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Understanding Capital Markets Can Lead to Consistent Success

The Effect the Markets Have on Investor Activity By Mitchell Zagrodnik It is no secret that the real estate investment space has been growing consistently over the past few decades. Whether someone is looking to purchase a property, renovate it, and then flip it for a profit, or they just want to purchase a nice cash-flowing rental property for passive income, there are multiple avenues investors can take to lead to a prosperous career in real estate investing. But as the second half of 2022 led to swings in the market due to rate increases, 2023 has started off with a more conservative outlook in the space, with most people wondering how the market is going to play out. Experienced investors who have been in the industry for decades have seen the worst of the worst, with the 2008 housing market crash. Newer investors are seeing their first volatile market after a few years of a very favorable market and low rates, and may be wondering how to navigate this new playing field. Looking at capital markets data and being able to identify trends in the market are a great way to stay ahead of the game and prepare for the future. What are Capital Markets? The definition of capital markets as described by Oxford Languages is “the part of the financial system concerned with raising capital by dealing in shares, bonds, and other long-term investments.” In real estate, the industry has its own particular capital markets, which are designed to accommodate the needs of investors and developers. Through this structure, businesses can gain capital by issuing securities to investors, who with these purchases, hope to earn solid returns on their investments. Overall, these markets are meant to act as a framework for how assets are valued, financed, and transacted from businesses to investors. And as investors, it is beneficial to have an overall understanding of how not only to invest in the real estate market, but to put in the time and research to better comprehend how your purchases fit into the grand scheme of the market. Real estate capital markets consist of both primary and secondary markets, and both are key factors of the financial system. The primary market is where the loans are originated, and then once they are created they can then be traded with investors either as securities or as some other type of financial instrument. The secondary market acts as a channel for the funds to get in the hands of investors in order to fuel investment activity and lead to a stable and functioning economy. Since mid-2022, the economy has been fluctuating and the Fed has taken steps to try and stabilize it through constant rate hikes that have a ripple effect on the real estate investment space. The Effect the Markets Have on Investor Activity Since the second half of 2022, interest rates have been on the rise and because of this, they have a heavy impact on real estate transactions. When interest rates increase, the cost of capital increases making real estate investments less profitable and lowers the demand for these assets. This is a prime example of what we have seen happening in the market since the middle of 2022. The consistent and frequent increases in interest rates led to overall lower valuations of assets, having ramifications throughout the market. When interest rates are lower it is the opposite, costs are lower and real estate investments are more attractive. It all comes down to returns on the investments. With higher rates that have continued to rise, projected returns are lower, and the uncertainty on where price points will land on these acquisitions is leading some investors to steer clear. Where will the property value appraise at? How much longer is the Fed going to continue to raise rates? These are questions that many investors are asking, but there are also those investors that can read the market and current trends, and because of that they are looking past the short-term volatility and focusing on the opportunities in the long run. The Trends You Should Look For Whether you are new to the real estate investment space or a long-time veteran, it is important to always have a student mindset. Even in times of consistency in the market, it is imperative to always be prepared for when the market gets more fluid and unpredictable. There are trends and data in the market that investors should always keep an eye on. A good place to start is by keeping an eye on housing supply and demand. In real estate for every action, there is always a reaction, so when supply is lower, demand is usually driven up. The same is said for the inverse, when supply is there then the prices are likely to lower. Looking at housing starts and building permits as well is a great way to stay ahead of the curve. If there is an increase, then that could potentially lead to a rise in housing prices. Also, keeping an eye on migration patterns throughout the United States can be a good indication of market conditions to come. Housing is expensive, especially in big metropolitan areas, and that trend seems likely to continue as prices and rents continue to soar to record levels. Even with the recent efforts to slow down appreciation, there has been little impact to help with affordability. Factors like low inventory and difficulties with new builds contribute to this as well, among other issues. Regardless, people are leaving the expensive areas and moving to smaller, more affordable areas. These are just some of the patterns and trends to be aware of as investors in a changing market. Getting Ahead in a Changing Market Real estate capital markets are the engine that makes that industry run. They provide investors with the opportunity to receive capital in order to help fund their real estate projects, whether that be rehabbing and selling a property or looking to

