Tag: real estate

CRE PropTech: How Will it be Affected by the Aftermath of COVID-19

COVID-19 will forever change the landscape of CRE (Commercial Real Estate), especially for firms who are used to operating almost exclusively in a brick and mortar, office environment. The aftermath of COVID-19 will almost undoubtedly include more “smart” CRE. To put it another way, as software like Zoom has become a household name – whereas prior to COVID-19 it was largely known to the white-collar working class – you can expect firms to invest less in physical property. Consequently, the data shows that in every sector, at least in the short-term, PropTech investment has slowed down (Abuelsamid, Forbes).

Intuitively, successful long-term investors tend to be heavily data driven, which has been a big reason for the slowdown in PropTech. Investors within the real estate sector are exercising caution with regards to their portfolios, as well as towards new deals for CRE projects. A great deal of this is attributed to the initial concept of this piece (which Forbes agrees with): corporations and startup firms alike are showing an increased interest in technology, which allowed them to work “smart” (i.e. Zoom) despite the pandemic (Abuelsamid, Forbes). With decreased overhead being a large incentive for startups and pressure from shareholders to cut costs being a large incentive for big corporations, many are realizing that the way they were forced to do business is perhaps a more efficient way than they were prior to the COVID-19 pandemic.

With that being said, as we mentioned in a previous piece, PropTech is still a relatively new field to most investors. The CRE investing subsector of PropTech is even smaller, so there’s definitely still plenty of opportunity for successful PropTech investment vehicles. Even with the current data showing there’s slowed growth in the PropTech CRE subsector, that’s not to say you shouldn’t keep an eye out for solid investment opportunities, as they are still out there and can definitely be lucrative. This is the main reason you’ll typically find seasoned, experienced investors in the CRE PropTech space. There is opportunity for large returns, but it is definitely slim.

In the longer-term, there’s no reason right now to believe firms will switch back to investment in more physical property, especially when that money can be spent on human capital. Therefore, if you’re interested in PropTech investment strategies, you should not expect to see consistent positive performance from PropTech CRE investments. On the other hand – while this subject deserves a complete discussion on its own – residential PropTech is definitely on the rise (Aramati, Forbes). With a major push coming from cloud technologies and digital transformation, there’s a lot more investment in “smart” residential real estate as opposed to commercial real estate. Generally speaking, investments in “smart” technology have gained a tremendous amount of traction and thereby very large returns for earlier stage investors. Again, as we discussed in a previous article regarding PropTech, technological advancement is the future and investors who are looking for the next Amazon or Google in the real estate market ought to look into residential PropTech options with a more favorable outlook than commercial PropTech.

July 19, 2021
Why Real Estate Investors Refer to Real Estate as an I.D.E.A.L. Investment

Many real estate investors are familiar with the acronym ‘I.D.E.A.L. Investment’ in the context of real estate investing (Chad Carson, Coach Carson). This acronym is a great, succinct explanation for why real estate is preferred by many investors to other vehicles like dividend stocks, bonds, small businesses, index funds, bank certificate of deposits, annuities, and more.

Income

Real estate properties provide excellent cash flow on a regular (typically a monthly) basis and the income size can be quite substantial, depending on your properties’ interest rate, unpaid principal, and property value. This is the primary objective of any investor, which makes real estate a top choice for many. If you aren’t seeing much or any cash flow from an investment, especially after a lengthy period of time, typically it’s not a very successful one.

Depreciation

Another big advantage to real estate investing was actually made widely known by Donald Trump in the 2016 presidential campaign; depreciation. Depreciation occurs because for residential buildings, the U.S. government requires real estate investors to spread out most of the cost of real estate purchases over 27.5 years. This creates an annual depreciation expense, which can provide incredible tax benefits. This ‘expense’ doesn’t come out of your bank account, like purchasing materials to sell products, or insurance/maintenance costs. Instead it’s absorbed ‘on paper’ and you see real financial benefits in the form of tax relief.

Equity

Generally for real estate investors, as time goes on the more equity they’ll acquire in their own properties by repaying loans, which is directly linked to greater overall wealth. The shorter it takes you to pay off your own financial obligations on a property, the larger your ROI will be. Additionally, you’ll be able to optimize the length of time you’ll see financial benefits from that investment. While it may depend on your financial situation and the real estate market climate, real estate investing is a great way to acquire equity and see positive cash flow simultaneously.

Appreciation

Appreciations refers to the idea that your property value is supposed to increase each year. As we’ve seen in recent years, this may not necessarily be the case (primarily due to unpredictable circumstances). However, long-term investors (who comprise a very large segment of real estate investors) are satisfied with the long-term average of property values visibly pointing towards an upward trajectory.

