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June 2020 Newsletter

Hey everyone! I hope you all are doing well and haven't been infected by this horrible disease. In light of everything that's happened to the world, the real estate market, our country, and our economy as a whole, I felt it only made sense to discuss with everyone whether or not now is a good time to dip your feet into real estate investing. Without a doubt, it has been the number one question I've received from investors, so let's just jump right in.

Introduction

When stocks drop and a recession seems imminent, it causes a lot of people to assume the same thing is happening in the housing market. When in fact, home prices actually increased during three of the last five recessions. Sometimes, investing in a recession can actually be the best time to buy real estate because it’s less volatile than the stock market. Plus, there isn’t as much competition from other buyers. The smartest real estate investing strategy during these times is finding properties that cash flow today but also have a great chance for appreciation over the long term.


In 2008, thousands of homeowners lost their shirts due to the housing bubble bursting. However, it’s important to note that single-family rentals actually performed positively as a whole, multi family even better than single. That’s because people are always going to need a place to live, even during times of recession. Yet another reason so many investors consider real estate to be a safe haven.


The trick is to look for key indicators of a strong real estate market and invest there. The question is, which housing market indicators should we be paying attention to during the COVID-19 pandemic?


5 Steps: How To Choose a Strong Real Estate Market During COVID-19


Is buying investment property during a worldwide pandemic, with seemingly no-end-in-sight, a smart decision? Interest rates are so low right now, it makes cash flow on affordable rental properties even stronger in most markets. BUT have we hit bottom yet? It would be pretty safe to say that we just don’t know. Some metro areas are seeing strong sales activity today while others have slowed down quite a bit. This is why it’s so important to look carefully for areas that have strong population growth mixed with affordable housing – especially during these volatile times.


Step 1: Look for Historically Strong Markets

To determine a good real estate market, we almost always look at the following indicators: job growth, population growth and affordability. The question is, should we still be looking at these three trends or should we be paying attention to others?

When looking for a strong market, it’s important to identify areas that have jobs “of the future.” This would include technology, health care, bio-tech, military, and higher education. Look at the job growth prior to changes from COVID-19. Will the industries that are hurting right now come back? Look for markets with affordable housing and stable, resilient economies.


Step 2: Avoid Areas That Have Dipped Really Hard

States and cities with already weak economic foundations are expected to fall the hardest from the effects of COVID-19, and may have an even harder time recovering. An example would be North Dakota, an area already struggling from the oil collapse of 2015. The area is even more challenged today, along with other towns in Okalahoma, Pennsylvania and Texas that have an oil-based economy.


Big cities like New York, Los Angeles and Chicago are getting hit hard, but these areas generally have very strong economies. Unfortunately, they are still very expensive – even today, so it’s difficult for most people to buy real estate in these areas – especially real estate that cash flows. Growing metros that are both affordable, and have diverse economies may experience a small dip, but will likely be quick to recover. Avoid those areas that were already struggling pre-COVID19 and look for opportunities in resilient markets where home values are stable.


Step 3: Go Where the Jobs Were & Will Likely Return To

Certain job sectors are growing, even today. It’s helpful to look into past trends to see if a market showed steady job growth before the COVID-19 crisis. It’s likely this trend will continue when the dust settles. Amazon warehouses, for example, were already a growth trend, but are even more so today. The same is true for the health care and tech industries.


Look for places with big industries that employ a lot of people but are now on hold, due to “stay-at-home” orders. For instance, Disney has been forced to furlough tens of thousands of employees in both Orlando and California. Or Chicago, where workers in service industries have been highly affected, but their job growth has historically been steady and their rental demand remains high. Or Mobile, AL, where Airbus and Austal are huge job providers in the market and were forced to furlough due to stay-at-home orders. Now they are opening back up, and even hiring additional personnel to cover the increased work load. These areas have very diverse employment and tend to overcome recessions quickly.


Businesses will start up again and the economy will recover. And many businesses haven’t stopped at all, as they have been deemed “essential,” like hospitals, military, and distribution centers. In the meantime, real estate investors may not see lower housing prices due to the fact that there has been a shortage of housing up until now, but they may have access to more desirable inventory that was difficult to obtain over the past years due to strong competition of buyers nationwide


Step 4: Are People Still Moving There/Will They Be?