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Succeeding in Real Estate in a Historic Way

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Be Agile with Your Dreams and Business Amir Alexander is an independent business owner with HomeVestors® of America, Inc. in Virginia, where he buys, rehabs, and sells residential properties in the Norfolk market which is comprised of seven cities which make up the Hampton Roads metropolitan area. Life Before HomeVestors Upon graduating college, Amir had dreams of going to law school and becoming a lawyer, until “One day, I researched a list of the richest people in the country and discovered they all amassed their wealth through real estate,” he said. That revelation was an eye opener, and he quickly shifted his dreams and energies to the real estate industry… in a historic way. Amir got in the industry in 2004 when he became the youngest licensed mortgage broker in the history of Virginia. In 2008, primarily due to the recession, he used his savings to begin investing in the Norfolk real estate market in partnership with a CPA firm. At that time, his focus was strictly on residential property buy-and-holds. Amir was introduced to HomeVestors through a friend who owned a local franchise. He then bought his own franchise in 2015 at the age of 32. “I was enthused with the prospect of having an independent business that already had proven and reliable systems in place,” he said. The Beginning of Rock Solid Real Estate LLC The Norfolk, Virginia, real estate market is a very stable market. Hampton Roads, specifically, is known for its large military presence and miles of waterfront property and beaches, all of which contribute to the diversity and stability of the region’s economy. Almost 80% of the region’s economy is derived from federal sources with the Hampton Roads area having the largest concentration of military bases and facilities of any metropolitan area in the world. When Amir bought his franchise, he relied heavily on the mentorship of Patti Robertson, who was his Development Agent (DA). “Right out of the gate, I relied on her wisdom, years of experience as a HomeVestors independent business owner, and on the HomeVestors systems and financing programs,” he explained. Consequently, Rock Solid Real Estate LLC has grown exponentially year-over-year since its inception in 2015. Present Day Today, Amir focuses on both buy-and-holds and fix-and-flips. He is also agile enough to shift his focus based on trending economic conditions. While currently not investing in short-term rentals, that is one niche he is watching closely. The Coastal Virginia – Hampton Roads region continues to draw visitors and tourists year after year. He is also a Development Agent supporting new franchisees nationwide with the assistance of his wife, Kristel, who is a full-time nurse practitioner and REALTOR®. Kristel also serves as the listing agent for the business. Advice from an Expert Amir Alexander is a firm believer in building generational wealth through real estate investing and has expert advice for investors just getting started. •          Get in early •          Stick with it •          Do it the HomeVestors way •          Advertise Homevestors What exactly does it mean to be a HomeVestors® business owner? Owning a real estate business is life changing and naturally comes with risks! When you become a HomeVestors business owner, you get immediate access to motivated seller leads, financing resources for qualifying purchases and repairs, one-on-one coaching with your local Development Agent, proprietary software for analyzing properties and deals, and access to a nationwide network of coaches and peers. Your house-buying business is yours and you run it as your own venture with a focus toward your individual business goals. If you are interested in a franchise, call 866-249-6932, email Sales@homevestorsfranchise.com or visit www.homevestorsfranchise.com. Each franchise office is independently owned and operated.

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Turning a Profit in the Post-Pandemic Housing Paradox

