Why I'm going back to real estate

What's up, Graham? It's guys here. So here's the deal: it's no surprise that right now the real estate market is absolutely ridiculous. We're seeing some of the highest prices on record, inventory is non-existent, and from the outside looking in, it appears to be the exact worst time to go and buy real estate. After all, the famous quote "be greedy when others are fearful" is pretty much the exact opposite of what's happening right now.

Well, buyers are practically foaming at the mouth to buy any house they can with four walls and running water. But even though the entire landscape of real estate has fundamentally changed throughout the last year, the market is beginning to flip. Instead of property values rising faster than you could blink, the next big change is probably a topic that a lot of people are largely overlooking for some reason, and that would be rising rents.

Reports are now highlighting an extreme disconnect between rents and home prices. While rents for single-family homes see their largest gain in nearly 15 years, the LA Times braces people to expect rental prices to rise. National rent growth is already approaching a five percent increase from a year ago, and starting now, a rental rebound is beginning to take shape across the entire country.

So we got to talk about exactly what's going on, what this means, and what you could do about it. Because whether you're renting, owning, investing, or even living in your mother's basement, most likely this is going to impact you in one way or another. But before we go into that, it would help me out tremendously if you flipped that like button for the YouTube algorithm by raising it until it turns blue. And best of all, if you hit the like button in the next 2.69 seconds, I will show you this really cute picture of a cuttlefish. So thank you guys so much, and also a big thank you to Policy Genius for sponsoring this video, but more on that later.

Alright, so here's some background about what's going on, because I gotta say what's happening. The rental market is completely different from skyrocketing real estate values. See, typically rental prices stay fairly stable regardless of how the overall market performs. For example, as we can see here throughout the last 40 years, even throughout several real estate boom and busts, rent only ever briefly sputtered in 2009 before quickly resuming their upward trend.

But COVID was a little bit different. During the shutdown, rents were hit especially hard throughout almost every major city in the U.S. Rents began to decline as tenants lost their jobs, were unable to pay, and landlords chose to accept whatever they could for fear of holding on to a vacant unit. Not to mention, rent strikes took place around the country. Nearly a third of tenants said they couldn't afford to make their payments, and rental discounts were everywhere for a qualified tenant looking to move in immediately.

But something interesting was happening. While rental prices were going down, housing values were going up. The fact that rents and housing values were moving in opposite directions was unprecedented. In some areas, the discrepancy was just too big not to notice. For example, in San Jose, home prices rose 14%, but the area's rents fell seven percent. The same thing also occurred throughout the nation's richest cities from Seattle, New York, Boston, Austin, San Francisco, Washington, Los Angeles, and Chicago.

Meanwhile, however, housing values were rising at their fastest pace in history, and rents were in overall decline until now. Today, rents are rising at their fastest pace in history, up 7.1 percent in Atlanta, 10 percent in San Diego, and get this, 17.3 percent in Las Vegas. This leads a lot of people to wonder: why is this happening, and how much higher can rents go?

First, we got to talk about why this is happening. One of the most obvious reasons is that, one, people are outpriced by rising home values, and they're forced to rent instead. That's caused rental prices to spike upwards as soon as the economy began reopening, and we're on track to continue even further as long as home values continue to rise.

Second, there's simply not enough rental inventory on the market right now. Builders are simply plagued by excess building restrictions, the rising cost of materials, and the fact that most of the time it's easier to build and sell to an owner user than to build to rent. By selling luxury units one by one, a developer is able to recoup their investment rather quickly. They could redeploy that capital elsewhere to build even more, and they don't have to wait three to ten years to break even on their investment. Not to mention, they don't need to manage a rental property as part of their business.

Although still, on a big scale, we're in one of the worst housing shortages in history, with some people saying it would take a decade of building just to meet the current supply. So that ends up impacting the real estate market, and with fewer homes available, whatever is left ends up going for more money.

A third, higher property values indirectly push up the cost of rent. That's because, in order for it to make financial sense to rent out a home, the rent needs to be enough to cover the minimum overhead associated with ownership. For example, at minimum it needs to be able to cover insurance, property taxes, maintenance, and repairs, and that's even before it needs to cover the mortgage. Then you have the mortgage on top of it. You have the opportunity cost of investing your money elsewhere. You have the time management to make sure everything is operable, and you have the risk that the tenant won't just stop paying their rent. As their own costs go up, that usually ends up being passed down to the tenant in the form of higher rent.

