Finding Value Despite Shrinking Margins

For perhaps 6 months or more many agents have been describing (and lamenting) the investment-buyer challenges in the current market. Not much has changed since then, but we are seeing a bit more inventory in the residential income space. Yes, margins and cap rates continue to decline, and we’ve seen some rising interest rates too, which isn’t helping our Buyers! So, is this another bubble or what?

Back in 2007, when evaluating income properties in the Treasure Valley, using a sensible downpayment, finding a property with a positive cashflow was like searching for unicorns. Rents didn’t support the values and yet many buyers willingly accepted negative cashflow in hopes of feasting upon rising prices in the future. However, in today’s market, we’re still seeing discerning buyers insist on cash-on-cash returns. And of course financing with nothing down is not a thing the way it was back in 2007, so fundamentally, this market is way different (thankfully!).

So, where’s the value for a buyer? Well, several things haven’t changed.  Financing a residential income property (4 units or less) can still be done on a 30-year fixed loan (thumbs up!) and the tax laws governing depreciation and other tax benefits are all still in place and may have gotten better depending on individual circumstances (two thumbs up!).

No question, the sale prices have come up, but so too have the rents.  Consider also that overall vacancy rates are historically low and with rising interest rates this is likely to keep that vacancy low. All these changing conditions should force change in our analysis… and in this market, we should always take a solid look at the achievable rents when doing your evaluation as many sellers are not keeping up with the market.

Continuing to look at “cash-on-cash” returns and/or “cap rate” is still okay (and important!). However, in this market, add in the principle pay-down and the tax benefits, and compare these combined returns against the risks associated with a very high stock market and rising inflation. This is both smart and necessary.

My crystal ball is far from clear when looking out beyond what I’m having for lunch. Real estate investing should be for the long term and when time permits, allow the Anfield team to help analyze and advise a strategy… ‘cuz there’s value out there!