2023 Will be All About Disappointment…and Opportunity By Bruce McNeilage When the New Year rolled around at midnight on January 1, 2023, we entered what could be one of the most opportunity-filled years for real estate investors in more than a decade. On the other hand, we also entered one of the most treacherous years in housing that we have seen in over a decade. Now that the country appears to be emerging on the other side of the pandemic, the only certainty among most investors and analysts seems to be that the euphoria is about to end. Naturally, this is a source of great concern for some people and great excitement for others. The reality of the situation is that there is always opportunity in real estate, but only if you are looking for that opportunity in the right places. Big Changes are Coming, and There is No Easy Solution At the end of the first quarter of 2023, the shifting market was already starting to emerge. For starters, what was working like a charm in 2020 and 2021 when it came to flipping houses had started to stall out in 2022 and came nearly full stop for many investors in 2023 thanks to rising interest rates and the cost of labor. Of course, the cost of materials was an ongoing concern throughout. Nevertheless, when you could borrow money at around 3% interest, flipping was a great business model. Now, however, that interest rates are hovering closer to 7%, it is not a good business model. In my business of building homes to rent and for retail sale, my funding costs have nearly doubled over the past 16 months. Something has to make up for those new costs, and investors will be limited in how they can reduce and accommodate new budget constraints. For example, for investors who own rental properties, 2023 brings rising taxes, rising insurance rates, rising costs of materials, and rising costs of labor. While rents are rising as well, it is unrealistic to simply double rents to make up the difference, which is what most investors would need to do in order to continue “business as usual” in 2023. Tenants cannot handle that kind of rate hike nor should they be expected to. Rents already rose last year by between 10-20% in most areas of the country. In my rental developments, we are hoping to lower rents slightly to keep our tenants housed. This might mean our revenues are lower — possibly around 5 % — but since they spiked in the two previous years, we expect to see positive, solid averages and reliable, long-term tenants in response to this strategy. As the cost of acquiring a home rises for retail buyers as well, investors will be well-served to pivot from owning traditional rentals to exploring creative strategies like rent-to-own. While it may be increasingly difficult for residents to purchase homes via the traditional route of a 30-year, fixed-rate mortgage, it will not become less appealing to own a home rather than rent one. In fact, about nine out of 10 millennials and “zoomers” who currently rent say they want to own their own homes — a far cry from forecasts in the mid-2000s that predicted these post-housing-crash young professionals would be content to rent their entire lives. These generations are typically quite comfortable thinking outside the traditional home-buying box, making them excellent candidates for rent-to-own models and, as an added bonus, they are usually reliable tenants as well. Breaking Down the “Affordability vs. Reset” Conundrum Two terms we are hearing more than ever in real estate are the words “affordability” and “reset.” First, the discussion deals with the topic of affordability. You tend to hear that in many states, only about half of the population has any chance at all of being able to buy and afford a home. Then, you learn that less than half of young (younger than 30) and young-ish (between 30 and 40) adults currently own their own homes even though roughly two-thirds of all Americans are homeowners. Then, the lecture continues in this vein, addressing the legitimate concern that rising interest rates, stagnating wages, and rampant inflation are going to price many of these young professionals right out of homeownership until they are well into middle age. The conclusion is always the same: The nation needs more affordable housing. The need for affordable housing established, the speaker then shifts topics. Now, they tell you about how housing is headed for a “reset” in the post-pandemic years. This is likely accurate. Since 2010, if an investor was reasonably active and ran their numbers with any degree of care at all, they could generate some fat margins on their deals. Around the time the market might normally have started correcting in 2019 or 2020, the pandemic “accelerated” the market into an unprecedented mini-boom fueled by government intervention and buyers’ fear of the unknown (and apartment living). Throughout 2020, 2021, and the first half of 2022, homes that went on the market in the southeast, for example, were sold within a day and tended to have multiple offers within the first few hours of listing. Then, somewhere around the end of the summer, things shifted. The bottom did not fall out of the market, but suddenly the only people making full-price offers were the i-buyers, and they were not necessarily moving terribly fast. When an algorithm is the only potential buyer offering you full price, you immediately know two things: Something in the market is changing or the software has not yet spotted the change. Of course, today there are far fewer algorithm-driven buying systems operating in the housing market. Investors will soon discover the coming “reset” is not going to be like 2008. Today’s market, with tighter lending standards, higher housing prices, historically low inventory, and as-yet unpredictable rates of inflation, is likely to experience a long, slow decline in some of the most expensive markets, a slight slide followed

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the “Lake Next Door” Affects Your Property Values