Just like job growth, population growth prior to the pandemic should be considered when choosing a strong real estate market. Spring is usually the time when real estate deals pick up and people begin making moves as summer approaches. But in 2020, fewer people are choosing to relocate.


Population growth may certainly slow down in many U.S. markets, but there may be people who have lost their jobs and are simply looking for work in less impacted areas and stronger economies. We are continuing to see strong migration trends to Texas, Georgia, Alabama and Florida.


Step 5: Invest for Cash Flow, Not for Potential Appreciation

The stock market has been declining since the spread of the Coronavirus has intensified. Some investors pulled their money as soon as they could, while others looked for ways to lower risk by looking for investments to diversify their portfolio.


Real estate has proven to be a great way to protect assets, particularly when the economy is suffering like it is now. Buying investment property for cash flow could be better than ever today due to low interest rates and increasing rental demand as fewer people are able to afford to buy a home. The pay off will be both long term appreciation and cash flow.


Markets That May Have Good Investment Opportunities Right Now


Follow the five steps listed above as you research housing markets that may have good investment opportunities during COVID-19. Here are some options for possibly the best places to buy rental property in our current situation.


Orlando

Disney World just announced that they will be furloughing its employees indefinitely, following last month’s closure. Walt Disney World in Orlando encompasses Animal Kingdom, the Magic Kingdom, Hollywood Studios and Epcot theme parks, employs around 77,000 and brings over 52 million visitors every year, along with billions of dollars in revenue.


As of April 10th, more than 170,000 residents of Florida have applied for unemployment benefits. Needless to say, the housing market in certain parts of Florida is at a higher risk to suffer due to the Coronavirus. But because we know Orlando will eventually bounce back, this market could present an interesting opportunity.


However, Miami is the area most affected in Florida by COVID-19. Florida offers much more than Mickey Mouse. Orlando, Tampa, and Jacksonville have a strong military presence, universities, hospital systems, port systems and technology sectors. Many workers have continued to work either from home or as “essential” businesses.


Anaheim, California (Orange County)

Real estate investors generally should avoid “bubble” areas like Anaheim (and California as a whole) with super overvalued home prices. But many experts in real estate, including myself, expect the top-tier housing markets to get hit the hardest.


Orange County’s economy is already seeing a major hit due to the Coronavirus. The Disneyland Resort closed in March causing a huge drop in tourists, and subsequently impacting the surrounding hotels and restaurants.


Cal State Fullerton’s recent study shows that Disneyland contributes $8.5 billion annually to the economy in Southern California. It also produces over $500 million in state and local taxes (as of 2018).


Disneyland has announced that they will furlough their employees (over 31,000) during the COVID-19 pandemic. Which means, employees will keep their jobs, but won’t be paid.

We know that the OC has a solid economy and will eventually come back. And with its insanely high home prices, it might be worth keeping an eye out to see if you can snag a deal on an investment property or finally purchase the primary residence of your dreams.

Detroit

Low housing inventory coupled with high demand in the Detroit metro has driven home values up over the last several years–but generally homes are still pretty affordable. Detroit’s economy as a whole has been improving steadily, especially since the Great Recession of 2008. This has a lot to do with Michigan being home to some of the world’s largest automobile manufacturers.


Car sales across the U.S. are expected to take a massive dip, so Michigan’s economy will likely suffer causing the housing market to slow down too. How much will it slow down and what should potential buyers do? Answers remain unclear as we continue to see emerging effects of the pandemic.


For real estate investors looking to buy in the Detroit area, there should be less competition right now and high rental demand. Don’t forget, right now the best investing strategy is long-term and buying during times of uncertainty, when others are afraid to, could very well pay off in the future. The Big Three are expected to participate in some of the massive bailouts.


Chicago

With over 50% of Chicago’s population renting, this metro continues to be a good place to invest in rental property, even right now. While the number of real estate deals has slowed due to COVID-19, Chicago is known to have one of the most stable and balanced economies in the United States.


Even with soaring unemployment rates, huge cities like Chicago aren’t going anywhere. The economy will swing back, steady job growth will pick up again and high rental demand will continue.


Investors who bought rental properties in Chicago with Section 8 tenants are largely unaffected by COVID-19 because the rent is paid by the government.


Indianapolis

Indiana is one of the least affected states in the country in terms of the number of employees who work in severely impacted industries. But it’s #19 on the list of states whose economies are most vulnerable or “exposed” to COVID-19.


