Source: Think Realty
Although the talk of bubbles is everywhere—from single-family homes, stock market to crypto—the apartment housing market not only will be impervious to the bubble bursting but will prove to be a protection and a beneficiary.
Over the last decade, this country has printed more money than in the previous 95 years. In addition, there are fewer and fewer places where individuals and institutions can get yield on their cash. When the asset craze finally does bust, the money moving from those assets—stocks, crypto, and single-family housing—will seek protection and yield. Money from the sales of those assets will not simply sit on the sidelines. Instead, they will seek the safest place to fight off inflation and achieve yield. The meltdown will not change the fact that people still need a place to live.
During the pandemic, every nonessential business, including bars, schools, government, office buildings, stadiums, hotels, shopping centers, malls, and even churches, were closed. Not one apartment building in America was shut down for even a day, however. In fact, apartments continued to operate and provide operations and investors with cash flow. Institutional money moved from investing in hotels, retail, and office to apartments because apartments are the investment vehicle that provides a safe place to keep money, receive money, and multiply money.
Apartments are real, tangible assets that produce positive cash flow. Investing in apartments allows ordinary people to protect their hard-earned money while they wait for appreciation and pay down debt. This is called “the ultimate multiplier.” Others call it leverage.
There are four reasons apartments are impervious to an asset meltdown.
Let’s look at each one.
1. Lowest Leverage in History
Unlike 2008, those buying apartments today are using the lowest leverage in history. Apartment loans being processed today are somewhere between 55%-75% leverage. Rents, occupancy, and values would have to collapse to negatively impact the sector at this time. Also, a great deal of this debt is a 10-year term at fixed rates during a time when apartments are experiencing the highest occupancies and rent growth in U.S. history.
2. Yield Scarcity
There is virtually no place to get yield today anywhere on the planet. This is a worldwide problem. 10-year Treasury will pay 1.7%—and the money is locked up for 10 years. The average checking account today pays less than a quarter of 1%. A core apartment deal like the one you see in the accompanying image will still deliver 5%-6% cash flow to investors, after debt and operations to investors. That is 24 times what a checking account pays. And there is some $10 trillion sitting in cash accounts.
3. Worldwide Inflation
Inflation will continue to push all costs associated with permitting and building modern housing. The reason single-family homes are not being built in numbers today is because the market won’t bear the cost of doing so. Instead, builders can spread the inflated cost of concrete, glass, labor, appliances, government intervention, and regulation across hundreds of units rather than one single-family home. You simply cannot build affordable single-family homes today because of inflation. New apartment housing will continue to rise.
4. Home Ownership Myth
The fantasy of homeownership as the American dream is over. It has been forever tarnished beyond repair when millions of Americans had that dream ripped from them in 2008-2010. Many of those homes are still underwater.
Add to that the social change of the millions of people today waiting longer to have families and new generations unwilling or able to take on the responsibility of homeownership. Seventy-five million aging baby boomers further exaggerate the situation as they move into retirement. Millennials are having families later than at any time in history and delaying the home purchase decision, so they are more likely to rent.
It is also important to mention that unlike stocks and bonds, banks will lend you money to buy an apartment building. When it comes to tax benefits, properties held longer than one year are taxed at lower rates than personal income, and cash flow produced from real estate is taxed at lower rates. All interest, expenses, maintenance repairs, and depreciation are tax-deductible items.
If assets are bubbling and are going to top out, it will be across stocks and the crypto craze, not real assets that produce cash flow and benefit from inflation and tax harbors.
Apartments can produce passive income for generations and great returns, but without the risks of other investments. That is the beauty of real estate. You can see it and touch it, and people live in it and use it. No technology today can replace it.
Grant Cardone owns and operates seven privately held companies and Cardone Capital, a private equity real estate firm with a multifamily portfolio of assets worth more than $3.6 billion.Cordone is one of the top crowdfunders in the world, raising over $740 million in equity via social media. He is featured on Season 2 of Discovery Channel’s “Undercover Billionaire,” where he takes on the challenge of building a million dollar business in 90 days. Cordone is also a New York Times bestselling author of 11 business books, including “The 10X Rule,” which led him to establish the 10X Global Movement and the 10X Growth Conference, now the largest business and entrepreneur conference in the world.
The online business and sales educational platforms Cordone created serve more than 350,000 individuals and Forbes 100 clients throughout the world. Voted the top Marketing Influencer to watch by Forbes, Cardone uses his massive 15 million plus following to give back via his Grant Cardone Foundation, a nonprofit organization dedicated to mentoring underprivileged and troubled youth in financial literacy.