Happy Tuesday! This is The Real Deal. The email that tells you the latest that's going on with Real Estate in plain jane english.
In Today's Email:
Just when it seemed multifamily asking rent growth had nowhere to go but down, the market defied expectations in February and rose to a new high of 15.4% year-over-year, according to Yardi Matrix.
The sustained growth illustrates the long-term shortage in America’s housing supply, which has been exposed to a surge in demand.
Occupancy rate growth has been weak in only a handful of major metros: Phoenix, Sacramento, and the Inland Empire (-0.2% change year-over-year through January) and Las Vegas (0.1%). Yet all of those metros have exceptional asking rent growth, as occupancy rates were already extremely high, and they welcome a steady stream of renters coming from more expensive locations.
Rent growth is likely to start decelerating soon relative to the big increases that began in March 2021, but demand shows little sign of slowing.
I watched this awesome video on Bigger Pockets and if you have 12 minutes, I'd highly recommend watching it.
If you don't, here are the main takeaways:
1. Everyone uses COC. However, COC is only relevant upon acquisition of a property.
2. Why? Well, as time goes on, you may be getting a slightly higher COC each year (rent growth, forced appreciation, etc.), but at the same time you're building equity (debt paydown, natural/forced appreciation, etc.)
3. What's this mean? Let's look at an example below:
Year 1: you have $5,000 net cash flow with $50,000 tied up into the deal. Your COC is 10%.
Year 3: you have $6,000 net cash flow and still $50,000 tied up into the deal. Your COC is 12%
That's great! However...
By year 3, your equity has grown to $88,000.
Well, if you're able to still get a 10% COC, then that $88,000 should be yielding you $8,800 a year versus the $6,000 you're currently getting.
That's 47% upside you're missing out on 🤯
So what's this mean?
ROE, or Return On Equity, is a great metric to use after acquisition to see when you have too much equity in a deal.
The ROE calculation is super easy...
Cash Flow / Equity.
I wonder how many of you are having this Aha moment right now 😎
The US Federal Reserve raised rates by 0.25% last week (from 0.25% → 0.50%).
Unfortunately, this is something we all knew was coming after printing trillions of dollars out of thin air in order to combat the COVID-19 Pandemic.
So what's this mean for Real Estate Investors like yourself?
Interest rates are going up and it's not going stop anytime soon.
That boils down to good deals being harder to come by as the difference between your financing and cap rate are now closing in on each other ever so slightly.
But the writing is still on the wall...
Interest rates are likely to continue rising as the Federal Reserve has penciled in 6 more increases by the end of this year.
So as the saying goes, "the best time to buy Real Estate was yesterday."
We're your partner for sourcing, analyzing, and negotiating long/short term rentals. Go to www.TeamKekoa.com to get started today.