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Category: Ideas

Round up of investing ideas and insights that we can actually put to use to invest.

  • What America’s Past in Real Estate Tells Us About the Future

    Some experts have argued that we’re at a torrid time in the future of the US real estate market. Others have argued NYC’s housing market has been roaring, with no sign of slowing down. With inflation continuing to cripple the value of the USD, prospective home buyers face pressure to invest in tangible assets. Many Americans are realizing a home is the most sensible shelter for their savings (Nguyen, Forbes).

    However, home supplies in coveted markets are scarce. Prices are ever-climbing and competition for homes is currently relentless. That’s generally where America’s market currently stands. The main question on the minds of homeowners and prospective buyers continues to be: “Where will markets go from here?”

    Of course, no one can say with certainty. Nevertheless, select lessons from America’s history provide a blueprint for home buying at this unique historical juncture.

    Lesson from the Great Depression

    Principally, you cannot separate the national economy from the nation’s housing markets. The American economy and the American housing market are akin to dominos aligned in the same row. On some occasions, the economy is the domino at the front of the row. Whereas there were other times – the subprime mortgage crisis (Great Recession, 2008) – the housing market is first in line.

    Arguably no time in American history better exhibits the inextricable link between national economic performance and the American people’s ability to both purchase, as well as hold onto, long-term houses. As the stock market crashed in 1929, bank runs quickly ensued, and mass unemployment followed closely behind. A staggering 273,000 Americans lost their homes in 1932, plus even more suffered foreclosure in the following year. Americans simply did not have the wherewithal to keep up with mortgage payments when crushing stagflation hit.

    Some things have not changed since the onset of the Great Depression. Americans today have become far more cognizant of a future possibility of widespread economic downturn. An economy in contraction means jobs lost, wages uncollected, and mortgage payments undelivered. Ultimately, this means foreclosures.

    Current Home-Buying Spree Continues

    Yet, even facing economic hardship triggered by the pandemic, America finds itself in the midst of a record home-buying spree. This may suggest any of the following three (Nguyen, Forbes):

    • A new segment of Americans (including former apartment-dwelling city residents) are injecting unprecedented capital into newfound housing markets.
    • Home buyers see houses as a sound investment, even as many expect the economy to take a turn for the worse.
    • The demand for homes in America is far greater than supply, increasing competition for each home.

    On one hand, the Great Depression is a necessary reminder for prospective home owners to not purchase beyond their means. However, many who lost their homes during the Great Depression certainly weren’t living lavishly. This is a critical takeaway – though one we must extract – from the hardships of the late 1920s and 1930s.

    Moreover, there are notable differences between 1930’s America and 2021, which bode favorably for today’s housing market. Incentive-laden tax policies, enacted since the Depression, made it more affordable to purchase homes and make the requisite mortgage payments. Today, Americans have a variety of investment options to mitigate risk. Additionally, federal policy has prevented bank failures from the magnitude witnessed during the Great Depression.

    Lesson from the GI Bill (1944)

    Concisely, cheap credit can set you up for life (Nguyen, Forbes). If you’ve been relishing your prevailing 3% interest rates, prepare for disappointment (by comparison).

    Not long after the Allied invasion of Normandy Beach, US President Franklin Roosevelt signed the GI Bill (1944). The was portrayed as a token of appreciation to a generation of young Americans, who risked their lives at war. Upon returning home, those GIs received government-backed loans that all but guaranteed homeownership, amongst other benefits. Banks the US government deemed a guarantor were overwhelmingly likely to approve a mortgage application.

    With access to such favorable loan conditions, veterans went on to purchase 20% of all homes built after the war. GIs took full, absolute advantage of the easy credit they undeniably earned.

    Fast forward to the present. While a government-guaranteed loan might sound ideal, you truly cannot complain about today’s prevailing 3% interest rates (Campisi, Forbes). To compare, interest rates topped 17% in 1982, then hovered around 10% for significant periods in the 1990s. That means two decades ago, you’d have to pay 8% for a home loan. Quite staggering compared to today’s housing market climate, to say the least.

    To reemphasize, the prime takeaway from the GI Bill, is that favorable credit should be pounced on, while it’s available. Historically, the sub-3% rate, which we’ve seen for the vast majority of 2021, is a statistical anomaly. Based on the frenzy of home buying we’ve witnessed, it seems that many Americans and foreign investors know their history. Perhaps much more than some casual real estate investors may think.

    Conclusion

    Seemingly, the two monumental American national economic events discussed provide opposing lessons for today’s prospective home buyer. The sudden, near-total crash of the Depression-era housing market reminds us the importance of consumer’s buying within their means. The GI Bill reinforces the importance of closing on a home, especially while lending terms are favorable. Upon extensive examination, these lessons can be very much complimentary in the future.

    As we’ve noted, today, Americans find themselves at a confounding point. Interest rates are very favorable; however, the economy is riddled with inflationary concerns and general uncertainty. It’s a time both reminiscent of GI Bill-era opportunity and Depression-era anxiety (Nguyen, Forbes).

    Of any lesson investors should takeaway, it’s this: you can embrace the benefits of comparatively cheap credit while remaining within your spending means. Be sure you don’t miss out on a prime real estate investment, while interest rates are so favorable. Stray away from overextending yourself to the point where you cannot keep up with future payments, should times get tough.

    For strategically sound real estate investing, you must look to the past to help predict the future. If nothing else, for guidance. That includes the better parts, but perhaps even more importantly for investors, the worse.  

  • What America’s Past in Real Estate Tells Us About the Future

    Some experts have argued that we’re at a torrid time in the future of the US real estate market. Others have argued NYC’s housing market has been roaring, with no sign of slowing down. With inflation continuing to cripple the value of the USD, prospective home buyers face pressure to invest in tangible assets. Many Americans are realizing a home is the most sensible shelter for their savings (Nguyen, Forbes).

    However, home supplies in coveted markets are scarce. Prices are ever-climbing and competition for homes is currently relentless. That’s generally where America’s market currently stands. The main question on the minds of homeowners and prospective buyers continues to be: “Where will markets go from here?”