This poses an interesting question because the Indianapolis metro is a big hub for healthcare (IU University Hospital, St. Vincents) and education (Purdue and Indiana University). Industries that both strengthen and stabilize their overall economy, especially during a global pandemic. It also has a big bio-tech industry with Ely-Lily helping to build test kits and find the cure for COVID-19.


While Indiana’s state economy may be negatively affected by the Coronavirus, the housing market and overall economy in Indianapolis seems to remaining solid. FedEx bought an older airport in Indianapolis and has made it it’s 2nd hub in the U.S.

There will certainly be less demand as people hunker down and avoid any big financial decisions. This could present a perfect opportunity for real estate investors to invest in Indianapolis.


Atlanta

Atlanta is home to the CDC’s headquarters and according to a study by WalletHub, Georgia has the least vulnerable economy to the COVID-19 pandemic. Fewer people are employed by small businesses and Georgia’s unemployment rate increase is the second lowest in the nation, second only to Utah.


Georgia’s economy shows strong signs of stability, so this market could present excellent opportunities right now.


Las Vegas

Nevada experienced the third highest increase in the number of unemployment benefit claims following the Coronavirus outbreak. It’s also the fifth highest state in terms of the amount of employees who work in highly impacted industries, like hotels, casinos, restaurants, bars, etc.


With the Las Vegas strip basically shut down, it doesn’t come as a surprise that the state as a whole has one of the most at-risk economies in the nation right now. It’s still early to make any definitive predictions, but it’s likely Nevada’s home values may see a decrease, offering potential real estate investors a chance to buy undervalued property – but not yet. It may be awhile before people are willing to gather in large groups.


Mobile Mobile has experienced some mid to high losses in jobs due to COVID-19, but has also seen the job market stay resilient due to "essential" businesses continuing to work. Now that everything is opening back up again, we are actually seeing an increase in visitors and economic financial impact due to so much travel to beaches and AirBnB's. It's as if people are making up for lost time and using their stimulus money to travel rather than for essentials. Mobile could be prime for AirBnB's as well as rentals due to 30+% of the job pool relating to the service and entertainment industry. Affordability is still low, but once forbearance payments must be repaid, there will more than likely be a spike in the need for affordable rentals.


More Factors To Consider When Investing During the Pandemic


May Be More Difficult to Find Renters

One might think it would become a bit more complicated to find renters in the midst of the COVID-19 pandemic as social distancing has forced only virtual interactions. However, technology has allowed many industries, including real estate, to continue doing business as usual – but with masks and staying 6 ft apart.


So far, the property managers I have relationships with have seen April rents come in as normal, with a record number of rental applications. Perhaps more people are looking to “shelter in place” in a nice rental home with a backyard for the kids and pets.

If you’re looking for strong markets with high rental demand, consider that 50% of people living in the Chicago metro area are renters. If there was high demand for affordable rentals before, there should continue to be in the future.


Section 8 Might Be A Good Option

Section 8 landlords are breathing easier than other landlords right now. Government subsidized housing, like Section 8, comes with government-backed rents. So, if your tenant is unable to cover their portion of the rent, the government still sends their portion of the rent to Section 8 landlords. Some Section 8 tenants have their full rent paid for by Section 8.


Section 8 Voucher tenants are also typically better than a lower class tenant who's paying all on their own. Highly due to the fact that Section 8 tenants know they can't afford the nicer place that they live in and if they do something like, not pay rent or trash the place, then their voucher is revoked and they are evicted. They definitely don't want to stay where they can afford, so they typically become better tenants. With Section 8 Vouchers, you also aren't capped at government regulated rents. You can charge market rent and still be able to gain those more responsible tenants looking for a little nicer place to stay in the neighborhood they love. This increases NOI, decreases turnover,typically increases overall appreciation if you buy in the right market, & increases desirability from tenants & turnkey buyers.


You Can Always Raise the Rent Down the Road

Just because many renters are strapped for cash right now doesn’t mean there won’t be an opportunity to increase rent when the economy stabilizes and people return to work. Remember, buy investment property right now for future appreciation and cash flow, not immediate profits. The name of the game is patience and those who are willing to wait could see a pay off down the road.


Please note: In most states, landlords must wait until the initial term of the lease is up before raising rents.


Real Estate Will Outperform the Stock Market

Tenants are required to pay rent, even during a recession. Evictions stay on someone’s record for a long time and make it difficult for people to qualify for rentals in the future. Most people value living in a nicer home today more than ever.


