First I’m going to make you mad, sad, or possibly depressed, then I’m going to explain how you can profit from solving the biggest real estate problem in the U.S and help an abundance of people along the way.
Let’s start with a quick quote from our mate Warren Buffet: “Only dead fish go with the flow.”
Put simply, if everyone else is already doing it then you are far too late for the opportunity.
Anyone heard about the old “fixing and flipping” model? Case in point!
I want you all to start thinking outside of, “I’m just going to wholesale or fix and flip SFRs because that’s a good place to start.” That’s the place everyone else is thinking of starting, so you’ll only be joining the herd of other sheep doing the obvious.
I’d rather you get upset at me for saying this to you now, than waste your hard-earned money and your most valuable asset (time) competing against the other 80% of newbie investors who are all searching for the same thing. That cow has already been milked and although there is still success to be had there, it’s meager compared to solving America’s primary real estate problem.
I’m not saying that wholesaling or fixing and flipping is a bad idea. What I am saying is that we need to think outside of the box and get creative as to what, where, and how we are wholesaling and fixing and flipping (if we must stick to those basic investment models), or think even more wisely, “what’s the biggest problem to solve in U.S. real estate?”
Some of you may have heard, “When the economy crashes there are going to be real estate deals everywhere!” It is true that when the economy crashes, opportunities present themselves, but deals won’t be “everywhere.” They will be in certain real estate niches in certain locations.
There will, however, be abundant opportunities due to the unprecedented circumstances we are in economically, socially, and politically. Let’s put a big emphasis on “unprecedented!”
As mentioned in my previous article, real estate takes time to react to the economy. We still have a ways to go, although we are on the precipice of the biggest economic shifts any of us have experienced in our lifetimes
On the other end of the scale, some of you may have heard, “Real estate is thriving in 2020 and this recession is not like 2008, so it won’t affect real estate, as sales are high and business is great!” The truth in this comment is that real estate is indeed thriving right now if you are selling properties, as we are near or at the top of the market. Buying, on the other hand, is not where abundant opportunities lie (at least not just yet).
Historically, real estate pricing goes up and down in seven- to 12-year cycles, like an upward trending rollercoaster. The new high point is usually slightly higher than the previous high point, and the new low point slightly higher than the previous low point.
As we know, what goes up must come down, which plays true in our economy and real estate prices. Given that we are near or at the top, we can all guess what comes next.
I don’t give financial, investment, tax, or legal advice; that’s up to your financial advisor, attorney, or CPA to advise on your individual circumstances, needs, and goals. This article is for educational purposes only, and there are some things to consider before we move on to discuss the problems we are facing.
- If you’re considering selling your property, then you may only have a short while left while sales prices are still high. It’s hard to say exactly how long prices will stay high, although the longer you wait, the higher the possibility prices will drop.
- If you don’t sell in time, you may miss out on prices remaining high and could be stuck with diminishing property values that may not come back up for another decade or so.
- It’s prudent to have enough reserves to carry yourself and your business through challenging times. Many investors prefer to have one year of reserves as a safety net, and many investors believe there is rarely much benefit to having more than two years of reserves.
Setting the Context
A little doom and gloom before we discuss where this opportunity lies and how to best provide value and solve America’s top real-estate problem. It’s not fun to talk about the cracks in our economy’s foundation and how that could play out for some folks. But we must be aware of our surroundings so we can make the wisest investing decisions and know where we can provide the most value.
Let me quickly touch on why we are at the precipice of economic turmoil and why we are in “unprecedented” times.
- Increased debt. U.S. debt is increasing at an exponential rate (key word here is “exponential”). In January 2020 we were at $23.224 trillion of debt. As I’m writing this in August 2020, we are nearly at $27 trillion. You can watch it increasing in real-time.
- Quantitative easing. Quantitative easing (creating currency out of thin air, aka “printing money”) has never been done at the current scale. Currently, they are printing “unlimited” amounts of money, and each new dollar created is more debt for the U.S. It’s literally impossible to pay this debt back, as there is not, and never will be, enough currency in circulation to pay it off. This is mainly due to fractional reserve lending. Printing money and fractional reserve lending are not sustainable, and the U.S. (and world) economy can only end in a crash. The only question is, how long will money printing hold off this inevitable crash? Only time can answer as this all unfolds.
