Winning in real estate investing requires that you follow two simple rules:
- Understand which asset classes have the best risk/reward ratio.
- Invest in the best locations for your asset class and strategy.
In this article, I’d like to discuss Rule 1 (best asset classes) and review the compelling reasons for why resident-occupied cash flow real estate – specifically apartment buildings – are the asset class of choice for the next 20 years.
Fact 1: Baby Boomers (~76 Million) , the largest demographic group in US history are aging and the largest part of that group is moving into the “Over 55” group. As an age group, those over 55 begin to downsize their homes and rent more. In fact, those over 55 as a group rent more than they own.
Fact 2: The Echo Boomers (~72 Million), the second largest demographic group in US history, are moving into the 18-30 range. This age group contains the largest group of renters and rents for 5 to 7 years before purchasing a home, if at all.
Fact 3: U.S. Immigration is continuing to increase and will grow year over year into 2030. U.S. Immigrants as a group rent far more than they own and often continue to rent even after they could own a home. If you can provide quality rental properties in areas that capture a greater than average percentage of U.S. Immigration along with just national average growth, than you will have positive absorption. This means you will have low vacancy rates and still have the leeway to charge favorable rent for your units.
Fact 4: The national average of home owners vs. renters has taken a very large hit. Due to the artificial increase in the home ownership rate over the past few years, people who were not really in a position to own a home, entered and then departed the ranks of home ownership. We have seen a rapid transfer back to the average, which is driving increasing numbers of renters. Every 1% decrease in the home ownership rate is 1 million new renter households.
Fact 5: Multi-family housing starts are at an all time low. We have seen a 97% decrease in multifamily starts in the United States in recent years. This means that we’re not even building enough units to keep up with current population growth. Due to the current financing market, this decrease in new apartment development will increase occupancy rates nationally over the next few years. It will not be as dramatic at first. Single-family housing vacancy (that can be blamed on over-building) still needs to correct itself, but we believe that correction will happen soon enough and leave apartments in a great position to meet housing demand.
Fact 6: Multi-family Apartment Investments are historically one of the most stable of the commercial asset classes. You can make more growth equity in the Retail or Office asset classes, but you are exposed to a more volatile economic cycle. Apartments have some exposure to the economic cycle, but it’s nowhere near as significant. That is because the population cycle is not nearly as volatile as most economic cycles. As a result, the type of affordable housing that Multi-family Apartments represent will provide stability and safety, even as other economic sectors suffer through dramatic swings.
These 6 facts point to an overwhelming conclusion: More and more Americans will need rental housing in the coming years, and that trend will continue for decades. At 37th Parallel, we see these compelling facts plus great investment opportunities, and we are very optimistic about our future and the future of our clients.
The underlying fundamentals for apartment investments are very strong and we encourage you to learn more about this asset class and how it can improve your investment results: Achieve Permanent Wealth