the property doesn’t meet your other requirements. The financial analysis will help you determine the final offer price and at this step is where the offer negotiations can begin.

Conclusion

Real estate investing is a long game, and our years of experience in multi-family and commercial real estate brokerage have taught us the importance of a systematic approach. Following these six steps will help you make more efficient and informed decisions when it comes to making an offer on a property or waiting for a better opportunity.

Baron Realty specializes in matching buyers and sellers of apartment buildings. The author,

Mikael Kurkdjian works in partnership with Ramona Ursu and a team of real estate professionals to bring the best boutique-brokerage services to the apartment transactional space in Ontario and Quebec. mkurkdjian@baronrealty.ca

Youtube video of this article is at

(53) The 6 steps BEFORE making your offer – 2023 edition – YouTube

Advice

The Relationship Between Cap Rate and Upside Potential

Par Mikael,avril 2, 2023avril 2, 2023

Investing in real estate, especially multifamily properties, can be a rewarding venture over the long run. To make informed decisions, it’s crucial to understand essential concepts like the capitalization rate (cap rate) and the potential for rental income growth. This article aims to shed light on the relationship between cap rate and upside potential, which is often misunderstood in the real estate market as most sellers, investors talk about cap rate without mentioning the upside potential in the rents.

The cap rate a definition

The capitalization rate (cap rate) is defined as a property’s net income divided by the sale price. It’s an important metric used by investors to evaluate potential investments. However, the cap rate alone does not provide a complete picture of an investment’s potential. The potential for rental income growth, or “upside,” also plays a significant role in the decision-making process.

When a buyer or multifamily investor perceives substantial upside potential in a property’s rental income, they may be willing to accept a lower cap rate at the time of purchase. This is because the investor anticipates that the property’s net income will increase once the rental rates are raised, ultimately leading to a higher cap rate and justifying the initial purchase price. Of course, achieving this rental growth often comes with costs, such as renovations, which can be a topic for another discussion.

The cap rate and link with upside potential

On the other hand, if a property has limited upside potential, a potential buyer may require a higher cap rate. This is because the buyer anticipates that the property’s net income will not increase significantly in the future, so they need a higher initial return to justify this investment. Thus, as multifamily property owners and commercial real estate brokers, it’s essential to consider both cap rate and upside potential when evaluating investment opportunities. The cap rate alone is insufficient without understanding the potential for rental income growth.

Conclusion

In summary, the relationship between cap rate and upside potential can be described as follows: the lower the upside potential in rents, the higher the cap rate will be; conversely, the higher the upside potential in rents, the lower the cap rate can be.

Understanding the intricate relationship between cap rate and upside potential is vital for making well-informed decisions in multifamily investing.

Baron Realty specializes in matching buyers and sellers of apartment buildings. The author, Mikael Kurkdjian works in partnership with Ramona Ursu and a team of real estate professionals to bring the best boutique-brokerage services to the apartment transactional space in Ontario and Quebec. mkurkdjian@baronrealty.ca