- Weakening dollar. The U.S. dollar’s purchasing power is massively decreasing due to quantitative easing and fractional reserve lending, which in turn leads to ever-increasing pricing (aka inflation, or worse, hyperinflation).
- Possibility of new currency. Based on the above points and due to our currency being a fiat currency that is destined to fail, it’s highly anticipated we will see a new currency replace the American dollar within the coming years. I personally believe this will be in place in or before 2025. We can all agree that when this happens, it will not be a smooth transition and will cause quite the economic disruption. There are bills currently in discussion to introduce a government centralized digital currency, so this may happen sooner than expected.
- Rising unemployment. The COVID-19 lockdowns have dramatically affected unemployment rates—which have reached all-time highs in 2020—and massively slowed down supply chains. As a result, many businesses have closed for good and supplies are dwindling. The real effects of this have not been felt yet economically because quantitative easing is delaying the inevitable, and we are not seeing any signs of lockdown slowing any time soon.
- Missing housing payments. Within the U.S., 32% of households missed their July housing payments, and 30% missed their June payments.
- Income inequality. There is massive and increasing income inequality. The spread between the top 0.01% and the rest of the population is enough to make you sick to the stomach.
- Retiring boomers. Baby boomers, who make up the largest percentile of any singular generation in our population, are retiring at a phenomenal rate. Many of them are downsizing in homes, a movement called the “silver tsunami.” Based on the current economic landscape, the rate at which boomers will be forced to sell based on their own internal financial pressures has increased in velocity.
- Shifting generational priorities. On the flip side of these transactions is the millennial generation that would be expected to buy the boomers’ homes. In many cases, they don’t have the desire to buy the larger homes many boomers will be selling. For many millennials, they’d rather deck out a sprinter van and travel, or rent rather than buy a home. Even those that might want to are not in the financial position to buy these homes, and that situation is only getting worse day by day in light of COVID-19. The effects of this have only just begun and will play a huge role in real estate in the coming years.
- No funds for pensions. Many seniors’ pensions and social security will not be able to be paid out as anticipated, as in many cases, the money to pay them out in full simply does not exists. This is a worldwide problem and riots have already begun in Europe over this matter.
- U.S.-China relations. China is in the biggest bubble of any record. It’s a $52 trillion real estate bubble that will have an impact on the U.S. economy.
- Global political unrest. In addition, we live in a world economy. We are involved in massive disagreements and are on the verge of huge changes socially and politically on a worldwide scale. The fact that we are nearing the 2020 elections also plays a role in the complexity of what’s going on.
In some of these cases, the news speaks for itself.
It’s fair to say we are in quite the predicament and things are only getting worse. The crash will happen; the only question is when.
Now I’ve delivered on my promise to make you mad, sad, or possibly depressed. You have to know your surroundings before you can make an educated decision. So, where’s the good news?
Now take a deep breath. It’s not all bad! We needed to get some housekeeping out of the way to set the context of what we are about to discuss.
Yes, the above is depressing information, and yes, this will mean that many people will be affected economically. How is this an opportunity for newbie investors? (Or any investors for that matter.)
Great question! The simple answer is, and always is, “room to provide a ton of value where high demand and low supply meet.” This, my friends, is the main point of this article.
With chaos and turmoil comes a great need for big problems to be solved. I’m confident that the biggest problem in U.S. real estate already is, and will increasingly continue to be, the need for affordable housing.
What is affordable housing and why is it so important?
Before 2008, the term “affordable housing” didn’t really exist. But since then it’s been an ever-increasing term used in U.S. real estate. Although a few attempts have been made to solve this problem, nothing of any scale has come to fruition yet that can do so sustainably.
Although answers may differ depending on the source, the simple definition of affordable housing is housing that doesn’t cost more than 30% of your household income.
So what’s the average household income in the U.S.? It’s hard to give an accurate answer here as we’d need current data to get the most accurate numbers and that’s not readily available.
