Spotting True Recovery in a Year of ‘Take-Backs’

Spotting True Recovery in a Year of ‘Take-Backs’

Residential rental real estate is definitely a bright spot in the economy these days. While many sectors of the economy are foundering, the demand for single-family rental (SFR) housing is far greater than that for any other type of housing, including multifamily options. As more households opt to move outward from the crowded metro areas in which they were once concentrated, it remains unclear whether this suburban/rural trend will coalesce into a dominant movement that will outlast 2021. What is clear, however, is that a house with a yard is currently one of the most attractive residential options out there even if you have to rent it instead of buying.

Rental Real Estate Investors are in a Great Position for 2020

Not surprisingly, real estate investors who already own SFR properties are feeling a strange combination of tension, as they wonder whether their tenants will continue paying rent and what will happen if they do not, and pride of ownership. After all, rentals are among the best assets out there at this point in time. Most rental investors active in the market today are actively seeking additional properties for their portfolios, but they are trying to do so in a way that enables them to “hedge their bets” against ongoing economic uncertainty on national and regional levels. Investors who do not currently own SFR properties tend to be investigating just how to acquire them without breaking the bank.

The big question is really this: How can real estate investors identify markets in which rental ownership will place them in a sound position to bring in returns while also optimizing their chances of owning rentals in resilient, pandemic-resistant economies?

Real estate investors are expert forecasters. Some go with their gut; others go with big data. Most use a combination of anecdotal evidence, networking-derived information, and local numbers and information. Important development factors like what companies are coming into (or leaving) an area and how many young professionals are looking to move to a given metro can be hugely important to some rental owners, while others care only about the MAO (maximum allowable offer) and the ARV (after-repair value). Investors like to say it is all about the numbers, but the truth is that there is a lot of impact when it comes to trends as well. Those trends will make or break your market selection process in 2020 and 2021.

Trend Stacking Will be Crucial for the Next 18 Months (Maybe Longer)

Although many in the medical and public health communities are publicly optimistic about the development of a COVID-19 vaccine and a return to “normal” pre-pandemic life and behavior, the truth is that even the most optimistic outlooks put the first availability of an effective vaccine sometime in the next 12 months. To make “normal” even more unlikely, the coronavirus COVID-19 is related to the common cold. That means that it is highly likely that a vaccine would not be a permanent solution and there could be a COVID-19 season just like we have flu season. Even more troubling, since COVID-19 does not appear to be particularly seasonal (unlike the flu), a vaccine that is only partially effective or that only lasts a few months could result in the need for regular revaccinations, which will likely mean that there is no “return to normal” in the near future.

What does this have to do with picking a good market for rental property investments? More than you might think. Because the world around households is changing, household preferences are going to change as well. In order to identify strong markets for your investment properties, you will need to identify markets where the appeal outweighs the fear or where the perceived safety or security of a location is strongly apparent. The best way to identify these markets is by trend stacking.

Here is how trend stacking works:

  1. Identify multiple positive trends that create market resiliency and/or insulation from economic volatility. 
  2. Look for markets in which consumer behavior indicates these trends are at work. 
  3. Evaluate the metrics of doing deals in this market (how to find leads, the conversion process, and cost of doing business). 
  4. Start seeking deals that meet a predetermined criteria.

Here is an example of how an investor might use trend stacking to compare two housing markets where they are considering investing:

Bob Investor is considering investing in rental properties in Savannah, Georgia, and in Tucson, Arizona. Both markets’ single-family sector is performing well, and the pandemic has lowered housing supply volumes while increasing demand in both markets. Both have positive trends going for them, including:

  • Attractive climate that enables residents to spend time outdoors most of the year.
  • Relative affordability compared to larger metro areas
  • Strong jobs markets with jobs that allow for either or both remote work or essential on-site work performance
  • Investor-friendly policies at state and local levels

So, how will Bob Investor decide which market he prefers? Bob takes a closer look at local trends to see how they “stack” in terms of long-term market performance. Note that Bob is considering two markets that were attractive and performing well before the pandemic and that have continued to generate returns for investors throughout 2020. When Bob stacks the trends, however, he notices something important: Savannah, Georgia, is what is considered a “drive-to leisure market” because it is located on Georgia’s coast and is easily accessible by car from Georgia and surrounding states.

This “drive-by” factor boosts Savannah’s likelihood of recovering and remaining somewhat insulated from COVID-19-related economic volatility above other markets (not to mention it plays host to one of the biggest ports in the country). Ultimately, Bob Investor decides to invest in the southeastern market because of the “bonus factor” that last trend brought Savannah’s trend stack.

So, if Bob Investor had gone with Tucson, would he have experienced disastrous results? In all honesty, probably not. He probably would have been fine as long as he had someone working with him in the market who could find good deals and get his properties cash-flowing in short order. However, by stacking up all the trends and looking for the tallest pile, Bob was able to make an investment he felt was both pandemic-resistant and economically insulated to the best degree.

The More Things Change, the More They Stay the Same

Fortunately for real estate investors focused in residential real estate, certain things do not change about that sector of the industry. For example, everyone needs somewhere to live, be they renters or owners. Although residential real estate has by no means remained untouched by the pandemic, it certainly has not suffered the equity meltdown that most real estate investors associate with the term “economic downturn” as a result of the last housing-led recession.

Certainly, some types of real estate assets do need to be evaluated using entirely different metrics than investors employed in the past. For residential investments, however, trend stacking is the most effective approach when it comes to optimizing your investments.