"Affordability matters, for the investor and the homeowner too."
The Atlanta skyline has a lot of visible cranes right now making it easy to understand that we are in an interesting growth cycle. Everybody is giddy and excited about where the real estate market is headed, and we’ve had, what I think, is one of the longest run-ups in the history of the overall market. Equities are at an all-time high, but in contrast, so is student debt and vehicle loans. The financial market that has yet to face a correction itself, which ties directly to housing affordability and strategies real estate investor deploy.
In my Think Realty Radio interview with Doug Duncan, the chief economist at Fannie Mae, he mentioned that if there was to be a market correction, we can expect it toward the end of 2019, within the next 24 months. It should not be as drastic of a correction as 2008/2009 since predatory lending is not currently prevalent. However, there should be a little bit of a correction to help adjust home values. Personally, I think prices are a little inflated, especially in Atlanta. Keep in mind, demand is very high, and inventory is very low. Does this mean we should be careful about what we buy or just let the good times roll?
Affordability matters, for the investor and the homeowner too. As affordability decreases, homeowners are not able to buy, so, where do they go? They’re likely to move to neighborhoods that are outside of primary markets. For example, they may look in Atlanta’s secondary markets that include Alpharetta, Marietta, Douglasville, Lawrenceville, Newnan, Macon, and Stone Mountain.
These secondary markets are still well positioned to commute to Atlanta. Sure, you may have to deal with a bit of traffic, but ultimately folks who are priced out of Atlanta due to unaffordability are forced to seek opportunities and options elsewhere.
Impact on Investors
What does this mean for investors? This could mean interest rates will increase this year, maybe two or three times by a quarter point each time. In general, this doesn’t affect the mid-western, and south eastern markets.
However, it will affect those markets where property prices are hundreds of thousands of dollars into the millions. We’re talking about the most expensive markets in the United States, namely Los Angles, California; San Francisco, California; Seattle, Washington; New York, New York; and Miami, Florida.
As investors, we can take advantage of this by going to secondary markets and buying single-family properties.
What Properties Should Investors Consider?
At most your all-in cost – acquisition plus carrying costs, plus closing costs, and plus any renovation costs – should be no more than $140,000 to $150,000.
As far as property characteristics, investors should be focusing on single family homes, three-bedroom, two baths with a one car garage, or if there is on street parking with no garage that is also acceptable. Depending on the neighborhood you purchase in, a minimum square footage of 1,100 to 1,200 square feet.
In general, a 3/2 home will support a family. However, if you are looking at 2/1 homes, you may get a more transitional type of renter which could skew your yields a tad due to frequent turnover in renters. A slightly larger home might lend itself to renters who stay longer.
The Investor Perspective
This is exactly what I’m doing right now. I’m looking for a property that’s outside of Atlanta, just a little bit, within 30 to 45 minutes driving distance, and properties between $100,000 and $140,000 that can rent for between 1.2 and 1.4 percent of my all-in cost. Once I find those opportunities, I will also find associated property management that’s local to that area, then buy the property.
If we, as investors, take advantage of those specific opportunities that are a little outside the primary markets, in these secondary markets, we can win. Even if we pay a little bit more, when we understand we’re in the game for the long term, we can win. But the moment we start getting greedy, don’t pay attention to our numbers, or violate our investment criteria and the rules we’ve set up for ourselves, we lose.
Affordability is a key factor for any real estate investor, new or seasoned. Go one step further though and consider these additional factors:
- Days on market
- Job market in perspective area
- Public transportation
- City planning
- City expansion
Perform your due diligence while looking at secondary markets, follow your investment plan and you should come out ahead.