According to the United States Census Bureau, the median household income based on 2014-2018 averages is $60,293. This does not include 2019, nor does it account for where we are in 2020 with high unemployment, a global pandemic, and economic shutdowns.
Based on that figure, the average American needs housing that costs less than $1,500 a month. That’s the median average American, but it doesn’t include today’s adjusted numbers or those who fall below the poverty line.
The poverty line in the U.S. falls at about $26,000 of annual household income for a family of four (varying slightly depending on statistic source). According to the Census Bureau, 11.8% of Americans live below the poverty line as of a 2019 survey. Again, this number will likely have dramatically increased in 2020 due to high unemployment and economic shutdowns.
This means that as of that 2019 United States Census Bureau survey, not including current and near-future economic effects, in America we have about 38,732,264 people that fall below the poverty line.
At four people per household, that’s about 9,683,066 households that need affordable housing that costs under $650 a month.
Let me say this again: Based on 2019 statistics (from before the pandemic, record unemployment, and economic shutdowns), roughly 9,683,066 households in the U.S. need affordable housing that costs under $650 a month!
Again, this is conservative, as the number of households that need $650 in monthly affordable housing in 2020 and subsequent years will most definitely be larger when we add in current and near-future unemployment, adjust for 2020’s actual average household income, and account for the increased percentage that falls below the poverty line.
For the sake of being conservative, let’s stick with our 2019 numbers to show you how this math problem is not being solved.
Sure there are single-family residences (SFRs) and apartments for rent for under $650 a month, although they are so few and far between that they can hardly contribute to solving the problem. They are also location-dependent and located in areas far away from the highest concentrations of people needing affordable housing. So, unless someone is going to pay for people to move to new and often remote locations, then SFRs and apartments are not currently solving this problem.
Mobile Home Park Investing
Mobile home parks (MHPs), on the other hand, are by far the biggest potential contributors to solving the affordable housing crisis. Lot rents in MHPs average about $300 a month. Even if we add in a $300 mobile home payment, this brings us to $600 total.
Currently, there are only about 45,000 mobile home parks in the entire U.S. and most of them are well occupied. So mobile home parks do play a significant role in solving this problem, but alone it’s mathematically impossible to house 9 million households in 45,000 MHPs.
This is why MHPs are considered recession-resistant, because in recessions people downsize in housing. This forces more people to the lower rungs of the housing market, where MHPs sit practically at the bottom, which results in increased demand for an already-high-demand asset class.
This is one of the main reasons mobile home park investing has been and still is my main focus as an investor. Right now, we have long waiting lists of pre-qualified/pre-approved tenants waiting for vacancies to open. We simply cannot keep up with the demand. A good problem to have as a business owner/investor.
Am I saying MHPs are the only niche to focus on for newbie investors? No, but it’s a very good place to start. If you want to start really small, then you can be a mobile home investor, where you invest in homes only; if you have an appetite for larger volume and larger returns you can be a mobile home park investor and invest in the entire park, including some or all of the homes.
As you can see, as much of a contributor as they are, MHPs alone can’t solve this ever-expanding problem. So what else can we do?
Urban vs. Rural Affordable Housing
First, let’s think about where the largest demand is. Even if we take into consideration that a handful of people will be moving from cities to more remote locations as a result of COVID-19, as they are doubting the benefits of city living, the vast majority will still remain in cities. In addition, those who have a household income under $26,000 are likely not in the financial position to move to a remote location anyway.
We can all agree that major metropolitan cities are the most in need of affordable housing, as they house the highest concentrations of people. Rural areas may also have high demand depending on the specifics of each location, so make sure to do your homework first when choosing a market to know whether there is a high need for affordable housing in your market.
Related: Why I’m Investing in Affordable Housing for the Long Haul
One key indicator I use to figure out if there is a need for affordable housing in a market is whether the average monthly rent or mortgage payment on a SFR or apartment is $1,000 or higher. This is a significant step up from the $650 that affordable housing tenants can afford, so there’s a clear need for more cost-effective housing. The larger the monthly rent/mortgage number, the greater the need for affordability.