    Of course, no one can say with certainty. Nevertheless, select lessons from America’s history provide a blueprint for home buying at this unique historical juncture.

    Lesson from the Great Depression

    Principally, you cannot separate the national economy from the nation’s housing markets. The American economy and the American housing market are akin to dominos aligned in the same row. On some occasions, the economy is the domino at the front of the row. Whereas there were other times – the subprime mortgage crisis (Great Recession, 2008) – the housing market is first in line.

    Arguably no time in American history better exhibits the inextricable link between national economic performance and the American people’s ability to both purchase, as well as hold onto, long-term houses. As the stock market crashed in 1929, bank runs quickly ensued, and mass unemployment followed closely behind. A staggering 273,000 Americans lost their homes in 1932, plus even more suffered foreclosure in the following year. Americans simply did not have the wherewithal to keep up with mortgage payments when crushing stagflation hit.

    Some things have not changed since the onset of the Great Depression. Americans today have become far more cognizant of a future possibility of widespread economic downturn. An economy in contraction means jobs lost, wages uncollected, and mortgage payments undelivered. Ultimately, this means foreclosures.

    Current Home-Buying Spree Continues

    Yet, even facing economic hardship triggered by the pandemic, America finds itself in the midst of a record home-buying spree. This may suggest any of the following three (Nguyen, Forbes):

    • A new segment of Americans (including former apartment-dwelling city residents) are injecting unprecedented capital into newfound housing markets.
    • Home buyers see houses as a sound investment, even as many expect the economy to take a turn for the worse.
    • The demand for homes in America is far greater than supply, increasing competition for each home.

    On one hand, the Great Depression is a necessary reminder for prospective home owners to not purchase beyond their means. However, many who lost their homes during the Great Depression certainly weren’t living lavishly. This is a critical takeaway – though one we must extract – from the hardships of the late 1920s and 1930s.

    Moreover, there are notable differences between 1930’s America and 2021, which bode favorably for today’s housing market. Incentive-laden tax policies, enacted since the Depression, made it more affordable to purchase homes and make the requisite mortgage payments. Today, Americans have a variety of investment options to mitigate risk. Additionally, federal policy has prevented bank failures from the magnitude witnessed during the Great Depression.

    Lesson from the GI Bill (1944)

    Concisely, cheap credit can set you up for life (Nguyen, Forbes). If you’ve been relishing your prevailing 3% interest rates, prepare for disappointment (by comparison).

    Not long after the Allied invasion of Normandy Beach, US President Franklin Roosevelt signed the GI Bill (1944). The was portrayed as a token of appreciation to a generation of young Americans, who risked their lives at war. Upon returning home, those GIs received government-backed loans that all but guaranteed homeownership, amongst other benefits. Banks the US government deemed a guarantor were overwhelmingly likely to approve a mortgage application.

    With access to such favorable loan conditions, veterans went on to purchase 20% of all homes built after the war. GIs took full, absolute advantage of the easy credit they undeniably earned.

    Fast forward to the present. While a government-guaranteed loan might sound ideal, you truly cannot complain about today’s prevailing 3% interest rates (Campisi, Forbes). To compare, interest rates topped 17% in 1982, then hovered around 10% for significant periods in the 1990s. That means two decades ago, you’d have to pay 8% for a home loan. Quite staggering compared to today’s housing market climate, to say the least.

    To reemphasize, the prime takeaway from the GI Bill, is that favorable credit should be pounced on, while it’s available. Historically, the sub-3% rate, which we’ve seen for the vast majority of 2021, is a statistical anomaly. Based on the frenzy of home buying we’ve witnessed, it seems that many Americans and foreign investors know their history. Perhaps much more than some casual real estate investors may think.

    Conclusion

    Seemingly, the two monumental American national economic events discussed provide opposing lessons for today’s prospective home buyer. The sudden, near-total crash of the Depression-era housing market reminds us the importance of consumer’s buying within their means. The GI Bill reinforces the importance of closing on a home, especially while lending terms are favorable. Upon extensive examination, these lessons can be very much complimentary in the future.

    As we’ve noted, today, Americans find themselves at a confounding point. Interest rates are very favorable; however, the economy is riddled with inflationary concerns and general uncertainty. It’s a time both reminiscent of GI Bill-era opportunity and Depression-era anxiety (Nguyen, Forbes).

    Of any lesson investors should takeaway, it’s this: you can embrace the benefits of comparatively cheap credit while remaining within your spending means. Be sure you don’t miss out on a prime real estate investment, while interest rates are so favorable. Stray away from overextending yourself to the point where you cannot keep up with future payments, should times get tough.

    For strategically sound real estate investing, you must look to the past to help predict the future. If nothing else, for guidance. That includes the better parts, but perhaps even more importantly for investors, the worse.  

  • How Real Estate Impacts the US Economy

    Real estate, commonly known as the largest asset class in the world, would intuitively play an integral role in the US economy. Residential real estate properties provide a vital pillar of the “American Dream”: private housing for families. Separately, they can also be the greatest source of wealth and savings for many Americans. Commercial real estate (CRE) – including apartment buildings – creates jobs and rented spaces for retail stores, offices, and manufacturing warehouses. Real estate business and investment provides a source of revenue for millions of Americans.

    In 2018, real estate construction contributed $1.15 trillion to the US national economy output (BEA.gov). That accounts for 6.2% of the US economy GDP over the same year, which is quite a significant proportion. For comparison’s sake, it’s more than the $1.13 trillion in 2017, however less than the 2006-peak of $1.19 trillion. Back in 2006, real estate construction was an even heftier 8.9% component of US GDP (Amadeo, The Balance).

    While there’s some politicization over whether these qualify as “good” jobs, real estate construction is obviously labor-intensive. It plays a major force in job creation. The decline in housing construction was undoubtedly a major contribution to the COVID-19 Recession’s high unemployment rate.

