One of my fantasies in life is to be a back-up singer and horn player in the 70’s disco-era band, K.C. and the Sunshine Band. For one full summer tour, I’d travel with the band, play songs that everyone knew by heart, and just have a blast. I’ve practiced my dance spin with a staccato horn blow move to the song “Boogie Shoes” just in case. That one probably isn’t ever going to happen. And neither are a few other fantasies I’d like to enjoy, like rewinding our economy about a year.
Commercial real estate investors are playing it quite safe these days given current conditions, prompting the question “Where are the opportunities?”.
Most success in commercial real estate is achieved at times like this, though. Usually by deploying some contrarian philosophies. Follow the crowd, believe all of the news you read, and act on that and you’ll, well, go where the crowd is going. Look for the hidden secrets, threats, and opportunities — a practice that becomes particularly helpful in tough times — and often a move is apparent that might not be possible in a different economy.
Today’s hidden gem seems to be residential rental properties. Conditions have created a new barrier to entry for would-be homeowners who now must remain in rentals longer than they would have in recent years. They are a longer-term customer, in other words, in the residential rental pool. Financing products for buyers of rental properties asks a 25 percent or 30 percent as a down payment. These are fairly abundant. You just need to shop around.
The condition making this a viable investment strategy is that housing prices are down and sellers are, in some cases, very willing to negotiate. Find one where that sweet spot of carrying ownership and the rent you might collect intersect and you have a potential winner. A savvy investor with his bank financing lined up in advance might put out more than one offer on potential rental houses and simply wait out the sellers.
With a customer base now likely to remain renting longer and more renters being created every day, it’s likely rentals will hold on strong over the next two years based on these demand factors. After all, even in an 8 percent anticipated unemployment environment, 92 percent of people are still gainfully employed. Find those folks, fix your purchase loan at today’s interest rates, and when prices rise again, you will rise with that tide all the while collecting rent to cover your carry costs. A contrarian move in an environment apparently content to sit on hands and wait for something more obvious to do.
Tom Hoban is co-owner of the Everett-based Coast group of commercial real estate companies, specializing in commercial real estate management, sales, leasing and investment. He can be reached at tomhoban@coastmgt.com, (425)339-3638 or www.coastsvn.com.
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