AAM Presents: Factors Affecting the Investment Property Market

Y’all know me, I’m Sharon Strickland, business development manager for advantage asset management. And today we’re starting a series of short videos about the state of the market in the Houston area and to update our current owners and potential owners on different trends that we see. Moving forward, we will be doing future videos and so we welcome your feedback about those and what might be interesting to you as far as those are concerned. Today I have with me, Charlie Roseland who is the president of advantage asset management and David Schein, who is our broker and counsel. Thank you gentlemen for joining us. We sure appreciate it. The first question is for you Charlie, and I guess it’s one that’s on everybody’s mind. The market is crazy right now, up and down huge swings, constantly changing our ways it seems. So, does that make sense? Does it make sense still to, invest in such a market? And if so, why?
No, it’s, it is a great question. One that I get often from, not only some of our clients but from family members and close friends even, and I’ll, be honest, it is difficult to know where to put money to work right now, in these volatile environments. Like you said, stock market seems like it’s changing o n a whim, daily, hourly, even, and so it makes it difficult to say, well, let’s feel comfortable putting money into that versus bonds, cash, real estate, you know, all of the options. I will say, you know, I think diversification in general is very important. So diversification of your investments, be it, if you’re investing in stocks, you don’t want to just invest in one or two stocks. You want to have the diversification so that if there are some swings with individual companies, you’re kind of protected on the downside a little bit.
But it’s true if you take it from a broader perspective as well, not to just invest in stocks, but look at other, you know, ways to, to put money to work. Especially if you’re in a volatile market, you need to make sure that you’re diversified because if the stock market is crashing, that can be bad if that’s the only place you have your funds. So, I do think real estate is a very viable option, and a couple of things related to that. You know, Texas right now is the third youngest state in the United States. We, the median age is only 34.4 years old. Which if you have a younger population, typically that means you’re going to have more renters in place. The ability for somebody that’s under the age of 30 hasn’t been working very long to actually go out and buy a house.  And you can clearly understand that being a little more difficult. So if somebody has the means to buy investment property, you’ve got a pretty wide ready market of renters ready to go. And another factor related to that is that income, in the United States in general and as true for Texas as well, it is increasing amongst the middle class and the lower middle class. However, it’s not increasing as quickly as what real estate prices are. So even though there’s been some recent reports that come out that, the middle class income is finally growing, it’s still getting further and further away from them to be able to buy real estate and actually buy their home. So again, that kind of lends itself to renting a home. So, you know, there’s, there’s a lot of factors and everyone needs to look at their own investment portfolios to really make sense about if they want to put money to work in real estate versus stocks versus cash or whatever that may be. But, you know, in summary, I do think that real estate right now is a good investment and a good hedge. Especially if we get into an inflationary type environment, that you can really justify putting money there, in my opinion, at least a lot better than putting money into the crazy stock market right now.
That makes sense.
Okay. The next questions for you, David, and I’ve got to tell you, I get asked this all the time. Like in the grocery line, everywhere is the Houston area still an investor friendly market?
Yes, but it still requires caution. You know, the famous saying in real estate location, location, location, you can buy one subdivision in by a dog and you buy another subdivision and they have a winter. And so, you know, a couple of different observations. One of things is, the Houston market did not suffer nearly as much as the rest of the country in the 08/09 downturn. At the same time we had a downturn in 2015 and 2016 due to the oil price crash that the rest of the country didn’t necessarily experience. So our market is not the national market. Having said that, the Houston market, , even with the 15/16 downturn is doing very well. And so those of us who own a rental real estate are enjoying, solid equities. For some people that have bought in with higher mortgages, and planning to keep the investment properties. This may be a good time to refinance those properties, at lower interest rates. So some of the lowest we’ve had in several years, people who are thinking of selling, it’s a sellers market. Now, usually when you have a sellers market, it’s not an investor’s market. So I think investors need to be, more careful. It may be time for investors who are looking at turning over parts of the portfolio to consider, selling and then holding the equity, buying back in, the next time the market dip, something like that. But, there as strongly explaining it’s an excellent market. We have a lot of young people. The, growth in the market of just sheer bodies in employees is very good. So it’s pretty optimistic from the standpoint if you buy a rental property that you will have tenants and you’ll be able to get a reasonable rent. Keeping in mind, however, that Houston historically is not the highest price real estate market, which also means it’s not the highest priced rental market. So there may be, you know, one of the things I recommend to investors is to always have some cash on hand. Don’t put your every, your very last dollar into your real estate investments because if there is a vacancy for several months or some type of market reversal, you need to be able to financially withstand that.  I think that’s a thing a lot of people don’t really plan for. So I think that’s really good advice.
Okay. The next one is for you Charlie, so, have the trends in the oil and gas market benefactor in the local rental market.
Dave actually kind of touched on that a little bit with the downturn and a kind of 14, 15, 16 that that did affect things in the local market that really didn’t affect outside of the Houston area as much. But just kind of taking a step back, Houston itself has diversified. We have a very large medical industry here. Just around our office in general, we have some new hospitals that have been built new office spaces for doctors, kind of small offices. So we’ve actually even got some initiatives, close to downtown and the tech industry trying to bring more tech business to Houston. So, there is some diversification and Houston has gotten away from being a pure oil and gas town, but at the end of the day we are very much tied to oil and gas and the energy industry.  The U.S. is actually now the largest global producer of oil. We’ve actually surpassed Saudi Arabia and other Middle Eastern countries as far as production of oil goes. And Texas itself is an extremely important part of that. It’s actually kinda interesting if Texas was a country, it would be the sixth largest producer of oil in the entire world. And of course Houston is the hub of that from both the U.S. production standpoint, overall Texas, clearly. But then we also have a lot of international companies that have US headquarters or large U.S. operations that are based out of Houston. So while we’ve diversified, we’re still very much tied to oil and gas. But it’s not completely a bad thing. The oil and gas industry since 2016 when it started to kind of recover a little bit, and it has mostly been at least the oil price itself is mostly been between $40 and $60 and the U.S. has become extremely efficient at producing oil and so what that means is that although 40 to $60 in the past might’ve been a price, they would not encourage any kind of investment. Now we actually have the ability and our companies have the ability to make good profits at that 40 to $60 range, especially above the $50 range. And investment has come back, job hiring has come back and companies that have shut down plants or maybe kind of storing plants away for a little while are starting to get those going again. Even in the local Conroe area Tenaris is one that is a very large company, Halliburton, Baker Hughes, that have all hired on and increased their population recently of employees. So that 40 to $60 range, like I said, is actually one that has worked for investment purposes and based off of the oil futures pricing and all the kind of investment guys that really studied this stuff they’re still seeing if you look at the pricing kind of at 40 to $60 range, our band being what’s going to at least for what we can predict for the near future, that’s where we’re going to be. So again, that 40 to $60 range, although it’s not going to make things go crazy and amazing investment, it’s one that will encourage at least investment and encouraged job production growth here. And of course those are typically good paying jobs. Both from a blue collar standpoint and a white collar standpoint. You know your guys in the manufacturing side, guys out in the field are making decent money and then you have a lot of engineering, a lot of financial services, things like that. So again, from a job market perspective, that 40, $60 band, although not going going great and crazy is still one that is encouraging.