Therefore, markets like Los Angeles, San Francisco, and New York, which clearly have rents over $1,000 per month, have huge affordability issues. In markets like this, we may be able to increase $650 a month to $1,000 a month or even higher and there will still be massive demand, as affordability numbers in these major cities are different than the rest of America.
Types of Affordable Housing
Below is a list of possibilities outside of mobile home park investing that can contribute to helping solve the affordable housing crisis in America. It is by no means an exhaustive list. Remember: This problem has not been solved, nor are we anywhere near solving it. We need massive amounts of creativity here, then we need to test that creativity and put it into action.
The cool thing is there are many ways to skin a cat (so to speak), so our possibilities here are endless. It’s less about knowing exactly how to solve this problem and more about looking at the same properties through a different lens. The lens of, “how can this property help solve this affordability problem,” and, “where is the demand that is not being met?”
Affordable housing is already is the largest real estate dilemma in the U.S., and as you are now fully aware, it’s destined to get significantly worse.
Some of what I’m about to mention may seem pretty simple and other things may seem a little more complex. Rather than telling you what to do here, I want to wrap your head around the concept of affordable housing. I’ll provide a handful of possible solutions so you can get your problem-solving wheels spinning; there is no “one size fits all” here.
It’s an open playing field with one common problem. The need for affordable housing and how we solve this problem is up to us, our creativity and determination. The only thing we can guarantee is that the demand for solutions is high and many hands will get to play in helping to profitably solve this problem.
Before you read below, also note that you as a newbie don’t have to try to solve this problem all by yourself. I suggest teaming up with or getting support from other experienced real estate investors who have had experience in the specific asset class you are looking to focus on. At the least, have someone experienced look over your deal to make sure it’s possible and confirm there are no red flags.
Better yet, team up with an experienced investor where you do the groundwork and they bring the experience and resources to the table. This is win-win real estate and you’d be surprised how many experienced investors could benefit from your time and efforts as theirs are limited.
Single Family Residences
If I were starting out as a newbie investor today and only felt comfortable investing in single-family residences, then my focus would be on trying my best to provide housing that is close to or under $650 a month in rent or mortgage to the tenant/homeowner.
This may mean smaller houses that are located far from the best street in town, although if you select the right market then demand should still be high. What you may miss out on in profit spreads per deal, you will likely make up for in volume due to massive demand for that price of housing.
Again, in major cities, your affordability number will be higher than $650 per month, so do your market research to find out where the sweet spot is for your given market.
The typical cookie-cutter fix-and-flip may not work in today’s landscape given these unprecedented circumstances. I’m confident in saying that once house prices dramatically fall, it will be a long time before they rise to any decent place. So the standard fix-and-flip model won’t be as profitable as it once was. Plus, every man and his dog is on that model anyway so you’d only be joining the herd. (Remember, “Only dead fish go with the flow.”)
Related: The 7 Vital Steps to Buying a Single-Family Rental House
It’s a little challenging to find SFRs where these numbers jive, so we may need to get creative. Some people are going to be looking for a room to rent. If we can do that for a reasonable price, then we can fill the house with room renters. If we have a bathroom for each bedroom, then we’ve just upgraded to a more desirable rent-by-the-room house; we could even consider squeezing in a kitchenette in each room to further increase desirability.
Per-room rentals will only work for a portion of the population in need, so in other cases, you could consider turning larger houses into two separate sections, similar to a duplex. What’s typically needed here is a soundproof wall dividing the two sections; two separate entrances; kitchen, bathroom, and living space in each section; shared or separate laundry; and preferably designated parking. This may seem like a lot of work. Based on my past experiences doing this, it’s minimal to moderate effort, as most things are typically already there, and we can now get almost double the rent.
So I’m not saying wholesale or fix-and-flip won’t work, although I am saying we need to think outside the box to fill the needs of today and tomorrow.
We will have to take into consideration how this works with local ordinances and zoning so make sure your plan is approvable in your market before you dig in too deep.