    The Ripple Effect in the US Economy of Real Estate

    Construction is the only part of real estate that’s directly calculated into US GDP (Amadeo, The Balance). Nonetheless, real estate affects many other areas of the US economy, which aren’t captured by US GDP metrics. As an example, a decline in real estate sales inevitably leads to a decline in real estate prices. This effect lowers the value of all homes, irrespective of whether owners are actively selling or not. Furthermore, this causes a reduction in the overall number of home equity loans available to owners. Ultimately, the market impact is reduced consumer spending, as more homeowner cash is tied up in housing projects.

    As many are aware, nearly 70% of the US economy is based on personal consumption (BEA.gov). Consequently, a reduction in consumer spending is directly linked to a downward spiral in the US economy. The downward spiral causality is easily witnessed. This macroeconomic phenomenon leads to further drops in employment, income, and consumer spending (Amadeo, The Balance). The primary concern about the US economy falling into a deep recession stems from concerns about Federal Reserve policy. The Federal Reserve received widespread accreditation for keeping rates very low throughout the COVID-19 pandemic. Many experts argue a further cut to interest rates are still necessary (Amadeo, The Balance). There is one positive takeaway regarding lower home prices. They lessen the chance of inflation.

    Real Estate and the 2008 US (Global) Economy Recession

    Of course, no better example exists of real estate’s impact on the US economy than the 2008 recession. While very few immediately realized it, falling home prices triggered the downturn and subsequent broad, ill effects. According to the National Association of Realtors (NAR), by July 2007, the median price of an existing single-family home in the US was down 4% since its peak in October 2005 (National Association of Realtors). Macroeconomists, risk analysts, credit analysts, and economists as a whole couldn’t reconcile how concerning this was. Clear definitions and numeric parameters of recession, bear market, and a stock market correction are well standardized. The same is still, not yet true for the housing market.

    For perspective and comparison, many likened it to the 24% decline during the Great Depression of 1929. Others compared it to the decline ranging from 22% to 40% in US, oil-producing areas in the early 1980s. Incorrectly using these as benchmarks, the 2008 housing “slump” could appear barely newsworthy. To the contrary, the crash quickly gained steam. Economic studies have shown that even fairly small declines between 10% and 15% are enough to eliminate the homeowner’s equity. We saw this occur in early 2007 within communities in Florida, Nevada, and Louisiana.

    Death by Derivatives

    Staggeringly, nearly half the loans issued between 2005 and 2007 were subprime. Of course, this means homebuyers are much more likely to default. Far worse for the national economy, banks used these loans to finance trillions of dollars of derivatives. Banks infamously packaged these loans into mortgage-backed securities. They peddled them as “safe” investments to pension funds, corporations, and retirees. Moreover, they were thought of as “insured” from default by a new insurance product called a credit default swap. The biggest issuer was American International Group, Inc. (AIG).

    Once borrowers defaulted, the mortgage-backed securities had very questionable value. A huge number of investors began to exercise their credit default swaps, such that AIG ran out of cash. They were ready to default themselves, until the Federal Reserve bailed them out.

    Investment banks with a large number of mortgage-backed securities on their books – most notably Bear Stearns and Lehman Brothers – were rejected by other banks. Without cash to continue operations, they ran to the Fed for help. The Fed wound up finding a buyer for Bear Sterns, but not the latter, Lehman. The bankruptcy of Lehman Brothers kicked off the 2008 financial crisis, officially.

    Are We on The Brink?

    Studies show investors are seriously questioning whether another real estate market crash will happen in the next two years. Housing prices are more or less stagnant, while the Fed is beginning to drop interest rates. This is indicative of a bubble and historically we know that bubbles burst.

    However, there are many structural differences to consider when evaluating today’s market with the housing market in 2005. Firstly, the volume of subprime loans makes up a smaller percentage of the mortgage market. Interestingly, however, these are growing under the “nonprime loans” name. In 2005, they contributed roughly 20% (Amadeo, The Balance). Additionally, banks have greatly increased lending standards. Investors, those who flip houses, have to provide between 20% to 45% of the cost of a home. Compared to during the subprime crisis, buyers needed to provide 20% or less.

    Most importantly, homeowners are not taking as much equity out of their homes. Home equity skyrocketed at $85 billion in 2006. Subsequently, it collapsed to less than $10 billion in 2010 and remained around that level until 2015. By 2017, it had only risen to $14 billion (Amadeo, The Balance). A major reason behind that is fewer people are filing for bankruptcy (Allen, Consumer Reports). In 2016, only 770,846 filed for bankruptcy; by comparison in 2010, only 1.5 million people did (Allen, Consumer Reports). Many economists, quite surprisingly, attribute this to “Obamacare”.

    The Bottom Line

    Concisely, we’re very unlikely to see anything close to what we witnessed in 2008 for a number of reasons. Primarily, structural changes in the economy – such as volatility ratio mandates for investment and retail banks – would prevent a widespread financial epidemic, even if the housing market were to suffer a significant downturn. Equally important to the housing market, mandates for homeowners and active real estate investors are more stringent. Finally, cost-cutting measures, such as the ACA, make it less likely for homeowners to default on mortgage payments.

    This is not even considering that while some reputable economists believe we may see prices decline in the next two years, we’ve yet to see it. In fact, as we continue to recover from COVID-19 economically, we’re seeing a housing market recovery. There’re multiple reasons we don’t need to worry about a repeat of 2008.

  • How Real Estate Impacts the US Economy

    Real estate, commonly known as the largest asset class in the world, would intuitively play an integral role in the US economy. Residential real estate properties provide a vital pillar of the “American Dream”: private housing for families. Separately, they can also be the greatest source of wealth and savings for many Americans. Commercial real estate (CRE) – including apartment buildings – creates jobs and rented spaces for retail stores, offices, and manufacturing warehouses. Real estate business and investment provides a source of revenue for millions of Americans.

    In 2018, real estate construction contributed $1.15 trillion to the US national economy output (BEA.gov). That accounts for 6.2% of the US economy GDP over the same year, which is quite a significant proportion. For comparison’s sake, it’s more than the $1.13 trillion in 2017, however less than the 2006-peak of $1.19 trillion. Back in 2006, real estate construction was an even heftier 8.9% component of US GDP (Amadeo, The Balance).

