Wall Street got rocked again this week with news that single-family home construction decreased in July, and permits for future building were also down. These stock market gamblers worry that our economy can’t grow without more new home construction.
Don’t those ivy-league economists recognize that builders already built enough housing during the early part of the 2000’s? Lack of new construction is not a sign of economic decline, but rather a result of oversupply. There are already millions of vacant homes on the market. Why build more?
Economists who rely on housing starts data to gauge the strength of the economy really need to find a different source of GDP activity. However, they may be pleased to know that new construction was up nearly 10% from a year ago. That growth is mostly due to an increased demand for housing near city centers and jobs.
While building has come to a complete stop in the exurbs (areas beyond the suburbs), infill projects near major metropolitan areas are still red hot.
In fact, finished lots in good locations are becoming a rare commodity as more consumers become less willing to make long commutes.
John Burns Real Estate Consulting Group expects land development in good locations to increase substantially this year now that conservative bank financing has returned. Public builders are buying finished lots near large cities at a faster rate than private builders, and their market share is growing rapidly.
Does this mean you should run out and buy some land so you can sell it to a public builder?
Not exactly. Slick salespeople have been hawking "land banking" for years, trying to get investors to hold land until it becomes valuable. Unfortunately, that could be a really long wait if the land is out in the exurbs where there's already an oversupply of vacant homes.
Holding land in the outskirts can be costly if you also add the missed opportunity of creating income from that asset. Let's say, for example, that you used your IRA to buy $100,000 worth of land that is located over an hour from the city. How long will it take before builders are needed there for the lots to become valuable? Based on the amount of inventory for sale today, it could take decades.
If you invested that $100,000 to buy a rental home instead of land, you could earn $10,000 net income each year. After 10 years, you would have doubled your money. Would the lot out in the boonies double in value over that amount of time? No one knows for sure, but we do know that one strategy is predictable and the other is speculative.
Infill projects are a safer bet for land flipping, but they can be quite expensive and out of reach for the average investor. Hedge funds and institutional money managers are scooping those up. However, they are not interested in projects under $10 million.
That leaves few buyers for infill projects under the $10M purchase price because they are too small for hedge funds but too big for individual investors. This gap offers an opportunity for small syndications to score big.
A syndication is a group of investors who pool funds to acquire property they could not afford on their own. At Real Wealth Network, our members were able to work together to acquire a 27 unit waterfront town home project in Portland at a foreclosure auction for $3M. The property was 70% complete and will be worth over $12M after construction. They will receive double digit returns.
Our members also optioned waterfront property in Alameda for $2.4 Million that would have cost $16 Million to purchase. The property value will be well over $12M after entitlements. The minimum investment was $25,000 and funds could come from an IRA account.
While it’s surprising that institutional money managers would pass up opportunities like this, it’s encouraging that the small investor can finally play in the big leagues. It gives us a chance to earn back what we’ve lost over the past 5 years investing in paper, by getting into solid income-generating assets.
Caution: There are unprecedented opportunities in real estate today for those who are educated on the market cycles. If you are a new investor, work closely with someone who has been successful doing what you’re trying to achieve.
About the Author: Kathy Fettke is the founder and CEO of www.RealWealthNetwork.com – “The Real Estate Investor’s Resource.” She specializes in helping people build income-generating retirement plans through smart property investing. Kathy is also host of The Real Wealth Show on KABC Los Angeles and on iTunes.
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