Covid seems to be the cover to upend home ownership
I have friends that own a home in Toronto that probably could sell for 1.5 million… They proudly told me that they have all this real estate wealth to pass on to their children. They have average jobs, I think they lived off their line of credit when one of them was out of work (just guessing, because as interest rates rise, they’re not living as large). They’re struggling to pay the bills. So I asked when would the sale of this house happen? They probably will live another 20 years, if all goes well, so are they going to sell now and give a chunk to the kids? Then where are you going to live? Or stay in the house and let your kids try to own their home in impossible conditions, saddled with university debts for which you might dig into your line of credit to help them. I think homeowners who used their real estate as bank machines are going to be in trouble now. And I think there are a LOT of people who did that. Homeowners who live within their means and can stay ahead of stupid debt have a better chance of doing well.
Don’t be left behind; housing is transforming into an income-producing commodity
For years, I have been uniquely blunt about housing’s transformation, but in the post-covid world, the window is now quickly closing for the adherents of the old world past. The powers want to make it ever more difficult to hold on to residential real estate.
Their goal; to be the landlord for everyone.
These money powers also know how high rents will eventually move in the future and want to be your landlord.
If you are an incredulous potential investor, don’t be discouraged with housing capitalization rates stuck at 5-6%. Based on house prices from three years ago, these cap rates are now 8-9%, and rising quickly.
These powers are intentionally destroying the housing market forever. They want to make the costs of ownership so onerous that home ownership in the States and Canada will eventually be for a privileged few. Thus, a growing percentage of the population will no longer be able to buy and own a personal domicile.
Not by chance; Housing costs are now rising faster than inflation
I know first hand how high the costs of property ownership have become. Between property taxes and the costs of maintaining and fixing, many of the younger folk will bow out. The construction, zoning, regulations, restrictions, and the science behind housing materials and equipment have become so complex and overwhelming that most are now totally out of touch with being able to repair their homes on their own, let alone understand the costs involved. This result is not by chance.
Ironically, the average homeowner family and society at-large are much better off when home prices are much cheaper.
The less expensive house prices,
- the lower the property tax and insurance bills,
- the less it costs to perform repairs,
- the less commission real estate agents make per transaction,
- the lower construction and equipment costs become,
- the easier it is to obtain loans,
- the less government regulation is needed,
- the more transactions that will take place as they are less costly,
- the higher a percentage of a family’s disposable income that can be devoted to other activities.
Ironically, the only people in a society who benefit are long-term investors and governments. The average family continues to get squeezed as house prices rise, and this includes current owners with free and clear properties.
Technology and modern finance has completely upended the once subjective housing industry
Those who rely on the wealth of an owner-occupied property are either going to be shaken out of it eventually or will have to readjust their life plans and become a slave to their domicile. The goal of the powers is to transform housing into a income-producing commodity that can only be owned by deep-pocketed investors or very careful small investors who understand the game.
You may laugh at this notion, but all I see is a one way trend in this direction. I am warning potential investors; you must stop vacillating and discard your old-school ideas. The only people left owning real estate and who will be able to continue holding will be the wealthy or the ones that can generate some sort of income off their assets, and the more properties an entity owns the better off it will be.
The residential real estate industry in its gestalt is quickly transforming into one that will be devoted to generating income with ever higher costs of entry.
This will all be a natural result for many as the costs of living become more crushing. In countries like the United States and Canada, as house price to income multiples increase, the cost of owning will become too great for an ever larger percentage of the population, especially when we consider how these countries are being overwhelmed on the lower end through multicultural immigration. These newcomers help achieve these objectives as they continue to put upward pressures on resources and costs.
The reason why homeownership is so much more prevalent in many of the Eastern European nations, for instance, is because many of these homes are inherited and are kept in the family while the costs of ownership are less. Moreover these houses are easier to build, while these countries have much less restrictions and zoning costs involved. Here in the United States, Canada, and Western Europe, the home ownership percentages are much lower. Look for these percentages to drop going out to the end of the decade and beyond. A secular change has been set in motion and I don’t look to static and anecdotal observations as evidence. As prices rise versus incomes, this will be the natural result.
My guess is that the goal is to view homeownership in the United States to be like that of Germany. And as the immigrants pour in, it becomes more of a doable reality.
Thus, I see articles like this one from The Atlantic, The Homeownership Society Was a Mistake as cleverly placed propaganda pieces to demoralize and condition renters and homeowners alike to accept the desired outcome.
Don’t be shut out; Investors need to change their mindset
I mostly pay cash now for properties. That 10-20% downpayment stuff is over. Your competitor is coming in with either 50% down payments or an all cash offer. For example, if I were starting out and had only $150,000 cash, I’d buy a rehab deal for $150,000 cash, perform the rehabbing and fixing up, and concentrate on making it look good. I would then turnaround and rent it out for as much as I can get it. At that point, I would then engage with a private lender to lend me a cash-out loan based on the rental income. I would then take that cash and buy another property.
This is exactly what I did for my last transaction. I owned a house free and clear and the lender lent me $300,000 at 65% LTV. I then went and paid $248,000 cash for another house, which was listed on MLS for only three days. It was originally listed at $260,000 but we settled on the lower amount as the owner was a smoker. I closed in seven days and owned the home less than a month after closing on the loan. The deals are there for anyone who wishes to look. The next month, the house next door sold for $315,000.
I fixed up the new property with an eye on renting it out; I framed out the lower level a little bit nicer to add a fourth bedroom, for example. I spent $16,000 fixing it up and procured a good tenant. The house is now worth about $310,000. Now I have two houses worth about $750,000 with a single $300,000 loan. The best part is that the new rent essentially pays the new mortgage.
Plus, I had about 25k left over from the loan proceeds that went a long way in helping me install vinyl siding on two houses as well as add a concrete driveway to another. I keep adding to the values and my rents continue climbing
Some last pieces of advice
If you want to get serious about investing in SFRs, the old way of putting 10% or 20% down has gone the way of the buggy whip. Big down payments or 100% cash will give you leverage to get much better deals. If you come up with a small down payment, any lender will only lend against a property that is already in great shape. This means you will be paying up.
I recommend for anyone reading this that your first purchase is made for as much cash as possible and you get the house and fix it up and add a ton of value into it. These opportunities are still available. Private lenders right now are offering 30-year fixed loans for 7%. There has been a major compression between conforming mortgages for owner-occupied residences and for investors. The difference used to be at least 300 basis points. They’re probably less than 100 basis points now. My last loan was a 30-year amortized mortgage @ 6.25% for five years. At inflation currently printing at 7-8%, I consider this cheap money. Moreover, I will raise rents on an ongoing basis.
20 years ago, my first two rental house purchases were financed with 10% down loans. We can’t do that anymore, but with house prices the way they are, the opportunities to make money on appreciation by adding value has increased tremendously. Instead of fixing up and flipping the house, rent it out instead and pull cash out to buy another rental property.