    While there’s some politicization over whether these qualify as “good” jobs, real estate construction is obviously labor-intensive. It plays a major force in job creation. The decline in housing construction was undoubtedly a major contribution to the COVID-19 Recession’s high unemployment rate.

    The Ripple Effect in the US Economy of Real Estate

    Construction is the only part of real estate that’s directly calculated into US GDP (Amadeo, The Balance). Nonetheless, real estate affects many other areas of the US economy, which aren’t captured by US GDP metrics. As an example, a decline in real estate sales inevitably leads to a decline in real estate prices. This effect lowers the value of all homes, irrespective of whether owners are actively selling or not. Furthermore, this causes a reduction in the overall number of home equity loans available to owners. Ultimately, the market impact is reduced consumer spending, as more homeowner cash is tied up in housing projects.

    As many are aware, nearly 70% of the US economy is based on personal consumption (BEA.gov). Consequently, a reduction in consumer spending is directly linked to a downward spiral in the US economy. The downward spiral causality is easily witnessed. This macroeconomic phenomenon leads to further drops in employment, income, and consumer spending (Amadeo, The Balance). The primary concern about the US economy falling into a deep recession stems from concerns about Federal Reserve policy. The Federal Reserve received widespread accreditation for keeping rates very low throughout the COVID-19 pandemic. Many experts argue a further cut to interest rates are still necessary (Amadeo, The Balance). There is one positive takeaway regarding lower home prices. They lessen the chance of inflation.

    Real Estate and the 2008 US (Global) Economy Recession

    Of course, no better example exists of real estate’s impact on the US economy than the 2008 recession. While very few immediately realized it, falling home prices triggered the downturn and subsequent broad, ill effects. According to the National Association of Realtors (NAR), by July 2007, the median price of an existing single-family home in the US was down 4% since its peak in October 2005 (National Association of Realtors). Macroeconomists, risk analysts, credit analysts, and economists as a whole couldn’t reconcile how concerning this was. Clear definitions and numeric parameters of recession, bear market, and a stock market correction are well standardized. The same is still, not yet true for the housing market.

    For perspective and comparison, many likened it to the 24% decline during the Great Depression of 1929. Others compared it to the decline ranging from 22% to 40% in US, oil-producing areas in the early 1980s. Incorrectly using these as benchmarks, the 2008 housing “slump” could appear barely newsworthy. To the contrary, the crash quickly gained steam. Economic studies have shown that even fairly small declines between 10% and 15% are enough to eliminate the homeowner’s equity. We saw this occur in early 2007 within communities in Florida, Nevada, and Louisiana.

    Death by Derivatives

    Staggeringly, nearly half the loans issued between 2005 and 2007 were subprime. Of course, this means homebuyers are much more likely to default. Far worse for the national economy, banks used these loans to finance trillions of dollars of derivatives. Banks infamously packaged these loans into mortgage-backed securities. They peddled them as “safe” investments to pension funds, corporations, and retirees. Moreover, they were thought of as “insured” from default by a new insurance product called a credit default swap. The biggest issuer was American International Group, Inc. (AIG).

    Once borrowers defaulted, the mortgage-backed securities had very questionable value. A huge number of investors began to exercise their credit default swaps, such that AIG ran out of cash. They were ready to default themselves, until the Federal Reserve bailed them out.

    Investment banks with a large number of mortgage-backed securities on their books – most notably Bear Stearns and Lehman Brothers – were rejected by other banks. Without cash to continue operations, they ran to the Fed for help. The Fed wound up finding a buyer for Bear Sterns, but not the latter, Lehman. The bankruptcy of Lehman Brothers kicked off the 2008 financial crisis, officially.

    Are We on The Brink?

    Studies show investors are seriously questioning whether another real estate market crash will happen in the next two years. Housing prices are more or less stagnant, while the Fed is beginning to drop interest rates. This is indicative of a bubble and historically we know that bubbles burst.

    However, there are many structural differences to consider when evaluating today’s market with the housing market in 2005. Firstly, the volume of subprime loans makes up a smaller percentage of the mortgage market. Interestingly, however, these are growing under the “nonprime loans” name. In 2005, they contributed roughly 20% (Amadeo, The Balance). Additionally, banks have greatly increased lending standards. Investors, those who flip houses, have to provide between 20% to 45% of the cost of a home. Compared to during the subprime crisis, buyers needed to provide 20% or less.

    Most importantly, homeowners are not taking as much equity out of their homes. Home equity skyrocketed at $85 billion in 2006. Subsequently, it collapsed to less than $10 billion in 2010 and remained around that level until 2015. By 2017, it had only risen to $14 billion (Amadeo, The Balance). A major reason behind that is fewer people are filing for bankruptcy (Allen, Consumer Reports). In 2016, only 770,846 filed for bankruptcy; by comparison in 2010, only 1.5 million people did (Allen, Consumer Reports). Many economists, quite surprisingly, attribute this to “Obamacare”.

    The Bottom Line

    Concisely, we’re very unlikely to see anything close to what we witnessed in 2008 for a number of reasons. Primarily, structural changes in the economy – such as volatility ratio mandates for investment and retail banks – would prevent a widespread financial epidemic, even if the housing market were to suffer a significant downturn. Equally important to the housing market, mandates for homeowners and active real estate investors are more stringent. Finally, cost-cutting measures, such as the ACA, make it less likely for homeowners to default on mortgage payments.

    This is not even considering that while some reputable economists believe we may see prices decline in the next two years, we’ve yet to see it. In fact, as we continue to recover from COVID-19 economically, we’re seeing a housing market recovery. There’re multiple reasons we don’t need to worry about a repeat of 2008.

  • How to Best Invest in Real Estate in the Midwest

    The most surprising feature about housing markets in the Midwest is that home prices – in most of them – are still below the level where local incomes dictate they should be (Winzer, Forbes). If you’re a real estate investor, this means two things. Firstly, there are bargains still available in these markets. Secondly, demand for housing not been very strong, at least not yet.