Owning rental properties is much more stable than other types of investments, like the stock market for example. Historical trends show the real estate market is relatively unaffected by stock market volatility – another positive sign for investors like us.


Summary

Buying investment property during the COVID-19 pandemic may be a great opportunity–if you buy smart. Historically strong markets with fundamentally sound economies will recover faster than others. Don’t be afraid to look outside the box. We’ve never been in this situation before so predictions are just that, educated guesses. Unique opportunities for investors are still out there for those willing to look. Investment Opportunities: Speaking of unique opportunities, we've got an amazing opportunity for you guys to invest, get on the ground floor, and be completely passive in your wealth creation. We currently have a 56-unit apartment complex under contract, with a 12.48% - 18.10% Cash on Cash Return, 20.33% - 24.12% Internal Rate of Return, and a 23.40% - 27.72% Average Annual Return over a 5 year hold period. If you'd like to learn more, or are interested in investing, click this link, create an account, and you'll be able to see the entire offering with pictures, rent roll, previous operating expenses, pro-forma, etc. You'll also be directly paid cash flow distributions through the portal via direct deposit, and will receive all tax documents and communications through the portal. Mobile, AL Market Analysis: Job Growth:

The Mobile Area Chamber of Commerce, in its role as an economic developer for the city of Mobile and Mobile County, announced aggressive growth plans on behalf of two local businesses last week.


On its face, the press release provides an eye in the hurricane of bad economic news that has blown across headlines for months due to COVID-19 shutdowns, ranging from the death knell of well-known companies closing permanently to record levels of unemployment not seen in decades.


In the middle of this, Prichard-based Jones Welding Co. (JWC) and SpillTech (found near Brookley) have proclaimed plans for operational expansion.


The two companies are making new internal investments that will add up to nearly $13.5 million and are expected to generate over a dozen new high-paying jobs in the next few years.


Both Jones Welding and SpillTech are two strong companies that call Mobile home. Their investments show a continued commitment to our area, and the people who work with them.


JWC President Roy Parker announced in a prepared statement he wanted to expand the capabilities of his family-owned business, not just by volume, but by the physical size and complexity of projects.


Founded in 1911 and currently employing close to 40 workers, JWC specializes in the repair of industrial equipment, and is reportedly one of the largest and longest-serving businesses of its kind in the Southeast.


With an $8.5 million investment, primarily in equipment, plans are in place to hire around 10 more employees to keep up with growth.


“In today’s machine shop environment, you either make technological advancements or you become obsolete,” Parker said. “In the acquisition of more modern and sophisticated equipment, we will need more floor space and more highly trained employees.”

JWC also expects to move out of its current building this year, relocating their home office, currently found at 1926 Telegraph Road, to construct a new site on some 17 acres of land in Prichard. Buildout timelines were unknown as of press time.


SpillTech, a manufacturer of polypropylene mats for absorbing fluid leaks, announced their second expansion this year.


The company’s latest chunk of dollar outlay geared toward growth is nearly $5 million ($4.98 million), with money earmarked for buying new equipment and growing payroll; eight new hires are expected to be added to a current staff of 75 employees.


SpillTech has a global customer base, with the majority of its clientele found in the U.S., Canada, Middle East, Netherlands and U.K. New technology acquired is reportedly needed to increase capacity, keep up with competitors and meet current and future demand projections, according to company officials.


Business Moves:

New York Life Insurance has leased a 1,417-square-foot office space on the 15th floor of the historic Waterman-Smith Building, in addition to the 4,000-square-foot office they currently lease at Montlimar Place in West Mobile.


Located at 61 St. Joseph St. downtown, the 70,000-square-foot professional office complex was built in 1947 by 101-year-old, Mobile-founded Waterman Steamship, now a subsidiary of Mobile-based International Shipholding Corporation.


According to Josh Hall with NAI Mobile, who handles leasing for the site, the most recent owner of the building has been renovating the property since its purchase in 2018. The 15th floor has been out of commission for years, but is now fully renovated and has two remaining vacancies available for lease.


Chris Harle with White-Spunner Realty recently reported the closing of a lease signing on some 2,400 square feet of retail space by Powell, Ohio-based Dell’s Ice Cream, located at 25637 Canal Road in Orange Beach.


