HomeUnion®’s very own Steve Hovland, director of research services, was recently featured on Market Wrap with Moe Ansari, a broadcast that’s dedicated to informing listeners on the current state of the markets and how it affects their money.
Hovland spoke to Ansari about how job growth is one factor in determining a market’s renter-demand, and how areas that are most-sought after like Oakland, New York, etc. might not be where investors should be investing their hard-earned money.
Listen to the full broadcast, or scroll down to read the whole transcript.
Market Wrap with Mo Ansari Transcript – 10/18
Moe Ansari: Welcome back everyone to Market Wrap, I’m Mo Ansari, and on our guest line is Steve Hovland. He is the director of research services at HomeUnion®. During his tenure at HomeUnion®, Mr. Hovland has invented a proprietary system to identify cap rates for investment homes across the nation, generated a list of the best markets for investors, authored a white paper on national and micro-economic trends shaping nearly 30 investment housing markets nationwide, and issued a number of economic briefs. Mr. Hovland, welcome to Market Wrap.
Steve Hovland: Thanks for having me, Mo.
Ansari: You have a new report out that compares investment property values for 10 of the most-sought after real estate markets. First of all, tell us what those markets are.
Hovland: We looked at markets that our investors are very active in, so Jacksonville, Dallas, Atlanta, Charlotte and Austin, and then we wanted to compare those markets to markets where investors ask us a lot about. They call us and they want to invest in these other markets: Denver, Seattle, Washington DC, New York, and Oakland.
Ansari: And those are some of the markets that you looked at as the most-sought after markets right now. Why are these markets doing better than others?
Hovland: Well, a lot of it’s job growth. Job growth is the proxy for renter demand. So job growth has been pretty stellar across most of the country, other than in say, Houston. So job growth is really driving the health of these markets. And Jacksonville was very late to the recovery, so Jacksonville’s been one of the big producers of jobs over the past year. And then Dallas has created the most jobs in the country over the last year along with Atlanta, which his way up there. Austin is a tech hub, so it kind of serves as a back office for San Jose. So they are getting a lot of those high-paying jobs in Austin.
Ansari: In your report, you analyzed a total of what a total of $400,000 will buy and investor of single-family rentals (SFRs) in these markets versus other markets that might be more popular with investors. Tell us what you found.
Hovland: What we found was when you’re looking at the high-priced markets like New York, Oakland, or Washington, DC, there’s a cap on rents. And the reason for that is you can only get a renter making so much income into say a 400- or 500 –square-foot studio, condo, or one-bedroom. Because of that, you can only get so much rental income out of that property. So, when you look at some of the less-expensive markets, these are still strong job-growth markets; you can buy two houses, and you can put families in there. Dual-income families that are more likely to stay for a long period of time, and they can pay much higher rents. So you’re getting one-and-a-half times more rent in some of these less-prohibitive cost of entry markets than some of the more popular, some of the more newsworthy markets that people are out there looking at.
Ansari: So, you want to be in a market where there are good jobs and you can get more for your property, so you can get people who can afford to pay that instead of getting a one-bedroom micro-apartment in New York, as I would call it, where it’s not really an apartment but sort of a studio. And, there you can get more rent, but it is very, very expensive. So, you think it’s a better deal to buy single-family homes where you can put a dual-income family in, and get more rent?
Hovland: Oh, for sure. And like I said, they’ll stay longer, whereas a studio in New York, that’s just a stop on someone’s path. So, life changes will quickly have them moving onto something else. They’ll find themselves married or in a relationship with kids, and so you can’t stay in a 500-square-foot studio very long, whereas, we see people living in these suburban, nicer homes in a Jacksonville or a Dallas, and they are staying for a much longer period of time. It’s just better for the investor, and it’s better for the renter.
Ansari: One of the areas you did not mention in this top 10 is Phoenix (or Scottsdale), where the property values went way down in 2008, 2009, declined, they have come back up, but why are they not mentioned, because it’s still very affordable there?
Hovland: It is. You know, I’m actually from Phoenix, so I have an in-depth knowledge of Phoenix and Scottsdale, and I own an investment property in Phoenix, and I bought at a very good time. It’s still affordable there, we looked at it, but it’s not…that ship has sailed. It’s not a market where we are seeing as many investors interested as they were when the prices were very, very low. Vegas is a similar market where you know the profit-taking has already gone away, and they are more likely to build a lot of houses there.
Ansari: So, the appreciation is gone at this point in time. The big bump in appreciation. And what about rents? Rents are not that high in Scottsdale, is that one of the reasons also?
Hovland: Rents are pretty elevated there. But you have a lot of condos. During 2004, 2005, 2006, we saw hundreds of apartment units in Scottsdale, specifically North Scottsdale, convert to condos. So there are a lot of rental properties there, and a lot of people when they moved on from those condos and bought houses and started families, they’ve kept them as rentals. It’s a highly competitive area of Phoenix, so the rents are healthy…it’s a very competitive area.
Ansari: We’re talking to Steve Hovland, director of research services at HomeUnion®. The problem for many real estate investors is location. They may live in an area they cannot afford to buy investment property in. What would you say to them?
Hovland: That the option to buy investment properties elsewhere is available. Our founders recognized this problem, and being here in Orange County, we see that this is a difficult place to invest in if you want to invest locally. So, what we’ve done, is put together a process where investors can buy remotely. That’s done through on-the-ground infrastructure and technology. Big data makes us more available than it ever was. It’s always been a challenge. Of the 16 million single-family rental properties that exist in this country, only a few hundred thousand are owned by institutions. Nearly all of them are owned by mom-and-pop investors. Nearly all of those are owned within 75 miles of where they live. So this is an asset class that is begging to be opened up to everybody that wants to invest in it.