    Midwest Housing Market Overview

    The lack of rebound in the Midwest housing market following 2008 is largely due to the specific types of local economic growth that prevailed before that (Winzer, Forbes). The housing recession came coupled with a lengthy, slow decline in manufacturing. The availability of an educated but low-cost labor force had encouraged the growth of big financial operations in Des Moines, Minneapolis, Omaha, Sioux Falls and Green Bay. However, manufacturing still has a large role in Fayetteville, Davenport, Peoria, Rockford, Gary, Fort Wayne, South Bend, Wichita, Milwaukee and Green Bay (Millsap, Forbes).

    This makes these markets a bit riskier to invest in. The markets with a large finance sector are also risky because automation is responsible for an increasing amount of work. Despite structural problems, growth is now returning to many Midwest markets, as it did prior to COVID-19. Especially in areas that function as regional centers – Fayetteville and Peoria, for example – the expansion of jobs is due to an increase in healthcare and business services. Similarly, to the country, these services are becoming concentrated in large urban centers, creating opportunities for investors in rental housing.

    An uncharacteristic feature housing investors contend with is many Midwest markets have agricultural roots, with manufacturing later added on top. Since land was readily and easily available during their growth, they tend to be spread out. This combination produces low home prices, but increased difficulty for investors to select a locality. After all, the saying “real estate is about location, location, location”, rings true in most cases.

    Now that we’ve established some fundamental generalities, let’s get to the specifics and numbers.

    Established Demand

    Fort Wayne, Kansas City, Indianapolis, Green Bay, Springfield, Fayetteville, Gary and South Bend.

    In these markets, it appears home prices increased relatively broadly in the past year, indicating good demand not just for single-family homes, but rentals as well. With prices still well below income levels and above average job growth, demand is likely to keep raising prices higher. Though the trend depicted below shows the housing market pre-COVID, that trend is pretty much identical today. The housing market didn’t really suffer the same volume of consequences as other markets, but the small parts that did are steadily recovering (Winzer, Forbes).

    Source: Local Market Monitor, Inc.

    South Bend and Gary are at the bottom of this list because their job growth had been less reliable. Before bargains evaporate, investors should move quickly into these markets. Straight, single-family rentals – with minor improvements – are the best bet (Winzer, Forbes).

    Growing Demand

    Des Moines, Omaha, Lake County-Kenosha County, Sioux Falls, Minneapolis, Madison.

    These markets are showing solid job growth, but only moderate increases in demand thus far. Apartments appear to be a good investment in Lake County-Kenosha County and Minneapolis, due to higher density and prices. Since their dependence on the financial sector is comparably very high, most of these markets are also slightly riskier, so investors should be very careful to find properties towards the middle of the renter pool and definitely avoid the higher end.

    Uncertain Demand

    Little Rock, Wichita, Davenport, St. Louis, Chicago, Rockford, Milwaukee, Fargo, Peoria.

    In these markets either demand or job growth are weak, or even more likely, both. Low home prices are also far more commonly found in these markets. This may tempt investors to purchase a low-cost property and rent it out for cheap, without spending another dime. However, renting at the low-end is a specialty that most investors should avoid. In uncertain real estate markets, it makes sense to first look for the safest geographic areas in that market. Then you can perhaps expand and renovate a really inexpensive property, turning it into a profitable rental. That definitely involves more work, but it has potential to give you a bigger return for less risk.

    The Bottom Line

    Concisely, there’s clearly room for excellent returns on housing market investments in the Midwest. While some areas have more opportunity, depending on what strategy you choose, there’s solid return on investment potential all-around. The more time that passes from the start of the COVID-19 pandemic, the less attractive prospects will exist. Active real estate investors would be wise to look strongly into the Midwest and move quickly on specifically the kinds of properties with the features described above. Considering the housing rental market is excellent and still growing, there are definite, safe strategies to fall back on.

  • How to Best Invest in Real Estate in the Midwest

    The most surprising feature about housing markets in the Midwest is that home prices – in most of them – are still below the level where local incomes dictate they should be (Winzer, Forbes). If you’re a real estate investor, this means two things. Firstly, there are bargains still available in these markets. Secondly, demand for housing not been very strong, at least not yet.

    Midwest Housing Market Overview

    The lack of rebound in the Midwest housing market following 2008 is largely due to the specific types of local economic growth that prevailed before that (Winzer, Forbes). The housing recession came coupled with a lengthy, slow decline in manufacturing. The availability of an educated but low-cost labor force had encouraged the growth of big financial operations in Des Moines, Minneapolis, Omaha, Sioux Falls and Green Bay. However, manufacturing still has a large role in Fayetteville, Davenport, Peoria, Rockford, Gary, Fort Wayne, South Bend, Wichita, Milwaukee and Green Bay (Millsap, Forbes).

    This makes these markets a bit riskier to invest in. The markets with a large finance sector are also risky because automation is responsible for an increasing amount of work. Despite structural problems, growth is now returning to many Midwest markets, as it did prior to COVID-19. Especially in areas that function as regional centers – Fayetteville and Peoria, for example – the expansion of jobs is due to an increase in healthcare and business services. Similarly, to the country, these services are becoming concentrated in large urban centers, creating opportunities for investors in rental housing.

    An uncharacteristic feature housing investors contend with is many Midwest markets have agricultural roots, with manufacturing later added on top. Since land was readily and easily available during their growth, they tend to be spread out. This combination produces low home prices, but increased difficulty for investors to select a locality. After all, the saying “real estate is about location, location, location”, rings true in most cases.

    Now that we’ve established some fundamental generalities, let’s get to the specifics and numbers.

    Established Demand

    Fort Wayne, Kansas City, Indianapolis, Green Bay, Springfield, Fayetteville, Gary and South Bend.

    In these markets, it appears home prices increased relatively broadly in the past year, indicating good demand not just for single-family homes, but rentals as well. With prices still well below income levels and above average job growth, demand is likely to keep raising prices higher. Though the trend depicted below shows the housing market pre-COVID, that trend is pretty much identical today. The housing market didn’t really suffer the same volume of consequences as other markets, but the small parts that did are steadily recovering (Winzer, Forbes).