We’ve all heard the hype of tiny homes and there is certainly a handful of minimalists interested in this niche. Having that said, living in a 120-400-square-foot home for an extended period of time is only going to work for a small portion of America’s population. Nonetheless, it’s still a contender to fill some of the void of affordability in American real estate, and for some of you, this niche will perfectly be your cup of tea. You can do singular tiny home deals or consider a tiny home community.
Shipping Container Homes
These are on the rise too. I’ve seen single-container homes that have a small kitchen and bath, and I’ve seen multiple-container homes and container communities. Some have detached communal bathrooms and kitchens to allow more space in the living space itself. Again, we may be restricted by local ordinances and zoning here, so we will need to do a little exploration as to where this works and what hoops we need to jump through.
I’ve also seen shipping container restaurants and small businesses, so let’s keep thinking outside the box. Small businesses need affordable real estate too!
Mobile Home Land-Home Deals
Some mobile homes are located in mobile home parks and others are located on a singular piece of land. The latter is called mobile home “land-home” investing. You can apply the same principals that you would to SFRs mentioned above, although the type of housing is a mobile home instead of an SFR. You can rent rooms in homes, split the home in half, or rent/sell the whole home.
Some of the 9 million households that need affordable housing will also be seniors who need medical care. Sure, the cost of living in a communal assisted living house would be more than living in a standard communal house, but the demand for assisting seniors is high.
Baby boomers are the largest percentile age group and we are in the midst of many boomers retiring and needing assistance. This investment model requires the added complexity of health care, so it may not be the best fit for many newbies, but it’s such a big need it’s worth mentioning.
Assisted Living Mobile Homes
Mix assisted living with mobile homes and we have an even more affordable type of assisted living. Sure, it will take some creativity and a little complexity here, but we are trying to stretch our brains a little to explore possibilities outside of the standard “fix-and-flip” model that every man and his dog has pursued to this day.
Under-Valued Commercial Real Estate Conversions
This is more for those with an appetite to take on a challenge that’s a little more complex. It’s rarely done and barely heard of.
Most of us by now are aware that retail and small businesses have taken a significant hit due to COVID-19 lockdowns. For many commercial real estate landlords, this means it’s time soon to sell or lease their vacant properties at cents on the dollar.
With a little creativity and probably a lot of work with the city, some of these buildings either are or can be zoned as multiple-use properties, some for housing. How we design the layouts of the properties and how many people fit in each building will be open to your creativity and the workability of local authorities.
Within these spaces, you could create anything from a basic black-and-white no-frills accommodation to a cost-effective hipster-style accommodation and beyond.
Same as above, but each hotel room gets converted into an affordable housing unit. This will likely only work with more run-down hotels that need remodeling anyway, although other hotel deals may also pencil out using this model.
We are going to see an abundance of new properties come on the market in the near future, due to the factors mentioned above and the effects of COVID-19 and the economic meltdown. Not all these properties are going to be useful or profitable if used as they previously were. Repurposing these properties could not only be profitable, it could also fill the biggest housing need in America and help a ton of your fellow Americans along the way.
The list above is not an exhaustive list of all the ways we can solve affordable housing. It’s simply a starting point to get the creativity flowing and allow us to look at real estate investing from a different angle.
Some of you may be game to delve into this on your own. For the rest of you, there are plenty of experienced investors and mentors you could team up with that can either partner with you or look over your shoulder. Find those experienced investors now, and don’t be scared to try something out of the box.
Mobile home parks are tried and true and most definitely a great place to provide value in this affordable housing crisis. If you’re looking to break into this space, let me know and I’ll lead you in the right direction.
If you are open to exploring some of the other methods, then I’m taking my hat off to you in advance. Not only could you be rewarded with profitability, but you are also helping your fellow man in a massive way where the system has failed them.
Affordable housing is the biggest real estate problem in America today and this problem will be solved. The question is, are you going to be one of the fortunate few that play a role in solving this problem for profitability? Or would you prefer to leave that opportunity (and profit) on the table for the people that caused this problem in the first place?
If they attempt to solve this problem it will only be advantageous for one group of people, and that won’t be the people in need. Armed with this information, what are you going to do about it?
Do you use real estate to help your community?
Share how you’ve made a difference in the comments.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.