The parlor will be an exclusive reseller of Mobile-headquartered Cammie’s Old Dutch ice cream in the Orange Beach and Gulf Shores area.


Rhen Bartlett, COO for Irby Home Buyers (IHB), a privately-owned single-family acquisition firm, reported the company’s expansion plans into the Mississippi Gulf Coast this year. “We will be buying houses in Jackson, Harrison and Hancock counties with plans to expand deeper into the state,” Bartlett said.


The company currently operates in South Alabama and the northwest Florida area and anticipates adding 10 to 15 more employees to cover the Mississippi Gulf Coast, as well as possibly adding satellite offices in the near future. IHB currently employs around 30 in its headquarters located at 503 Government St. in downtown Mobile.


Academic Advancements:

The Barton Academy Foundation (BAF), a nonprofit organization working with Mobile County Public Schools (MCPSS) to raise money to renovate the building’s interior as a modern middle school, announced this week it has reached its $14 million goal.


“This has been a long road, and we couldn’t be happier to reach this milestone,” Elizabeth Stevens, BAF president, said. “For 10 years the BAF board, our donors and Mobile County Public Schools focused on the end goal of returning students to Barton Academy for the first time in more than 50 years. That will soon be a reality.”


Construction is slated to start in June for the 184-year-old historic property located in downtown Mobile’s Central Business District.


The Board of School Commissioners for MCPSS completed an extensive $4.2 million renovation of the exterior of the Barton Academy and Yerby buildings in 2015.

Since 2012, BAF has worked to secure the remaining $14 million needed to update Barton’s interior — most recently used as administrative office space — into a technologically competent academic institution. To date they have raised around $5.2 million in cash and pledges.


The campaign’s top donor, the Ben May Charitable Trust, contributed $1.27 million in capital. The J.L. Bedsole Foundation and the Hearin-Chandler Foundation each donated $500,000.


Other gifts of $200,000 or more were given by Crampton Trust, Daniel Foundation of Alabama, Mobile City Council, Mobile County Commission, Dr. Monte L. Moorer Foundation and Wayne D. McRae Fund of the Community Foundation of South Alabama.

In total, almost 450 other foundations, businesses and individuals contributed toward the effort.


BAF reached its $14 million goal with the additional help of AMCREF Community Capital as its tax credit advisor, plus $8 million of tax credit equity from New Markets Tax Credits (NMTC) Program, Federal Historic Tax Credits and State Historic Tax Credits.

AMCREF brought in partners United Bank, U.S. Bank and Brownfield Revitalization as tax credit funders.


United Bank provided the bridge funding allowing the foundation to leverage the historic tax credit equity and multi-year pledges to close funding and begin construction.

The AlabamaSAVES Program, sponsored by the Alabama Department of Economic and Community Affairs’ Energy Division, provided $2 million in financing for energy conservation measures including LED lighting, energy-efficient HVAC systems and energy-efficient water heaters for the cafeteria.


“Financing this historic effort was clearly one of Mobile’s most complicated preservation and education projects ever,” Stevens said. “As with some other important development projects boosting downtown’s economy, we turned to state and federal tax credits to make Barton’s comeback possible.”


The school commissioners also recently approved a bid on the interior work with Ben M. Radcliff Contractor Inc., and construction should begin this summer. Barton Academy for Advanced World Studies will open in August 2021.


The school is anticipated to enroll around 300 students from grades six through nine upon opening, and will integrate various subjects that provide curriculums focused around solving “real world” problems, as well as incorporating traditional learning methodologies.


The new school also will offer multiple foreign language studies, advanced fine arts and entrepreneurial learning with a strong global emphasis. Collaboration labs and science, tech, engineering and math (STEM) labs will focus on activities relating to students’ real lives and future careers.


Students must apply for the school — similar to application for a magnet school — and will need to meet certain academic criteria. Application details will be announced in Fall 2020 or Winter 2021.


“A new school at Barton will spark redevelopment in the area immediately surrounding it, largely bypassed by the revitalization transforming other downtown areas,” Stevens said.


Conclusion: I hope you all have gained a plethora of knowledge after reading this and feel as if you can make the best educated decision for you when it comes to your financial future. If you are still itching to learn more about real estate investing, either actively or passively, check out our website and the tons of blog posts, podcast episodes, newsletters, and more that we post on a consistent basis in order to give you, the individual investor, a chance at financial freedom. To your success!

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