    Source: Local Market Monitor, Inc.

    South Bend and Gary are at the bottom of this list because their job growth had been less reliable. Before bargains evaporate, investors should move quickly into these markets. Straight, single-family rentals – with minor improvements – are the best bet (Winzer, Forbes).

    Growing Demand

    Des Moines, Omaha, Lake County-Kenosha County, Sioux Falls, Minneapolis, Madison.

    These markets are showing solid job growth, but only moderate increases in demand thus far. Apartments appear to be a good investment in Lake County-Kenosha County and Minneapolis, due to higher density and prices. Since their dependence on the financial sector is comparably very high, most of these markets are also slightly riskier, so investors should be very careful to find properties towards the middle of the renter pool and definitely avoid the higher end.

    Uncertain Demand

    Little Rock, Wichita, Davenport, St. Louis, Chicago, Rockford, Milwaukee, Fargo, Peoria.

    In these markets either demand or job growth are weak, or even more likely, both. Low home prices are also far more commonly found in these markets. This may tempt investors to purchase a low-cost property and rent it out for cheap, without spending another dime. However, renting at the low-end is a specialty that most investors should avoid. In uncertain real estate markets, it makes sense to first look for the safest geographic areas in that market. Then you can perhaps expand and renovate a really inexpensive property, turning it into a profitable rental. That definitely involves more work, but it has potential to give you a bigger return for less risk.

    The Bottom Line

    Concisely, there’s clearly room for excellent returns on housing market investments in the Midwest. While some areas have more opportunity, depending on what strategy you choose, there’s solid return on investment potential all-around. The more time that passes from the start of the COVID-19 pandemic, the less attractive prospects will exist. Active real estate investors would be wise to look strongly into the Midwest and move quickly on specifically the kinds of properties with the features described above. Considering the housing rental market is excellent and still growing, there are definite, safe strategies to fall back on.

  • What is a Private Equity Real Estate Fund?

    In the simplest terms, a real estate private equity fund is a partnership established to raise equity for ongoing real estate investments (Bond, NAIOP). A general partner (GP), most frequently referred to as the “sponsor”, creates the fund. The sponsor asks investors, known as limited partners (LPs), to invest equity in the fund or partnership. Those funds, along with money borrowed from commercial banks, investment banks, public institutions, asset managers, and other lenders, are supposed to be invested in a variety of real estate development or acquisition opportunities.

    Typically, the LPs provide the bulk of the equity capital and are passive investors, who have actively chosen to invest in an offering, which was presented by the sponsor. LPs earn an early return of capital and a preferred return on capital invested (Bond, NAIOP). Sponsors are in charge of providing the equity capital, securing investment opportunities, managing the real estate and the fund, and earning fees (that typically are based on performance).

    A real estate private equity fund differs from capital that comes from friends and family and joint ventures. A differentiating example of a joint venture could be among a landowner, a developer, and a money partner. None could complete the investment without the others, and the joint venture is specific to just one investment. Real estate private equity funds, on the other hand, are created to invest in a series of deals with a standardized risk and reward structure created for the overall fund in which the sponsor and LP participate unequally (Bond, NAIOP).

    What are the Sponsor’s Motivations?

    While there are arguments for a laundry list of motivations, we’ll highlight the general motivating factors for sponsors.

    • Diversify and expand funding sources, as well as holdings

    A sponsor with a pipeline of potential investments can use a fund to take advantage of a portfolio consisting of a variety of deals that would not otherwise be available. The capital-raising strategy should, however, focus on the sponsor’s history, the experience of the team, the potential for returns, alignment of interests and clearly identified opportunities. The most reputable developers with the best track records are able to find investment opportunities in their home markets that are outside their traditional property type focus, opportunities outside their historical geographic focus, or some combination of both (Bond, NAIOPI). A private equity fund has the potential to provide the scale that will allow the sponsor to fully take advantage of these opportunities, thereby generating returns over a much larger capital base and likely even lowering the risk of the firm.

    • Invest in larger and higher quality projects

    A sponsor that has capital constraints can use funds to invest in larger and more complex projects. Conversely, more partners also enable the developer to share the risks with their investors to create a better risk-return balance on large, complex projects that the sponsor would not be able to take on alone.

    • Obtain better terms from banks and other lenders.
    • Provide an alternative to mezzanine capital.
    • Develop projects using fund-level financing in lieu of project-by-project financing.
    • Earn fees from the fund, including a promoted interest. 

    The “Three Key” Considerations to a Private Equity Real Estate Fund

    While an argument could be made for a myriad of factors that are critical to take into account when setting up a private equity fund, three key considerations standout. These are pillars to success in establishing the fund and efficiently raising capital from the limited partners.

    1) Amount of Equity Capital to Raise

    The first consideration is the amount of equity capital that ought to be raised. This should include organizational fees. The minimum private equity fund size is generally considered to be $20 million. While organizational costs are generally proportional to fund size, the floor for organizational fees is about $400,000. While the sponsor recoups these fees from the fund once the capital is raised, the sponsor must carry these costs during the fund’s formation period. Examples of these costs include: formation costs for the legal entity or entities, filing fees, accounting fees, regulatory brokerage costs, clearing costs and the cost of producing marketing documents (Bond, NAIOP).

    While the fund’s equity capital is typically combined with debt capital to create a total pool for investing, a successful fund needs to balance potential deal flow with the fund’s size to ensure that the fund can produce sustainable returns for the LPs, and that it doesn’t become too small, such that a follow-on fund might need to be launched. The timing of flows to and from the fund should also be considered. In general, LPs begin earning a preferred return on their capital as soon as the funds are invested. Therefore, in addition to obtaining a commitment from each LP for the total investment amount, astute sponsors stage the pay-in to match the fund’s anticipated timing of investments.

