September RIA Roundup: A Shift in the Market
The RIA Roundup is a monthly real estate newsletter with the latest stories, data, and insights curated especially for rental property investors.
In this issue:
Lead Story: A Shift in the Market
Portfolio Updates
In Other News…
Final Thoughts: How Much Is “Enough”?
Lead Story: A Shift in the Market
The early data signals we saw several months ago pointing toward a slowdown in the real estate market have become more pronounced, and are now unmistakable: home sales have dropped precipitously; inventory is rising; and while prices are still high, they’re showing signs of stabilizing — or in some places, even beginning to drop.
At the current rate of sale, there is now nearly 11 months of supply of homes for sale, the most we’ve had since 2009. If demand continues to be soft, inventory may continue to rise, which will put downward pressure on home prices. However, inventory is still low by historical standards, and we still have an endemic housing shortage that can’t be addressed in the near term.
Why is this happening? The most obvious cause of the slowing of demand is rising interest rates, which are now over 6%, the highest they have been in more than 10 years:
You’ve no doubt seen and heard about these rising interest rates, since the media has covered it extensively. (If gas prices are any guide, they won’t be nearly as keen to cover the story if and when mortgage rates fall — it’s not news when the plane lands safely, as they say. So as a public service announcement, I’d like to mention that gas prices have fallen for 14 consecutive weeks to a national average of $3.77/gallon, the cheapest it has been since February.)
Anyway — as interest rates increase, buyers can afford less, so they may choose to wait (or rent instead.) Higher interest rates also tend to “lock in” homeowners who have lower interest rates on their existing loans — they may be less interested in moving, upsizing, etc., if it means giving up their 3% loan to get a 6% loan in its place.
Separately, some people argue that we’re headed toward a recession (or that we’re in one already). Are we? Hard to say. Here is Scott Galloway’s take on that question. (He is one of my all-time favorites; his No Mercy/No Malice weekly newsletter is consistently awesome.) In any case, rental properties are famously quite a recession-proof investment, so I don’t deem the question terribly relevant in that respect — though the expectation of a recession and/or a drop in home prices may be keeping some buyers on the sidelines as well.
So what does this all mean for rental property investors? Based on recent experience with my clients, here are my takeaways:
Buying is getting much easier. Solid listings aren’t getting snapped up in 1-2 days anymore, and you have more leverage as a buyer as a result. It also means that cash offers are not as important, since sellers aren’t as likely to have multiple offers from which to choose.
Homes cost more, but rents have risen too. Rents have increased at a blistering rate the last few years. This means that a home may cost 30-40% more than it did two years ago, but it will rent for 30-40% more as well. (If you’re looking for a good tool to estimate rent potential, I think RentCast is the best one out there, and I use it constantly.) Like home prices, rents are now showing signs of stabilizing, which is a good thing.
Cash flow is still achievable. While rising mortgage rates do reduce your potential cash-on-cash returns due to higher interest payments on your loan, strong cash flow deals exceeding 8% cash-on-cash are definitely still out there. (And remember: if rates go down in the future, you can always re-finance!)
In any case, there are very strong arguments that you should not try to time the market anyway. As the old maxim goes: the best time to buy was 10 years ago, and the second best time is now. So it’s all about navigating the current market smartly, not about waiting for perfect conditions.
Portfolio Updates
First of all, it’s been a while since I published my monthly portfolio updates, and I was getting nervous about how far behind I was falling. (I even received a few emails from subscribers to check that I was still going to be publishing them!) So I spent this past weekend getting caught up — you can now enjoy all the ups and downs of my Memphis rental portfolio over the last three months:
It was quite the bumpy ride, as this monthly cash flow graph attests:
June was my worst cash flow month ever, thanks to two expensive turns; August was by best month ever, thanks to a large chunk of back-rent received. The details, including all the financials, can be found in the individual posts.
Meanwhile, I am on the cusp of achieving one of my goals for 2022: selling all my NYC rental condos in New York City. At one time, I had three of them. I sold one this past December, another one in August, and I’m scheduled to close on the last one next week. Since I haven’t written extensively about these properties on the blog, here’s the gist: they were purchased before I understood the power of cash flow investing, so they were appreciation plays based on my knowledge of my local market. I’ve lived in NYC for decades, so of course I knew which neighborhoods were about to pop! Easy money, right? Well…not so much. The properties didn’t appreciate well at all. Eventually I’ll get around to publishing my final numbers on each of these condos, but suffice to say for now that they were lackluster investments.
The goal in selling them was to redeploy the equity into investments that produced more cash — i.e. more Memphis rental properties. But that hasn’t really happened so far: proceeds from the first sale were used to purchase a golf condo in Florida that we’ll use in winters; proceeds from the second sale have not yet been deployed. (We were a little short on cash, so we decided to hold onto it for now.)