Okay. Well the last one’s for you and I’m going to ask you to get your crystal ball. I asked here, how is the lowering of Interest rates by the Fed going to affect investment properties?

Well, it’s a positive generally speaking when the Fed lowers interest rates, it tends to stimulate business and stimulating business generally, whether you’re in the real estate business or another business, generally it’s, it’s good news. Especially because interest rates have a direct impact on investors. We’re spending more money, when we buy properties that we buy group of properties or buy larger complexes and so forth. So interest rates allow the investor to charge lower rents because their overhead is lower and allows them to get into properties with lower down payments and things like that. So overall, it’s a positive. My personal projection is that the market had already priced in the quarter point dropped, recently. I would say that with the current disruption in the market, concerns about overseas, that it’s quite possible that the U.S. and the next quarterly meeting of the Fed could lower the interest rate of say a half point or something like that.  So I can, I don’t have a crystal ball, can’t directly predict, but even at current rates, interest rates were going to be interest rates under 4% for traditional first mortgages. That is usually easy benchmark to say people can get in. There are some ways to play with that. If you’re a single family owner and you see the market doing well, you see a house you want to move up to it is, it’s easier to buy that next house and with less money and therefore it may allow a family that might not normally be able to afford to rent their current residence to move that house into a rental market rather than sell it in order to get the money to buy the next style. So there are some interesting things on this small investors stage, but the large investors of course would be more effected by the Fed directly and I think it’s very positive for them.  At the same time. It means there may be a little bit of price bidding because there’ll be maybe more investors in the market. You know, Texas is no stranger to out of state buyers. We’ve had in the past because real estate is so expensive in California, the Houston market has had a lot of California investors I think in the last year or so. A lot of them have backed off because our prices have come up but again, with such a differential, we may see California buyers back in, if interest rates stayed down in the Houston market stays more moderate relative to the, unfortunately runaway market in California.

Well, thank you gentlemen for your time this morning. We hope you found this video informational and helpful and you can find it on our website, which is www.themanagementpros.com. We hope that we’ll see you again for future market updates. Thank you.