Ansari: How important is it to know the area that you buy as well as knowing reputable management companies, etc. if you’re buying a rental property?
Hovland: It’s more important than anything. We are a technology company, but we are also a real estate company, so that old adage, “location, location, location,” hasn’t gone away, and that will never go away. It is extremely important to understand the area. Not necessarily the as the investor, but as an operator of investment properties. We have to know everything there is to know about that area. Let me give you a quick example: Some places in this country, you pay double the tax rate as an investor than an owner-occupied home would actually have on it. So if you don’t know that and you look at what the rents would be and what the home price would be, and go buy that, you will end up getting a tax bill and realize that you’ve made an investment in something that doesn’t pencil out like you once thought it did. So knowing that area, knowing the companies and the vendors, not just property management companies but also the people who are going to go to your home and fix leaks or repair anything that happens; that’s extremely important.
Ansari: So you really need to know the management company, that they can manage it, so you’re not getting calls in the middle of the night for something or the other. That’s really the key, and they can manage it properly and take care of it at a reasonable price. Some of these management companies will take most of your cash flow, and you’re left with very little.
Hovland: Exactly. So finding a management company that, one, is effective, and two, has done their due diligence, and vetted all of the vendors that they use, and they don’t take too much of your cash flow, that becomes paramount for investors and understanding that.
Ansari: It looks like the Fed will raise interest rates in December. There’s a 70 percent probability that they will. Should investors buy now to take advantage of lower rates, or should they wait and see how the higher interest rates impact the real estate market?
Hovland: Well, we do have a couple more jobs reports between now and December, so the Fed could end up going either way on this. I do think that they will raise rates in December. It’d be the first time they’ve lifted rates in over a year, and the reason for that is…we came out of this recession in July of 2009. We are seven years’-plus removed from the last recession. The largest economic growth period since World War II has been 10 years so we are almost definitely closer to the next recession than we are the last. So the Fed’s got to start normalizing the monetary policy, or they are not going to have the arrows in their quiver to head off a deep recession.
So yes, the Fed will raise rates, they’ll probably begin normalizing monetary policy, however there’s so much liquidity in the system right now that I think we will see mortgage rates stay relatively stable. They’ll tick up a tiny bit after the Fed raises rates in December, but it will be a lot like last year where we saw the Fed raise and then we hit all-time lows on the 30-year rates available from the agencies over the summer time. It’s a lot like the Fed is pushing on a string. It’s going to take two or three more hikes to the interest rate before we see real growth in mortgage rates. So the window is going to close a little bit in December, but it’s certainly not going to shut for investors looking to apply leverage.
Ansari: How does HomeUnion® help real estate investment policy? What does HomeUnion® do that could help the investor?
Hovland: What we did, and I’ve touched on this briefly, is we’re a technology company and a real estate company, and we use big data to open up this asset class for investors all across the board.
Ansari: Could you explain that a little bit? What does that mean? You use big data to analyze the real estate market?
Hovland: So we’re looking at 11 different inputs into 200,000 neighborhoods and 110 million homes all across the country. We’re looking at safety scores; we’re looking at white-collar jobs, we’re looking at the percent of renters in these neighborhoods; income and prices. We’re using all of that information to measure the quality of a neighborhood. On top of that, we have other algorithms that we use, such as our rent AVM that attaches a rent, so we have an expectation of what the rental income will be before an investor buys that property. We also have a Right Bid AVM. So we look at the heat of the housing market in a local area, and we’re able to tell our investors that these are the ranges we would want to bid in on this property on your behalf because this is where the home’s actually going to sell.
We’re using all this data and algorithms to underwrite these properties and get a reasonable expectation for the long-term returns for investors, and then we couple that with an on-the-ground infrastructure. So before we move into any market, we bring in all of these local real estate experts to protect both our investors and our renters. We are a property management company so our renters are our clients as well. So we bring in people that handle the inventory that we offer our investors, and we have property managers, and then we have a lot of rehab, usually $5,000 to 10,000 on the homes we purchase, so we have people that manage those rehabs in every one of our markets, and they vet all of the vendors that we work with in each market.
Ansari: So do you buy the property or, how does it work? So let’s say I want to buy a property in Phoenix, and I’m in California. How does it work? Does somebody come and subscribe to your service, and you give them the data…how would it work?
Hovland: So, if you wanted to buy a property in one of the HomeUnion® markets, Phoenix is not one of them, but let’s say it’s Austin. It’s a great market, you would come to HomeUnion®.com and register and tell us a little bit about your individual goals. Are you close to retirement? Or pretty much in real estate investing you can pay cash for a house and collect monthly dividends immediately, or you can leverage up to the point where the house takes care of itself. Then over the course of 15 years, you’re going to pay that asset off, and you’ll have dividends coming to you then. So whatever your goals are somewhere in that range, we’ll recommend how to meet those goals based upon, what you want to invest, where you want to invest, and where you want to be in 5, 10, 15 years. And then we’d recommend a portfolio for you, either one. Three or five houses, depends on what you want to invest. And you can swap out houses, find ones that you like. At that point, what you would do is qualify for a loan if you’re applying leverage, and sign what’s called an LPOA, a limited power of attorney, to let us bid on that house on your behalf. So the investor and HomeUnion® have a range that we’ve agreed to, and we will bid on that range, and we’ll start at the lower end of that range, and we’ll bid on it, on your behalf, so we don’t have to keep going back to you every time there’s a counter offer.
Ansari: It’s really interesting, Steve; this whole thing, how it works, and I appreciate your taking time to be with us today. Also you have a report, what $400,000 buys in the most sought-after investment housing markets, and I think it’s a very interesting concept that you have. Thank you again for being with us today on Market Wrap.