Cheaper More Expensive By the Dozen
Usually, the more of something you have to sell, the cheaper it is.
That’s just basic, “supply-and-demand” — Economics 101.
So, when is that not the case?
When it comes to rental properties in today’s housing market.
Buyer’s vs. Seller’s Markets
Currently, there is a huge disconnect between what duplexes and smaller multi-family properties fetch, vs. what apartment complexes (20 units or more) command.
The former can now be bought at a deep discount from their tax assessed value.
The latter command a rich premium.
What accounts for that?
The obvious explanation is that economies of scale make larger properties attractive to big investors, who all want to buy a 100-unit apartment complex — not 50, two-unit duplexes.
That phenomenon is not unlike the stock market, where institutional investors trade in and out of liquid, mega-cap stocks like Coca-Cola and Procter-Gamble, but steer clear of micro-cap stocks.
Scratch a little deeper, however, and you’ll find three additional explanations.
One. Mom-and-Pop real estate investors are broke.
The last few years have been tough on small real estate operators.
The drop in property values has decimated — or eliminated — their equity, limiting their ability to borrow.
At the same time, the pendulum for financing duplexes and triplexes, i.e., banks’ underwriting standards, has swung from overly permissive to unduly restrictive.
So, in the last 3 years or so, lenders have raised their required downpayments; are appraising properties much more conservatively; and are vetting prospective borrowers as never before.
Result: reduced demand.
Two. Lots of Supply
Add up all the foregoing factors, and you get a lot of bank-owned foreclosures.
Lots of small, multi-family units for sale further depresses prices.
Three. Flush Institutions and ZIRP (zero percent interest rates).
As the saying goes, “in the land of the blind, the one-eyed man is king.”
So, in an environment where the 10 year U.S. bond yields 2% and gold fetches $1,800 an ounce, a comparatively stellar 3% or 4% return on rental properties is pretty attractive.
With lots of big real estate investors chasing the same pool of bigger investment properties . . . pricing is strong.
Investment Opportunity
In light of the foregoing, it should come as no surprise that the one segment of new housing construction that is vigorous at the moment is multi-family.
In the era of securitization, that’s more than a little ironic.
In fact, the real investment opportunity now would seem to lie in buying up lots of duplexes and triplexes and bundling (“securitizing”) them into a package that would appeal to a wider range of investors.