Now, fourth, we're just starting to see higher rents as tenant leases are expiring from a year ago. Across the board, it seems like pandemic pricing is really coming to an end as tenant leases are expiring and they have to prepare for higher costs. Generally, rent increases are going to be realized on a year-over-year basis as lease agreements expire, so it would make sense that now, rents are going back up and tend to reflect what another person is willing to pay.

If the extension of an eviction memorandum means that less inventory gets added to the market, it further worsens the existing supply. Now, I'll be honest. I couldn't find a reliable source of data that estimates how many families fall under this eviction memorandum because that would really give us a good idea of how severe this problem really is. Instead, though, it does appear that two percent fewer tenants on average are paying their rent by the end of the month compared with 2019. If we have 43 million rental households in the U.S., we might be able to extrapolate that roughly 880,000 families are at least one month behind on their rent. If that half could be covered under the eviction memorandum, that gives us about 430,000 rental units above average.

Now, as for what's normal, in 2016 Zillow reported that there were an estimated 2.35 million eviction filings, and they estimated that number would be as high as 2.7 million in 2021, which mostly mirrors the exact same 430,000 estimate that I gave. It's a really high number, and at the end of the day, that lowers rental turnover and worsens supply. All of that combined really leads to the perfect storm for rental prices to continue higher and even into 2022.

Now surprisingly, from all the data I was able to look at, there is nothing that points to rental prices coming down anytime soon. As long as home values continue going up, this could very well be the beginning for rental prices.

So as far as what this means for you and what you could do about it, these are my thoughts. Then finally, I will address why I'm getting back into real estate because I have a lot to say about this. But before we go into that, the real estate market is not the only thing going up in price because life insurance could also go up every year you wait to buy it. Thankfully, your video sponsored today, Policy Genius, is here to help.

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So first, here's what this means for you and what you could do about it because there are things that you could do ahead of time to be proactive about the situation. The first is to sign a long-term lease. If you know you're going to be living in the same spot and you're happy where you are, see if your landlord would agree to keep the same rent if you don't move. Now this does two things: number one, the landlord is guaranteed to get rent throughout the new term of the lease without the hassle of needing to find a new tenant. And number two, you ensure that your rent does not go up.

Now second, you could relocate or downsize as needed to save costs. If you have extra space or an unused bedroom, consider getting rid of it and saving the extra money instead. The third, you could also negotiate with your landlord. For example, I offered a discount to a tenant who does all the landscaping themselves. Typically, this is a service that I was paying a hundred dollars a month for. But if the tenant wants to do it themselves and save the extra money, I'm all for it.

Fourth, if you're looking to move, check the new listings as often as you can. From my experience, the most efficient landlords price the rentals just under market value so they could rent it as fast as possible and to have their selection of best tenants. However, usually those listings are gone within about 12 to 24 hours, so the sooner you find one, the more likely you are to get one. I also highly recommend looking through unorthodox places like Craigslist and Facebook Marketplace because there's a higher likelihood that you're just going to get a mom-and-pop renter who puts up their place at a really good deal because they don't want the hassle of keeping it empty.

And fifth, you got to know the market and what's available. In this case, education is your best defense to rising rental rates. If you know what else is on the market and what your place is worth, you're going to be able to better negotiate the terms. In addition to that, understand your local rent control laws and regulations so that you know your rent isn't being increased higher than what's legal. Most people have no idea how much their landlord could legally raise their rent, and every county and jurisdiction is going to be different. So spend some time reading up on this, and the more you know, the more likely you are to keep your rents low.

But even despite all of that, the truth is rents are still going up. Even for landlords, it's getting more expensive to pay for materials, labor, and other overhead costs. At some point, rents will need to increase to help cover that. What most people don't understand is that renting is very much a high overhead business, and it's especially common for small mom-and-pop landlords to barely cover their overhead costs, let alone any profit. So just like everything else going up in cost, most likely it's inevitable that rental increases will continue to be even more common.

But finally, let's talk about myself and why I'm going back into real estate. As some of you know, real estate was how I built my entire career. I worked full-time as a real estate agent. I lived extremely frugally and I saved up all of my money to then go and invest in real estate. It was also how I got started here on YouTube, by talking about the housing market and the basics of buying rental properties.

