Dupre + Scott Video Highlights: Apartment Demand & Investor Leverage

Dupre + Scott Weekly Video Update from www.duprescott.com

We love Dupre + Scott’s weekly video updates–they’re a quick, easy way to stay informed on all aspects of the apartment market. Today, we’ve got a quick recap of the latest videos for you, along with the videos themselves for your viewing pleasure. Enjoy!

August 2: A Guide to Apartment Demand

Today’s video focuses on vacancy rates and apartment demand–and how we can predict their ups and downs over the next few years. Here are Dupre + Scott’s main tips:

  • Look at employment, not unemployment. Remember, unemployment can go down for plenty of reasons that don’t signal a recovery–for instance, if people stop searching for jobs or leave town. For a more accurate indicator of apartment demand, look at employment rates.
  • Eight jobs translate into demand for one apartment. While this can vary slightly, it’s a safe and easily-calculated principle that can be used from county to county. If you read in the paper that Amazon is adding 1,000 jobs in King County, for example, you’ll know that there will be demand for an additional 125 apartments.
  • This ratio changes over time, for many reasons; in the early 90s, it was under eight, as “the tail end of the boomers entered the housing market,” while it hit almost 9.5 in the late 90s, because there were fewer people in their twenties.

Bottom line? When you hear news about the unemployment rate, look for the actual employment numbers–they’ll tell you what you need to know.

July 26: The double-edged sword of Leverage

Last Friday’s video was all about leverage–borrowing money in order to buy real estate. While most investors do need to borrow in order to purchase rental housing, borrowers must keep things in perspective:

  • Smart investors know a bit about lending history. In the early 80s, buyers put about 25% down. Mortgage rates were near 20%, but attractive terms in seller-financing made up for it–until seller-financing “all but disappeared” by the early 90s. While things were fairly tough for borrowers during the 90s, they eased up after 1999, when mortgage rates fell; but over the past ten years, investors have used less and less leverage.
  • When it comes to leverage, we have the two investment extremes: “Eat well,” and “sleep well.” The Eat Well strategy maximizes leverage, which means a great deal of potential for gains, but less security; meanwhile, the Sleep Well strategy keep leverage to the absolute minimum, which protects against future changes in the market.
  • Borrowers today are falling somewhere in between these two extremes–a smart move, according to Dupre+Scott. Down payments on apartment sales over the past few years have oscillated between about 28% and 36%, which means investors have worked to balance risks, reward, and safety.

The bottom line: Leverage is an important tool–as long as you keep your history in mind, and balance the risk and the reward.

 

 

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