Leverage

Leverage can refer to two distinct advantages of real estate investing. Firstly, some indicate this means the initial incurrence of debt leading to equity growth over time (this appears to be covered by ‘Appreciation’). Secondly, leverage can more commonly refer to the idea of using other people’s money (OPM) to earn a positive cash flow. This gives investors the opportunity to use relatively small amounts of cash upfront to gain control over multiple investment properties and earn returns on cash invested. This method isn’t typically used by passive investors, who would be concerned with over-leveraging and what could happen if there was a steep decline in the housing market.

June 8, 2021
How big is the real estate sector in S&P 500?

Commercial Real Estate (CRE) Investor Question #91: How big is the real estate sector in S&P 500?

The following illustration gives an idea of the size of the real estate sector (circled in yellow) within the S&P 500. Going by market size, it is one of the smallest sectors in S&P 500 as of March 2021. Technology is the biggest sector. The real estate sector consists of REITs across multiple property types like Industrial, Multifamily, Office, etc.

Source: Finviz S&P 500 composition and the Real Estate sector

March 22, 2021
Can you leverage migration patterns for investing?
Demographics and in particular net migration plays an outsized role in Real Estate. In this article, we’ll look at the key factors affecting real estate and why net migration is a good indicator to follow for real estate investors.

We’ll delve into why net migration is actually a great indicator for the top states, counties, and towns to invest in. We’ll look at some migration reports from 2020 and see if they can form the basis of some investment ideas in 2021 and beyond.

Key Pillars of Real Estate Investing

Real Estate business and investing is impacted by multiple factors, but we can group them into three major categories:
- Demographics
  - Population Growth, Urbanization/Sub-urbanization, and Migration
  - Employment Growth
  - Income/Cost of living
- Economic
  - Supply & Demand
  - Infrastructure – Technology / Transportation
  - Fiscal and monetary policies (for e.g. interest rates)
- Incentives
  - Affordable housing policies
  - Tax and Federal housing incentives
  - State and local incentives and policies
For an individual investor, keeping track of the above can be overwhelming though some of the policies and economics may remain the same over years or even decades. Still, it is a stretch for individual investors. In this article, we’ll focus on demographics and see if net migration can be a proxy (or close to a proxy) to find states or cities to invest in.

Demographics and demographic trends

Our focus will be on demographics and in particular net migration in this article. Why is demographics a key pillar and why should we focus on that? Because demographics is all about the consumers i.e. tenants. One can have the best economic climate and the greatest policies, but at the end of the day a customer has to rent real estate and that is driven by demographics makeup. First, let us see the definition of demographics.

Demographics are the data that describes the composition of a population, such as age, race, gender, income, migration patterns, and population growth. These statistics are an often overlooked but significant factor that affects how real estate is priced and what types of properties are in demand
Source: https://www.investopedia.com/articles/mortages-real-estate/11/factors-affecting-real-estate-market.asp

A customer (i.e. tenant) has to rent real estate in a given location and demographics is all about the customers. Investors should look at demographics at a given point of time as well as over a period of time (i.e. trends). It is also good to remember that many demographical trends were already underway and they only got accelerated due to the global pandemic in 2020.

Net Migration and Migration Trends

Investors realize that certain states or cities are growing because they see or hear about many moving to those places. For e.g. many people in New York realize that a lot of jobs are moving to the south, particularly Florida, and people follow those jobs. Net migration in certain regions, states, and cities surpass those of poorly faring places.

Savills, the International real estate firm has done studies on the reasons for migration throughout the world. Here is the summary of the impact of migration on real estate.

In-migration has a major impact on real estate as demand for both residential and commercial space increases. If supply is unable to match the demand, this often results in pressure on prices. We have analyzed data from Oxford Economics to understand which cities are expected to attract the largest net migration over the next five years as a percentage of their population.
Source: https://www.savills.com/impacts/social-change/the-impact-of-migration-on-real-estate.html

Savills has the following take on the reasons major cities are seeing a lot of net migration:
- Europe: Swiss Cities in demand
- Asia: Attracting talent
- North America: Quality of life
We’ll look at net migration data and statistics on the following factors in US and see if we see some patterns that will give some ideas on locations to invest.
- Flight to suburbs and smaller cities
- Flight to quality of life
- Flight to “business” friendly and no-tax states
Net migration to secondary cities and suburbs

Mymove has studied migration patterns in 2020 with the COVID pandemic and over 15.9 million have moved during the pandemic based on USPS data. Urban density has been a big reason for people to move to smaller cities and suburbs. As you can see from the chart below, big cities have had a large outflow in the first half of 2020. This has resulted in rent reduction in dense and pricey cities, but the opposite in smaller cities and suburban places.

Net migration to “business” friendly or no-tax states

In the 20th century, people migrated to cities like New York or Los Angeles for better opporunities, but in the past couple of decades states like Texas have been able to lure many people with their “business” friendly or no-tax policies. Florida and Arizona are also considered “business” and tax friendly states and hence the net migration needs to be reviewed further.