With this final sale, though, I’ll be doing a 1031 exchange, which will allow me to defer capital gains and depreciation recapture taxes that would otherwise be due. (This is one of the many powerful tax advantages of rental properties.) I’ve helped several clients navigate 1031 exchanges, but this will be the first one I’ve done personally. I will use the proceeds of this sale to exchange into several (probably 3) properties in Memphis — so I’m excited to have some new properties to share with you soon!
In Other News…
As anticipated, the Federal Reserve raised interest rates 0.75% this week, as they continue to attempt to bring down the rate of inflation. (This action does not directly influence mortgage rates; in fact, the Fed’s determination to tame inflation may actually cause mortgage rates to fall.)
It has been a pretty bad year for stocks so far (down about 20%). And the outlook isn’t improving much.
I’ve been curious for many years about the water situation in the American Southwest. It’s getting more precarious, both because of the ongoing multi-year drought, but because people keep moving to these places. Cities like Phoenix have been some of the hottest real estate markets in the country, but I wonder if we’re reaching a turning point here…or a breaking point. (In related news you may or may not have heard, the Great Salt Lake is disappearing rapidly — this 6-minute video is a terrific explainer on what’s going on there, and across the Southwest in general.)
You may not like it, but Pumpkin Spice season is officially here. There are plenty of pumpkin spice haters out there, but I am not one of them — I’m unashamed to admit that I had an iced pumpkin spice latte from Starbucks this week. It was delightful.
And finally: two of the biggest names in the FIRE movement, Pete Adeney (aka Mr. Money Moustache) and Paula Pant, are out with a new Netflix documentary about personal finance called Get Smart with Money. It tracks 4 people/couples through a full year as they are coached toward their financial goals. I watched it and thought it was pretty good — particularly as a coach, I appreciated the different styles and approaches of four coaches (Pete, Paula, Tiffany Aliche, and Ross Mac.)
Final Thoughts: How Much Is “Enough”?
One story that really stuck with me this month was the suicide of Gustavo Arnal, the CFO of Bed Bath & Beyond. He jumped off the balcony of a high-rise condo building in Manhattan just a few blocks from where I live. (It’s known at the “Jenga tower”, for obvious reasons, and it has some of the most expensive condos in all of New York City.)
Mr. Arnal obviously had a successful career. He was just 52 years old, and had already been CFO of Avon and Walgreens before coming to BB&B. He was making ~$4M per year, he had a swanky apartment, a wife, and two grown daughters. (One chilling detail of this story is that his wife was in the apartment when he leaped.)
So what happened? Why would such a man jump from his 18th floor apartment? Was he unstable or mentally troubled?
We don’t know for sure. But it seems more likely that he jumped to avoid legal accountability for a good old-fashioned “pump and dump” scheme, in which he allegedly engaged in fraudulent activities to artificially inflate the price of BB&B stock (of which he owned quite a lot, since much of his compensation came in the form of stock.) A lawsuit had been filed in DC federal court just two weeks before his suicide; the suit named him, activist “meme stock” investor Ryan Cohen, and others. (There is also a Netflix documentary about the “meme stock” phenomenon coming out soon, which I’m looking forward to.) This lawsuit had the potential to end his career, send him to jail, and cause the financial ruin of his family.
And here’s the kicker: this scheme started in March of this year, only six months ago. In the midst of all his success, financially and otherwise, Mr. Arnal was apparently convinced by Ryan Cohen that he could get on the meme stock bandwagon and get really rich.
Which begs the question: just how rich did Mr. Arnal want to be?
To me, this was a tragic failure to recognize “enough”. During my retail career, I often marveled at 60-something senior executives who were still toiling away in their high-stress jobs, even after making huge sums of money in their careers. Why did they keep going? What were they after, given that they had no doubt already achieved financial freedom? I suppose the perks of a C-suite job are nice, but aren’t there even nicer perks to be had — like, I dunno…doing whatever you want, whenever you want?
I knew I would never reach the C-suite of a company, because I would quit long before I got there. Which is exactly what happened — I got out of there as soon as I had “enough” to not be there anymore. The concept of “enough” is a recognition that time is a much more precious resource than money — and that as soon as you no longer need to trade time for money in order to get by, you shouldn’t, and instead should be more thoughtful and intentional about how to structure your life and make use of your limited time.
My friend over at Retire Before Dad had a recent post that illuminates this idea in a nice way, focusing on the inflection point where time becomes more of a focus than money, what might cause that shift for someone, and what it means afterwards. (A while back, I wrote a guest post on his blog about my escape from the office grind.)
Happy investing!
Eric
About the Author
Hi, I’m Eric! I used cash-flowing rental properties to leave my corporate career at age 39. I started Rental Income Advisors in 2020 to help other people achieve their own goals through real estate investing.
My blog focuses on learning & education for new investors, and I make numerous tools & resources available for free, including my industry-leading Rental Property Analyzer.
I also now serve as a coach to dozens of private clients starting their own journeys investing in rental properties, and have helped my clients buy millions of dollars (and counting) in real estate. To chat with me about coaching, schedule a free initial consultation.
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