Although after nearly a decade of doing the exact same thing, I realized that I had to spend more time diversifying and broadening my interests. So in the beginning of 2020, I made the choice to take a break from real estate and instead focus my time on growing the channel and investing in the stock market. The timing of that happened to have worked out really well, as I was saving up for a down payment and happened to invest in the S&P 500 right after it had dropped 35 percent.

Now, in the beginning of last year, my goal was to have as much money invested in the stock market as I do in real estate. That way I would be able to build up a portfolio that encompasses a little bit of everything instead of spending my time trying to find the next rental property. Well, I'm really happy to say that through a combination of investing consistently in the stock market and going through a crazy rally, I've nearly hit that goal.

Even though I don't intend on stopping, the current market conditions are really making me rethink my strategies and where I think the best opportunities are over the next 10 years.

Now, on the surface, I admit it seems crazy to want to buy real estate right now. After all, prices have gone absolutely nuts, there's no inventory on the market, and materials cost an arm and a leg. But I have to say it struck me as kind of odd to see so many institutional investors buying up large apartment complexes during a time where housing was going through a record boom.

However, as I started looking into it further, it became apparent that hedge funds don't care about values. They're not trying to find off-market value bad wedge deals; instead, they're buying for cash flow. If my assumptions are correct, they're buying large apartment buildings now knowing that the next few years rental prices could very well start increasing the same way that home values have. With this perspective, it starts making some sense to enter the real estate market again.

But not in the way that I was doing before. At this point, it's extremely difficult to find a good deal when you're competing with owner-users who plan to move in themselves. As an investor, I want a place that no one else wants, that's in disrepair, that needs to be fixed up, or it may be in a location that most people don't think is desirable.

But here's the thing: apartment buildings only appeal to investors, and they're often sold based on their current cash flow. Those buildings are not necessarily seeing the same price increases as single-family homes are, and that's why I believe that they can offer a better opportunity. In addition to that, interest rates are still incredibly low, and if we believe inflation is going to be an issue in the future, it makes sense to lock in a low rate for as long as I can and then have inflation whittle away at that over the years.

Now, I do want to make it clear that I don't plan just to go and buy something and issue rent increases or go and kick out everybody in the building to re-rent at a higher price. That's never how I've done business. Throughout the last ten years as a landlord, I have barely ever raised rents. I would rather have a long-term tenant who stays forever, is hassle-free, and pays on time than I would extra money in my account from having a new tenant every few years.

Instead, I focused on finding reasonable deals, keeping the rents just below market rate to incentivize people to stay. Then if they end up moving out, I will re-rent it at the market rate. That way, I can keep the same tenants long-term. I have an extremely low turnover rate, I have less work on my plate, tenants are happy, I am happy, and my rent slowly winds up increasing if the tenants move out and I could re-rent it at the current price.

And as for the day-to-day aspects, I certainly plan to hire a property manager, and I would probably be looking for about 10 to 30 units within about 30 to 45 minutes from where I live. Personally, I believe we'll continue to see an influx of Californians moving into Nevada, and I don't see that stopping anytime soon unless meet Kevin becomes Governor.

So I think Las Vegas is perfectly positioned to see more people moving in, and I think it's about time that I diversify and find multi-family housing. But overall, investment aside, it's very obvious that we're experiencing a housing shortage across the U.S. At the end of the day, the only thing that we could do to truly solve it is more development. Simply put, we need building regulation that promotes the development of low-cost housing because right now that does not exist.

The building process is so time-consuming and expensive, even for the most experienced developers that it makes it cost-prohibitive to build anything other than a luxury unit. That further drives up the rental prices. The best thing that we could do is to continue to push for more development, understand that you can negotiate the terms of your lease to save you more money, and at least by now you have a better understanding of what's happening so that you could be better prepared for rents to continue going higher.

But that is not going to push the like button; that's going to be on you if hopefully, you enjoyed the video and found it helpful. So with that said, you guys, thank you so much for watching; I really appreciate it. As always, make sure to destroy the subscribe button and the notification bell. Also, if you feel free to add me on Instagram; I post there pretty much daily. So if you want to be a part of it there, feel free to add me there. As for my second channel, The Graham Stephan Show, I post there every single day I'm not posting here, so if you want to see a brand new video for me every single day, make sure to add yourself to that.

Thank you guys so much for watching, and until next time!