What Happens When Water-Related Value Goes Down the Drain? By Dana Nutt Imagine this scenario: You own a wonderful cabin near a crystal-clear, blue-ribbon trout stream. Just a couple of miles up the road, there is a picturesque lake that is home to an incredible variety of wildlife, including turtles, beavers, loons, frogs, and osprey. Your riverside cabin is the stuff that sportsmen’s and outdoorsmen’s dreams are made of, and when you are not using it personally, you rent it out to others who love the outdoors as much as you do. This cabin means so much to you because of the wonderful family memories you have made there and because of its value. You know that when you are ready to retire, the equity in that property is going to play a big role in your financial security. Then, you find out something terrible. You learn that the state government’s Department of Natural Resources (DNR) has decided to remove a dam that sits upstream from your cabin. The agency says its sorry, but that the dam is going to need some repairs and the state believes it will be less expensive to simply “drain down” the beautiful reservoir that has stood near your home for more than 80 years than to make the repairs. This process, by the way, will fill your own riverfront property with sediment, could completely eliminate the fantastic fishing, will certainly result in the departure and death of much of the wildlife (including federally protected nesting loons), and will reduce the appeal of your cabin to short-term renters to nearly zero, which means its value to your financial freedom is heading out the window. For that matter, this catastrophe is going to break your own heart and eliminate your cabin’s appeal for you, as well. Sound like a nightmare? It is. Worse, it is a nightmare that hundreds of property owners face right now in northern Michigan, where the state is laying out a process for draining down a longstanding, manmade reservoir called Cornwall Flooding and removing the dam that created the reservoir back in the 1960s. This process will not only eliminate the reservoir; it will permanently alter the face of the area downstream as well. What’s Wrong with the Dam? The DNR says the dam has to go due to a recent assessment indicating its condition needs work and a failure could cause “serious damage to inhabited homes or infrastructure downstream … where danger to individuals exists with the potential for loss of life.” The fastest solution, and one that is currently under discussion, would be to lower the level of Cornwall Flooding so that the dam would be under less pressure, then reevaluate the total removal of the dam. However, repairs will be far more expensive than removal, and the state has a limited budget. Casey Nutt, a local business owner who lives in nearby Afton, Michigan, and grew up spending all four seasons outdoors in the Cornwall Flooding area, says he and many others believe there is a way to draw down the reservoir and get the repairs made instead of removing the dam entirely. Nutt emphasized, “There are ways to do those repairs while the lake and the wildlife are unchanged and unaffected. No one wants a dam failure. We just want to preserve this incredible spot on earth.” Nutt said he believes the DNR and the many people who love Cornwall Flooding and the forest around it can work together to find a solution that does not have to mean the end of the treasured outdoor area. “This area is very pristine, and there are huge numbers of people who use and love this area,” he said. “We are hoping to see if there is some way to bring the cost of repairs down or locate additional money.” Curtis Goldsborough, another local businessowner, avid outdoorsman, and organizer for the Save Cornwall group, said that three state politicians, in particular, have taken up the cause of dam repair in recent months. Because of the rising costs of construction since the original project was bid in 2020, it appears likely that the cost of repairs could climb as high as $1.5 million. Goldsborough explained there are multiple possible routes to raising that money, noting that the state already has about $300,000 in a fund allocated to the dam. Funds could come from a 2024 DNR budget line item. State representative Ken Borton (R) has submitted a 2024 budget line item that would cover the estimated $1.5 million needed to cover the cost of dam repair. “We have to remember that the budget still has to be debated, trimmed, and approved, but we just want to thank the representative for listening,” Goldsborough said. State representative Cam Cavitt (R) and state senator John Damoose (R) are taking a different route, submitting the project for consideration for the 2023 supplemental appropriations bill. This type of bill is used when Michigan has a budget surplus; this year there is a surplus of about $9.2 billion. “We are so grateful to both of these representatives for listening to our collective voice and taking action,” Goldsborough added. Water Policy Affects Everyone At first glance, property owners might think dam removal only affects people living on the water. However, water policy plays a crucial role in home values for all proximal properties, and since the advent of COVID-19, “proximal” has taken on a new meaning. Some studies indicate that houses as far away as four hours from outdoor recreation locations like beaches and lakes gained equity because they represented a drivable option for locked-down individuals. While some of that value may have fallen off as pandemic restrictions diminished, studies dating back as far as the 1980s and published as recently as last year indicate that some proximity to water easily adds between 5% and 30%. Whether you invest in northern Michigan, where many homes are within a few hours’ drive of the Great Lakes, or in any