    2) Realistic Amount of Time, Energy, and Seed Funding Required

    Sponsors must be clear-eyed about the time, energy and seed funding required to launch a fund (Bond, NAIOP). The sponsor is responsible for all aspects of the fund: organizing the fund, which includes generating a partnership agreement, offering and subscription documents; securing investment opportunities; securing loans and other financing; managing the fund; operating the properties; preparing partners’ tax returns; and responding to accounting and audit matters, and this is to name only a few of the highlights. These responsibilities put the sponsor is under a constant, daunting amount of pressure. You may have the financial acumen, but you may not have other traits essential to being a successful sponsor.

    3) Clear Investment Fund Strategy

    It’s imperative for sponsors to have a clear and easily understood investment fund strategy. This differs from the market fundamentals, property type, and location strategies that dominate traditional real estate investing assessments. Though experienced sponsors and the largest funds may be able to raise funds for a “blind pool” – a fund for which no individual investments are identified – first-time sponsors typically must identify specific investments that are included in the fund’s offering memorandum.

    Concisely, there’s a lot of complexity to operating or owning a private equity fund that we didn’t get to. However, our goal was to cover the core basics. What is a private equity fund, how is it set up, and what are the key takeaways? We hope this piece was helpful and educational for those interested in private equity.

  • What is a Private Equity Real Estate Fund?

    In the simplest terms, a real estate private equity fund is a partnership established to raise equity for ongoing real estate investments (Bond, NAIOP). A general partner (GP), most frequently referred to as the “sponsor”, creates the fund. The sponsor asks investors, known as limited partners (LPs), to invest equity in the fund or partnership. Those funds, along with money borrowed from commercial banks, investment banks, public institutions, asset managers, and other lenders, are supposed to be invested in a variety of real estate development or acquisition opportunities.

    Typically, the LPs provide the bulk of the equity capital and are passive investors, who have actively chosen to invest in an offering, which was presented by the sponsor. LPs earn an early return of capital and a preferred return on capital invested (Bond, NAIOP). Sponsors are in charge of providing the equity capital, securing investment opportunities, managing the real estate and the fund, and earning fees (that typically are based on performance).

    A real estate private equity fund differs from capital that comes from friends and family and joint ventures. A differentiating example of a joint venture could be among a landowner, a developer, and a money partner. None could complete the investment without the others, and the joint venture is specific to just one investment. Real estate private equity funds, on the other hand, are created to invest in a series of deals with a standardized risk and reward structure created for the overall fund in which the sponsor and LP participate unequally (Bond, NAIOP).

    What are the Sponsor’s Motivations?

    While there are arguments for a laundry list of motivations, we’ll highlight the general motivating factors for sponsors.

    • Diversify and expand funding sources, as well as holdings

    A sponsor with a pipeline of potential investments can use a fund to take advantage of a portfolio consisting of a variety of deals that would not otherwise be available. The capital-raising strategy should, however, focus on the sponsor’s history, the experience of the team, the potential for returns, alignment of interests and clearly identified opportunities. The most reputable developers with the best track records are able to find investment opportunities in their home markets that are outside their traditional property type focus, opportunities outside their historical geographic focus, or some combination of both (Bond, NAIOPI). A private equity fund has the potential to provide the scale that will allow the sponsor to fully take advantage of these opportunities, thereby generating returns over a much larger capital base and likely even lowering the risk of the firm.

    • Invest in larger and higher quality projects

    A sponsor that has capital constraints can use funds to invest in larger and more complex projects. Conversely, more partners also enable the developer to share the risks with their investors to create a better risk-return balance on large, complex projects that the sponsor would not be able to take on alone.

    • Obtain better terms from banks and other lenders.
    • Provide an alternative to mezzanine capital.
    • Develop projects using fund-level financing in lieu of project-by-project financing.
    • Earn fees from the fund, including a promoted interest. 

    The “Three Key” Considerations to a Private Equity Real Estate Fund

    While an argument could be made for a myriad of factors that are critical to take into account when setting up a private equity fund, three key considerations standout. These are pillars to success in establishing the fund and efficiently raising capital from the limited partners.

    1) Amount of Equity Capital to Raise

    The first consideration is the amount of equity capital that ought to be raised. This should include organizational fees. The minimum private equity fund size is generally considered to be $20 million. While organizational costs are generally proportional to fund size, the floor for organizational fees is about $400,000. While the sponsor recoups these fees from the fund once the capital is raised, the sponsor must carry these costs during the fund’s formation period. Examples of these costs include: formation costs for the legal entity or entities, filing fees, accounting fees, regulatory brokerage costs, clearing costs and the cost of producing marketing documents (Bond, NAIOP).

    While the fund’s equity capital is typically combined with debt capital to create a total pool for investing, a successful fund needs to balance potential deal flow with the fund’s size to ensure that the fund can produce sustainable returns for the LPs, and that it doesn’t become too small, such that a follow-on fund might need to be launched. The timing of flows to and from the fund should also be considered. In general, LPs begin earning a preferred return on their capital as soon as the funds are invested. Therefore, in addition to obtaining a commitment from each LP for the total investment amount, astute sponsors stage the pay-in to match the fund’s anticipated timing of investments.

    2) Realistic Amount of Time, Energy, and Seed Funding Required

    Sponsors must be clear-eyed about the time, energy and seed funding required to launch a fund (Bond, NAIOP). The sponsor is responsible for all aspects of the fund: organizing the fund, which includes generating a partnership agreement, offering and subscription documents; securing investment opportunities; securing loans and other financing; managing the fund; operating the properties; preparing partners’ tax returns; and responding to accounting and audit matters, and this is to name only a few of the highlights. These responsibilities put the sponsor is under a constant, daunting amount of pressure. You may have the financial acumen, but you may not have other traits essential to being a successful sponsor.

    3) Clear Investment Fund Strategy

    It’s imperative for sponsors to have a clear and easily understood investment fund strategy. This differs from the market fundamentals, property type, and location strategies that dominate traditional real estate investing assessments. Though experienced sponsors and the largest funds may be able to raise funds for a “blind pool” – a fund for which no individual investments are identified – first-time sponsors typically must identify specific investments that are included in the fund’s offering memorandum.

