I‘ve been giving some thought to the opportunities in this market and when we might see opportunists emerge to take advantage of some element of the current real estate downturn. Anecdotally, I heard something that supported what I had already been formulating and so I put this question out there.
Q: “Are we seeing a new, under-the-radar crop of real estate millionaires in the making?”
There are many investors watching and waiting for the right time to invest in real estate here in the Phoenix area. Indeed, investors can look at the Phoenix real estate market knowing there are some very positive characteristics in the market.
We are approaching a nexus whereby property values are once again very low and where the cost of money is very cheap. Some investors are beginning to act and may represent the next real estate millionaires - small-level investors positioning themselves with a series of low-cost investments to be held over the long-term horizon.
First, Interest rates for primary residences are in the 4.75%-5.0% range though investors likely will pay a higher rate for financing. We may even see these rates move lower which is incredible (reportedly, current rates are the lowest rates in 60 years!).
Second, with housing prices dropping, the principal and interest on these properties will allow for investors to rent these properties at rates again attractive to apartment renters that prefer a home. In other words, the difference in rents between apartments and single-family residences is once again closing and so single-family residences will prove more attractive to many renters. As a result, investors will see promise here.
Third, the Phoenix metropolitan area continues to grow each year by as much as 2.4% to 2.8%. Even though growth has slowed given the current economic climate, nearly all the cities across the Valley expects continued population growth with some projecting populations more than doubling by 2030. Population growth will create sustained demand for rental properties and homes in general. This will mean likely gains in the value of the property.
Now, the old adage holds true now, as opposed to the previous market run-up, that it takes money to make money. For investors looking to finance a sizable portion of the money to purchase properties, lenders are looking for as much as 20% or more down. In addition, if the investor is more a ‘mom and pop’ with a primary residence, the lender is looking at the equity existing in the current property so as to avoid any possibility that the buyer is really trying to purchase a property only to dump the existing one once the new one is acquired.
The three elements above stand to create a low-cost long-term investment potential that could make many much more financially secure especially as you consider a renter literally paying down principal more quickly because loan interest rates are low.
Coming back to the anecdote, the discussion centered around an investor acquiring several properties to serve as rentals. The investor’s outlook is long-term and betting on a reasonable return on investment encompassing both long-term appreciation, tax benefits, rental income, and equity growth through principal paydown. The investor is banking on a substantial nest egg way down the road.
The investor is not institutional but just more savvy and willing to take the risk that the long term outlook for the Phoenix housing market has significant upside. As a result, the investor may be the New Real Estate Millionaires in the making.
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