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Wake up and “Smell” the AI

Why it is Imperative to Implement Artificial Intelligence into Your Business By Richard Katz Artificial Intelligence is here, and it is a watershed moment with impacts that will be greater than the advent of the internet and the invention of the personal computer. The difference is the adaptation will be much faster. You can already feel the disruption, but shortly, the AI revolution will be beyond our current comprehension. Sticking your head in the sand and not doing something right now is a recipe for your business to get left behind and become obsolete. It is time to be relentless and proactive in order to succeed and stay competitive in this ever-changing new world. What is Chat GPT? Only six months ago, on November 30, 2022, the infamous and life-changing Chat GPT launched. Chat GPT describes itself as “an advanced language model developed by OpenAI and is based on GPT (Generative Pretrained Transformer) architecture, which is designed to generate human-like text based on the input it receives.” I am not sure that the definition works; if I were to define it, I would say it is a conversational platform with limitless potential that learns every millisecond. There have already been new versions with improved and exponential results; just imagine what will happen in another six months. Overwhelmingly, many other AI models, robots, software, etc., are seemingly introduced daily, and Google will soon launch multiple AI products as they have an all-hands-on-deck approach. Once you delve a bit into the capabilities of this system, it is incredible what it can do and achieve. For instance, the other day, the director of our marketing department asked me to approve a marketing piece. After glancing over her material, I thought the phrasing was not resonating with me. Ordinarily, I would take an hour to read through it and suggest corrections and revisions. However, this time, I experimented and transferred the entire text onto Chat GPT and asked the AI to improve the piece and make it sound more effective and appealing. In less time than it took me to write this sentence, Chat GPT rewrote it. However, the striking fact was that it was so much better than the original. I tweaked it a bit and sent it back to the marketing department with the entire process taking about 5 minutes. This process previously would have taken about one hour. With the extra 55 minutes I saved, I used that time for more productive work geared toward growing the business. AI in the Construction Industry I recently read an article about AI and its utilization in the construction industry. Before reading the article, I could not imagine how AI could transform such a labor-intensive, hands-on business. However, this article discussed the birth of Digibuild, a supply chain and building material software company that now has integrated Chat GPT into its process. Before Chat GPT, contacting only five or six suppliers was a tedious endeavor that would require an investment of multiple hours. Enter Chat GPT; the task is now a breeze. As Digibuild commented proudly, “We can talk to 100 suppliers in one minute versus maybe a handful in a couple of hours.” Just think about the implications of this technology: it will revolutionize the way suppliers are located and communicated with and save a tremendous amount of time and money. On one job, a construction company in Virginia needed closet shelving, and the builder was only able to find one supplier with a cost of $150,000. Utilizing Digibuild powered by Chat GPT, they found a supplier in the Midwest for $70,000, and the shelves were delivered within weeks. As a construction lender, should I demand that our clients utilize a service like Digibuild to ensure they get the best prices and prevent them from borrowing more than necessary? It is definitely something to think about. And in thinking about it further, can Chat GPT or another AI model perform a feasibility study of a construction budget that is more accurate than the current manual standard of having a person look through the line items and give their assessment? AI has real-time access to infinite data to accurately assess in contrast to a human being that may myopically look at their view of a budget. Think about the time saved in getting an instant result from this study through AI, where today, a typical feasibility study takes us about three to five business days to get returned. AI in Underwriting and Valuations Underwriting today has come a long way, but there is still a significant human element to analyzing the information; AI has a lot of room to improve the process and make it more efficient. The underwriting process with the aid of AI can be stunningly accurate and allow clients to be served quickly with much faster turn times as AI does not have lag time; its results are almost instantaneous. Also, AI is making significant strides in fraud detection and prevention in lending. Every year billions of dollars are lost on fraud in lending. Will AI be able to prevent a substantial portion of that? I believe it will be instrumental in helping to detect issues within a file or outright fraud. For instance, Ocrolus.com is one of the products that can detect documents that were tampered with that the naked eye cannot see. Through AI and machine learning, it quickly detects altered documents to falsely place the borrower in a “better” light. This detection will flag these edits and usually can show what the document originally displayed and expose the fraud before it ever becomes a problem. Other AI products can review title reports for lenders and aid in determining what are red flags and necessary changes needed to ensure the loan you are offering has the title insurance you need. These tools will only improve as the AI learns. One of the issues for lenders is valuations and how values will change as interest rates go up or