    Concisely, there’s a lot of complexity to operating or owning a private equity fund that we didn’t get to. However, our goal was to cover the core basics. What is a private equity fund, how is it set up, and what are the key takeaways? We hope this piece was helpful and educational for those interested in private equity.

  • Twitter is the Ultimate Cryptocurrency Stock to BUY NOW

    Twitter (NYSE:TWTR) shares have soared more than 55% and counting in the past year, 2021 (Sun, The Motley Fool). An iconic platform best known as a micro-blogging social network, Twitter is quickly evolving. Moreover, it’s developing into something that’s likely even more influential and lucrative with the rise of cryptocurrencies. 

    Back in July 2021, Chief Executive Officer (CEO) Jack Dorsey announced that Bitcoin would become a “big part” of Twitter, specifically via integration with the company’s products and services. While this may not be well-known to investors, Twitter has already seen a huge rise in its bottom line due to the influx of cryptocurrency developers (Sun, The Motley Fool).

    An Extremely Unique Advantage for Twitter

    Unlike with stocks, there isn’t a centralized Securities and Exchange Commission (SEC) database (called EDGAR), where investors can go and get the latest information and financials for cryptocurrencies; until now. Twitter is quickly beginning to play the role of a “decentralized SEC” for the crypto community. Users can follow developer teams on Twitter, thereby getting the newest information on material changes in protocol, new partnerships, and significant events (the equivalent of 8-Ks at the SEC), as well as regular financial reports (10-Qs and 10-Ks). Furthermore, individuals can even report cryptocurrency tweets deemed to be scams or pump-and-dump schemes. A common practice in the vast majority of equity markets, this leads to a prototype of self-regulation (CFA Institute).

    Due to this phenomenon, Twitter is becoming exceedingly popular among altcoin networks such as Ethereum, Avalanche, Solana, Reserve Rights, Chainlink, Monero, and PirateChain, amongst many others. Their setup has attracted likely millions of users specifically desiring to stay up-to-date with the development of their latest tokens. Twitter’s capitalized on this financially by charging developers to promote their accounts via advertisement spending. Developers are incentivized into this because traffic is organic and directly within their target audience. Through this process, Twitter doesn’t even need to spend money on their own advertising. Celebrities, such as Tesla’s CEO Elon Musk, repeatedly use the platform to tout digital currencies such as Dogecoin to his fans, obviously generating substantial viewing activity.

    Financials Back Up Recent Boost in Success and Future Hype for Twitter

    During the second quarter of 2021, Twitter grew its monetizable daily active user base by 10.8% year over year to 206 million (Twitter, Inc – Financial Information). During the same time, revenue grew by a stunning 74% to $1.19 billion (Twitter, Inc – Financial Information). The company’s earnings have recouped their losses from the pandemic recession. Moreover, they more than doubled in the quarter ending June 30th (Twitter, Inc – Financial Information). They’re very clearly currently on track for stellar growth.

    Additionally, Twitter is doing well in terms of liquidity, with cash and investments outweighing its debt plus convertible notes by a factor of two (Twitter, Inc – Financial Information). Most experts agree it is both a great tech and crypto stock to buy at 10 times revenue. Expect continued profits and share gains as part of the boom in cryptocurrencies.

  • Twitter is the Ultimate Cryptocurrency Stock to BUY NOW

    Twitter (NYSE:TWTR) shares have soared more than 55% and counting in the past year, 2021 (Sun, The Motley Fool). An iconic platform best known as a micro-blogging social network, Twitter is quickly evolving. Moreover, it’s developing into something that’s likely even more influential and lucrative with the rise of cryptocurrencies. 

    Back in July 2021, Chief Executive Officer (CEO) Jack Dorsey announced that Bitcoin would become a “big part” of Twitter, specifically via integration with the company’s products and services. While this may not be well-known to investors, Twitter has already seen a huge rise in its bottom line due to the influx of cryptocurrency developers (Sun, The Motley Fool).

    An Extremely Unique Advantage for Twitter

    Unlike with stocks, there isn’t a centralized Securities and Exchange Commission (SEC) database (called EDGAR), where investors can go and get the latest information and financials for cryptocurrencies; until now. Twitter is quickly beginning to play the role of a “decentralized SEC” for the crypto community. Users can follow developer teams on Twitter, thereby getting the newest information on material changes in protocol, new partnerships, and significant events (the equivalent of 8-Ks at the SEC), as well as regular financial reports (10-Qs and 10-Ks). Furthermore, individuals can even report cryptocurrency tweets deemed to be scams or pump-and-dump schemes. A common practice in the vast majority of equity markets, this leads to a prototype of self-regulation (CFA Institute).

    Due to this phenomenon, Twitter is becoming exceedingly popular among altcoin networks such as Ethereum, Avalanche, Solana, Reserve Rights, Chainlink, Monero, and PirateChain, amongst many others. Their setup has attracted likely millions of users specifically desiring to stay up-to-date with the development of their latest tokens. Twitter’s capitalized on this financially by charging developers to promote their accounts via advertisement spending. Developers are incentivized into this because traffic is organic and directly within their target audience. Through this process, Twitter doesn’t even need to spend money on their own advertising. Celebrities, such as Tesla’s CEO Elon Musk, repeatedly use the platform to tout digital currencies such as Dogecoin to his fans, obviously generating substantial viewing activity.

    Financials Back Up Recent Boost in Success and Future Hype for Twitter

    During the second quarter of 2021, Twitter grew its monetizable daily active user base by 10.8% year over year to 206 million (Twitter, Inc – Financial Information). During the same time, revenue grew by a stunning 74% to $1.19 billion (Twitter, Inc – Financial Information). The company’s earnings have recouped their losses from the pandemic recession. Moreover, they more than doubled in the quarter ending June 30th (Twitter, Inc – Financial Information). They’re very clearly currently on track for stellar growth.

    Additionally, Twitter is doing well in terms of liquidity, with cash and investments outweighing its debt plus convertible notes by a factor of two (Twitter, Inc – Financial Information). Most experts agree it is both a great tech and crypto stock to buy at 10 times revenue. Expect continued profits and share gains as part of the boom in cryptocurrencies.