Net Migration for quality of life

Quality of life is primarily defined by cost of living and access to amenities that people are looking for. Savills Research shows the top 10 cities for net migration in the US. The results should not be surprising for many. We see cities in Texas, Flordia and Georgia that have attracted sizable new population. This should give investors some ideas about places to invest.

Source: Savills Research using Oxford Economics Note: Only cities with GDP greater than $50bn considered

Investor Takeaways

In summary, we’ve seen how demographics is a key pillar of real estate investing. We’ve seen how net migration is a great indicator or proxy of demographics and even attractiveness of investment locations. We’ve also looked at migration patterns in US to help investors find states and cities that may be attractive investing targets.

Though net migration data should not be looked at on its own, looking at migration along with other key data will net investors some good investment locations and ideas. The action items for investors are to answer the questions: Do the locations you want to invest in have these positive migration characteristics? Can you update your investment thesis based on these locations?
March 20, 2021
Can you leverage migration patterns for investing?
Demographics and in particular net migration plays an outsized role in Real Estate. In this article, we’ll look at the key factors affecting real estate and why net migration is a good indicator to follow for real estate investors.

We’ll delve into why net migration is actually a great indicator for the top states, counties, and towns to invest in. We’ll look at some migration reports from 2020 and see if they can form the basis of some investment ideas in 2021 and beyond.

Key Pillars of Real Estate Investing

Real Estate business and investing is impacted by multiple factors, but we can group them into three major categories:
- Demographics
  - Population Growth, Urbanization/Sub-urbanization, and Migration
  - Employment Growth
  - Income/Cost of living
- Economic
  - Supply & Demand
  - Infrastructure – Technology / Transportation
  - Fiscal and monetary policies (for e.g. interest rates)
- Incentives
  - Affordable housing policies
  - Tax and Federal housing incentives
  - State and local incentives and policies
For an individual investor, keeping track of the above can be overwhelming though some of the policies and economics may remain the same over years or even decades. Still, it is a stretch for individual investors. In this article, we’ll focus on demographics and see if net migration can be a proxy (or close to a proxy) to find states or cities to invest in.

Demographics and demographic trends

Our focus will be on demographics and in particular net migration in this article. Why is demographics a key pillar and why should we focus on that? Because demographics is all about the consumers i.e. tenants. One can have the best economic climate and the greatest policies, but at the end of the day a customer has to rent real estate and that is driven by demographics makeup. First, let us see the definition of demographics.

Demographics are the data that describes the composition of a population, such as age, race, gender, income, migration patterns, and population growth. These statistics are an often overlooked but significant factor that affects how real estate is priced and what types of properties are in demand
Source: https://www.investopedia.com/articles/mortages-real-estate/11/factors-affecting-real-estate-market.asp

A customer (i.e. tenant) has to rent real estate in a given location and demographics is all about the customers. Investors should look at demographics at a given point of time as well as over a period of time (i.e. trends). It is also good to remember that many demographical trends were already underway and they only got accelerated due to the global pandemic in 2020.

Net Migration and Migration Trends

Investors realize that certain states or cities are growing because they see or hear about many moving to those places. For e.g. many people in New York realize that a lot of jobs are moving to the south, particularly Florida, and people follow those jobs. Net migration in certain regions, states, and cities surpass those of poorly faring places.

Savills, the International real estate firm has done studies on the reasons for migration throughout the world. Here is the summary of the impact of migration on real estate.

In-migration has a major impact on real estate as demand for both residential and commercial space increases. If supply is unable to match the demand, this often results in pressure on prices. We have analyzed data from Oxford Economics to understand which cities are expected to attract the largest net migration over the next five years as a percentage of their population.
Source: https://www.savills.com/impacts/social-change/the-impact-of-migration-on-real-estate.html

Savills has the following take on the reasons major cities are seeing a lot of net migration:
- Europe: Swiss Cities in demand
- Asia: Attracting talent
- North America: Quality of life
We’ll look at net migration data and statistics on the following factors in US and see if we see some patterns that will give some ideas on locations to invest.
- Flight to suburbs and smaller cities
- Flight to quality of life
- Flight to “business” friendly and no-tax states
Net migration to secondary cities and suburbs

Mymove has studied migration patterns in 2020 with the COVID pandemic and over 15.9 million have moved during the pandemic based on USPS data. Urban density has been a big reason for people to move to smaller cities and suburbs. As you can see from the chart below, big cities have had a large outflow in the first half of 2020. This has resulted in rent reduction in dense and pricey cities, but the opposite in smaller cities and suburban places.

Net migration to “business” friendly or no-tax states

In the 20th century, people migrated to cities like New York or Los Angeles for better opporunities, but in the past couple of decades states like Texas have been able to lure many people with their “business” friendly or no-tax policies. Florida and Arizona are also considered “business” and tax friendly states and hence the net migration needs to be reviewed further.

