Comments by big private equity and hedge funds on their new plans for real estate investing caused a stir in industry circles at the end of July. So what are they up to now? What powerful lessons does this new revelation teach regular real estate investors?
In a dramatic turn of events, large Wall Street-backed investment firms and funds have announced new directions. Mid-sized firms are apparently being squeezed to sell off the tens of millions of dollars in single-family homes they have acquired over the last few years. Meanwhile, the largest funds, and funders of these mid-sized firms, are getting busy; diversifying into lending, multifamily and international property. Essentially, Wall Street set up many of these firms to fail. Now they can eat them up as they call their loans due.
So what does this mean for American real estate, and what important real estate lessons should small and solo real estate investors be taking away from this situation?
1. Watch Who You Borrow From
This is a lesson no one should have forgotten from the last housing boom. Still, too many are too fast to take the money when thrown at them. Leverage is one of the most powerful tools available to real estate investors. Still, careful thought should be given to who is being borrowed from. Look beyond the money for other perks.
2. Finance Terms
Clearly, the current issue is largely about the terms these mid-sized investment firms took. While they may not be in a serious crunch to sell immediately, or at major discounts, they obviously took balloon loans. Watch out for short term loans, don’t expect loans to be extended or new financing to always be available when they hit maturity, or that rates will be attractive.
3. Planning
The other main issue has been poor planning. Every experienced real estate investing professional saw that these firms simply weren’t prepared to jump into the market, and take on many of the worst properties in the nation. They underestimated the cost of spread out operations, hassle and unpredictability of rehabbing, and the daily challenges of property management. The result is high vacancy rates, and these firms running out of cash to complete remodels, and hold properties, while delivering poor returns. For smaller investors, this can all be avoided with better real estate education, planning, and leveraging established local property management experts.
4. Treating Tenants Better
According to Morningstar, big funds and institutional investors are currently suffering from rental vacancy rates as high as 50%. Each time a tenant exits, these firms are facing the equivalent of 5 months of vacancy, with no cash flow. Compare this to the vacancy rate in San Diego at just 2.8%, and turnkey real estate investment solutions which provide investors leased units and sometimes rental guarantees.
5. Leasing Strategy
Without a doubt, one of the major reasons behind these chart topping vacancies, and tenant turnover levels is the approach these firms have taken to leasing. Poor marketing, out of touch rules and systems for processing tenant applications, and the cold corporate approach, as well as flawed pricing systems, has alienated renters, and leaves an excessive number of units empty. There is more to great leasing and property management than just monitoring metrics. It takes an experienced eye to read between the lines and get it right, as well as remembering we are dealing with real people and emotions.
6. Smarter Rental Property Acquisitions
Mid-sized and super-sized descended on real estate markets, and picked them dry like vultures before moving on to the next. There was a desperate rush to buy, and a real estate fever that infected many new investors can cause them to buy blind, and overpay. Being fast is critical in the real estate industry, but that doesn’t mean being bullied into buying wild and ignoring due diligence.
Some of these big funds do plan to take their millions and billions on the road to buy in new locations after they cash out. They want out of overheated markets like San Francisco, which they pumped up by some 60% in the past few years, and are looking for more value. Investors that recognize where they are going and can get ahead of them with strategic partnerships, building relationships, and buying, will be well positioned to see sizable gains in the next three years.
7. Stick to Your Circle of Competence
All real estate investing strategies will require some education and learning. However, it is important to know when you are going too far out on the ice. Many of these firms did just that by getting into residential, single-family housing. Now, many are retreating to debt investing and commercial properties where they are more comfortable. Even Warren Buffett constantly reminds everyone to stay within their “circle of competence.” For the average individual, this will be single-family housing. After all, virtually everyone has at some point bought, rented, or at least lived in a house.
