As the calendar has flipped to the new year, that means my favorite time of year is here. It’s Real Estate Peak Season!! The time when inventory and Buyers’ hopes are both at its highest. It also means analysts are working overtime to try and predict what the biggest real estate trends will be in 2020 and what potential surprises await us. One trend that has been high on the radar over the last few years has been the growing interest first-time homebuyers have in multi-family properties.
First time homebuyers make up the largest portion of buyers, last year making up 33%. Millennials (people ranging in age from 21-38 years of age) make up 37% of those first-time homebuyers, which is the largest segment there as well. The problem Millennial first-time homebuyers are facing is the continued increase in home prices and since they also have the lowest household income level of any home buying group, the problem is compounded.
Being priced out of entry-level, single family homes, first-time homebuyers are turning to multi-family properties as a way to break into homeownership. Multi-family properties have a significant number of benefits that make this a wise path to explore for first-time buyers. First, as long as the property does not exceed four units, they can still utilize the standard mortgage products available to all residential purchases. The added benefit of considering properties with income generating potential is that you will most likely be able to qualify for a larger mortgage than your standard income would normally allow for since lenders will consider the income potential of the property as an additional means to be able to repay the loan.
Second, the rental market is hot and shows no signs of slowing down. Vacancy rates have maintained at about 5.1%, their lowest point in years, despite widespread efforts to increase the inventory level of rental units. Meaning that the probability is high of being able to keep the extra units of the property occupied and the additional income flowing to cover the mortgage and other costs of ownership.
Finally, getting your foot in the door of a multi-family property can act as a great springboard to securing financial independence. You now have an asset that should consistently grow more equitable through appreciation and income production, but most importantly with minimal expense out of your own pocket.
Unfortunately though, nature always wins out and the nature of real estate is that if a door cracks open, investors will stampede through it. What I’m not so subtly insinuating is that real estate investors are quickly forcing their way into the multi-family market. So much so that there are now three buyers for every multi-family seller. Further complicating the situation for first time buyers is that investors typically can come in with cash offers and are willing to accept initial yields below their desired ranges in order to secure the property. Translation, they can come in with more attractive offers, pay above market, and absorb the short-term loss in anticipation of the long-term potential.
This puts first-time buyers in a precarious spot. Multi-family properties were looked at as one of the last affordable avenues to joining the ranks of homeownership. But with increased competition comes increased prices. Combine that with competition that has a greater buying power and it’s the equivalent of entering a gun fight armed with a water pistol.
At the end of the day, it can be an impossible task to ask a new graduate to manage starting a career, moving to a new area, growing levels of student debt and buying a home. But an individual looking to enter into homeownership needs to start planning for it earlier than ever before. Consulting with a proven financial advisor might be a good starting point before even reaching out to a real estate agent.
Todd Wilkinson is the Founder and Owner of FonHome Realty. FonHome is a customer-centric brokerage where our clients are in control and our experienced agents are respected for providing the positive and exciting experience the real estate transaction should be. Todd is an accomplished real estate investor with an undergraduate degree in Financial Economics and a Masters’ degree in Business Administration. Todd has held senior management and executive level positions with the world’s two largest retailers and a successful startup venture. Todd has served terms on the University of Arkansas Advisory Board and is actively involved with the St. Theresa School in Kenilworth. Todd opened his own brokerage after feeling underserved in his personal experiences with real estate transactions and wanted a firm whose mission was on serving the fiduciary responsibilities guaranteed to the Buyer and Seller. Contact Todd today for a free Comparable Market Analysis for your home or for advice on beginning your search for a new home at www.fonhomerealty.com.
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