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Asking Rents Flattened in April

Rent Growth to Cool for the 11th-Straight Month By Lily Katz The median U.S. asking rent rose 0.3% year over year to $1,967 in April—the 11th-consecutive month of slowing growth, according to a new report from Redfin (redfin.com), the technology-powered real estate brokerage. That compares to a revised increase of 1.4% one month earlier and a 16% increase one year earlier. On a month-over-month basis, the median asking rent fell 0.2%, which is notable because rents typically rise at this time of year. An expanding pool of rentals to choose from is a major contributor to the slowdown in rent growth. The homebuilding boom over the last decade-and-a-half has increased the number of new rentals on the market, and landlords are now grappling with rising vacancies. Completed residential projects in buildings with five or more units jumped 60% year over year on a seasonally-adjusted basis to 484,000 in March—the most recent month for which data is available. There are only three other instances since the 1980s when completions were higher. The rental vacancy rate ticked up to 6.4% in the first quarter—the highest level in two years. “The balance of power in the rental market is tipping back in tenants’ favor as supply catches up with demand. That’s easing affordability challenges and giving renters a little wiggle room to negotiate in some areas,” said Redfin Deputy Chief Economist Taylor Marr. “The market has become more balanced, but the scales could tip back in favor of landlords if homebuilders pump the brakes on new construction in response to slowing rent growth.” Rent growth is also decelerating because many people are opting to stay put. Fewer people are moving due to economic uncertainty, slowing household formation, still-high rental costs in many markets, and the rising cost of other goods and services due to inflation. Rents Fell Across the Sun Belt in April In Austin, TX, the median asking rent fell 14.3% year over year in April—the largest decrease among the major U.S. metropolitan areas Redfin analyzed. Next came Phoenix (-9.6%), Las Vegas (-7.1%), Oklahoma City, OK (-6.4%) and Chicago (-6%). All but two of the 10 metros with the largest declines are in Sun Belt states.  »         Austin, TX (-14.3%)  »         Phoenix, AZ (-9.6%)  »         Las Vegas, NV (-7.1%)  »         Oklahoma City, OK (-6.4%)  »         Chicago, IL (-6%)  »         Birmingham, AL (-4.5%)  »         Sacramento, CA (-4%)  »         Memphis, TN (-3.6%)  »         Seattle, WA (-3.2%)  »         Dallas, TX (-2.8%) The Sun Belt exploded in popularity during the pandemic as scores of remote workers moved there in search of relatively affordable housing and warm weather. Rents surged and are now coming back down to earth as supply catches up to demand. Much of the nation’s homebuilding in recent years has taken place in the Sun Belt. Phoenix and Austin both ranked in the top five metros with the highest number of multifamily building permits in March. Rents Continued Climbing in the Midwest In Providence, RI, the median asking rent rose 16% year over year in April—the biggest jump among the major metros Redfin analyzed. Next came Raleigh, NC (12.4%), Indianapolis (10.9%), Charlotte, NC (10.5%) and Cleveland, OH (9.7%). Five of the 10 metros that experienced the largest rent increases are in the Midwest. Many midwestern housing markets have held up relatively well because they remain affordable compared to pandemic boomtowns like Austin and Phoenix. That’s in part because they haven’t seen large waves of people moving in and out, which is what drove the booms and busts in many southern and western markets, Marr said.  »         Providence, RI (16%)  »         Raleigh, NC (12.4%)  »         Indianapolis, IN (10.9%)  »         Charlotte, NC (10.5%)  »         Cleveland, OH (9.7%)  »         Columbus, OH (8.3%)  »         Kansas City, MO (8%)  »         Milwaukee, WI (8%)  »         Pittsburgh, PA (7.9%)  »         Nashville, TN (7%) To view the full report, including charts, full metro-level breakouts and methodology, please visit: https://www.redfin.com/news/redfin-rental-report-april-2023

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