Net Migration for quality of life

Quality of life is primarily defined by cost of living and access to amenities that people are looking for. Savills Research shows the top 10 cities for net migration in the US. The results should not be surprising for many. We see cities in Texas, Flordia and Georgia that have attracted sizable new population. This should give investors some ideas about places to invest.

Source: Savills Research using Oxford Economics Note: Only cities with GDP greater than $50bn considered

Investor Takeaways

In summary, we’ve seen how demographics is a key pillar of real estate investing. We’ve seen how net migration is a great indicator or proxy of demographics and even attractiveness of investment locations. We’ve also looked at migration patterns in US to help investors find states and cities that may be attractive investing targets.

Though net migration data should not be looked at on its own, looking at migration along with other key data will net investors some good investment locations and ideas. The action items for investors are to answer the questions: Do the locations you want to invest in have these positive migration characteristics? Can you update your investment thesis based on these locations?
March 20, 2021
Rental Yield vs. Cap Rate?

Commercial Real Estate (CRE) Investor Question #90: What is the difference between rental yield and cap rate?

Rental yield is the net amount of money a landlord receives in rent over one year (after deducting operating expenses), shown as a percentage of the amount of money invested in the property.
So, Rental Yield = (Net Annual Rental Income / Cost) X 100
Note that rental yield is calculated on Net Operating Income without considering interest payment, tax and depreciation.
Cap rate (or capitalization rate) is the ratio between the net operating income produced by a real estate asset and its cost (or current market value).
So, Cap Rate = Net Operating Income / Value (or cost)
If you notice, both rental yield and cap rate appears to be same!
Rental yield is used to calculate the yield (return) of an asset whereas the cap rate is used to find the value (capitalized value) of an income generating real estate asset.
Source: https://www.feasibility.pro/real-estate-analyst-interview-questions-answers/

March 18, 2021
Rental Yield vs. Cap Rate?

Commercial Real Estate (CRE) Investor Question #90: What is the difference between rental yield and cap rate?

Rental yield is the net amount of money a landlord receives in rent over one year (after deducting operating expenses), shown as a percentage of the amount of money invested in the property.
So, Rental Yield = (Net Annual Rental Income / Cost) X 100
Note that rental yield is calculated on Net Operating Income without considering interest payment, tax and depreciation.
Cap rate (or capitalization rate) is the ratio between the net operating income produced by a real estate asset and its cost (or current market value).
So, Cap Rate = Net Operating Income / Value (or cost)
If you notice, both rental yield and cap rate appears to be same!
Rental yield is used to calculate the yield (return) of an asset whereas the cap rate is used to find the value (capitalized value) of an income generating real estate asset.
Source: https://www.feasibility.pro/real-estate-analyst-interview-questions-answers/

March 18, 2021
Is real estate a good hedge against inflation?

Commercial Real Estate (CRE) Investor Question #89: Is real estate / housing a good hedge against inflation?

Yes, real estate or housing is a good hedge against inflation. Ben Carlson, a popular portfolio manager has an in-depth article on this question. Here’s a picture from his book on how inflation “destroys” wealth. On the flip side, having a mortgage can help counteract those interest payments over time.

Source: https://awealthofcommonsense.com/2021/03/why-housing-is-a-good-hedge-against-inflation/

March 17, 2021
Property Valuation and Methods?
Commercial Real Estate (CRE) Investor Question #88: What are the key elements of property value? What are the top valuation methods?

Real Estate Property Value consists of the following key elements:

Demand: the desire or need for ownership supported by the financial means to satisfy the desire.
Utility: the ability to satisfy future owners’ desires and needs.
Scarcity: the finite supply of competing properties.
Transferability: the ease with which property ownership rights are transferred.
Source: Reonomy

The key methods of property valuation, some of which we’ve seen earlier, are:
- Income Approach – Based on income generated by the property
- Sales Comparision Method – Based on comparable (comps) property sales
- Cost Method – Based on the cost of building
A detailed article on the above methods is available at Reonomy!
March 16, 2021
How to invest in REITs?

Commercial Real Estate (CRE) Investor Question #87: I would like to get exposure to real estate asset class through REITs. Where do I start?

We’ve seen that REITs or REIT funds are a popular way to invest in real estate as they behave like stocks and can be bought through various brokerages. Many of the brokerages (for e.g. Fidelity, Merrill, Charles Schwab et.) also provide material and research on REITs as they do for stocks of companies.

You can research and trade with your brokerage. Another great resource to understand the world of REITs is Nareit. It provides a listing or directory of REITs and you can search and research based on various criteria as shown below.

Source: Nareit

Nareit also provides a list of REIT funds in addition to various other resources to get started with your research.

Source: https://www.reit.com/investing/reit-funds

March 15, 2021