REAL Trending Episode 31
Steve Murray talks about the residential property management business, affordability and homelessness, taxing real estate transactions and millennial home buyers. Let’s jump in.
From REAL trends, the trusted source for real estate industry news, this is REAL Trending Episode 31. We’re breaking down the trends of the week and showing how they impact brokers and agents.
I’m Steve Murray, President REAL trends. Today we’re discussing the residential property management business. Is this one brokers should be in. Secondly, Boston in another attempt to solve affordability and homelessness wants to tax real estate transactions. And last, will 2019 be the year of the millennial home buyer?
Residential Property Management Business
So let’s tackle residential property management. And let’s step back and think about the big picture first. Approximately one-third of all households in United States are renters. Of those, there are approximately 20 million who live in one- to four-family housing.
It’s a highly fragmented business where the great majority of investor-owned rental properties, one to four family, the great majority are people who own one or two units. And if you step that up to those who own up to five units, it’s well over half the market.
It’s a huge untapped service business. I might add that residential property management is still a highly fragmented industry with tens of thousands of property managers who might manage anywhere between 20 and 100 units. The other thing to keep in mind is as a brokerage company, many have moved into things like mortgage or title insurance or property casualty or escrow, in the States where escrow is used. Residential property management is just an extension of your services to home buyers, home sellers and investors or tenants.
Now, let’s not make it sound simple. It’s not necessarily an easy business. It has its own challenges. But what we know from our research and our evaluation work on residential property management companies, either stand-alone or that are part of a restaurant brokerage company is that one of the beauties of this business is in fact, the larger you get, the larger the margins tend to be, which is not at all the case in the residential brokerage business. Residential property management can be built through offering this new service out to your agents or through acquisitions or both.
And it’s a wide-open business and you don’t have to be super-large to make money at it. We’ve seen residential property managers making a decent profit with 100 to 150 doors, which is how they refer to landlords in the residential property management business. A third of all households live in rental housing and of that number about half or more live in one to four family investor-owned residential real estate. It is a wonderful business, it is a scalable business.
And if you’re thinking about going into the business, it is really good if you start with the presumption that you don’t know what you’re doing. So if you want to go into the business, find somebody that you can employ or partner with that will make that entry easier, more understandable, and you’ll have more comfort with it.
This is a great, great opportunity for residential brokerage companies, whether they have 25 agents or they have 1,000 agents. It’s a good business to be in and worth considering in these difficult times as brokerage sales units flatten out after a somewhat soft 2018 and 2019 will probably be fine but not going to be a boom year in housing sales that anybody can tell. Okay, let’s move on.
Affordability, Homelessness and Taxing Real Estate Transactions
The leaders in the Boston community are proposing new taxes on people who flip housing, if you turn it over too fast, there would be an extra tax if you buy and then resell property within a relatively short time frame of a year to two. They’re talking about adding a whole new tax on upper-end housing sales. All in a means to raise a couple hundred million dollars according to the authors to fund affordable housing and [alleviate] homelessness. So this has been attempted in numerous cities.
Some people in some large metropolitan areas, it’s referenced by rent controls, or added taxes for developers like they did in Denver, where they attempted to tax developers to fund low-income housing. Let’s call this what it is right? It is a tax against those who have means or those who like investing in real estate to fund others.
In no city that we’re aware of, including San Francisco, Seattle and Denver, where this has been tried, Los Angeles is attempting to do the same thing, has there been any major impact on either affordability or on homelessness? If you’re taxing the sale of housing to give that money to others, that is a very worthy thing to do, right? Because it might help less fortunate families get into housing, who can argue with that. But the real issue is, it’s not going to solve the affordability problem.
It just doesn’t have the scale to do it in cities the size of Boston, Denver, Seattle, San Francisco, and those like them. You can’t put a dent in the problem by taxing housing transactions, particularly if you’re taxing those that somebody has to move.
They buy a home in Denver, and then a year and a half later, they have to move for a job and they’re going to get double-taxed on that? Where’s the fairness there? And people that aren’t even going to live in Denver anymore? What it does is it tends to raise the prices of housing, particularly as developers of new housing, they’re going to add that into their pricing.
So those people who want to buy are going to pay more so that some money could be delivered by politicians in the name of trying to solve two problems that they caused in the first place. There is no question of if you want to read a great book on the topic, read Housing Boom or Bust by former economist Thomas Sowell.
Stanford University publish it some years ago, perhaps 15 years ago now? He lays the problems with housing affordability, and lack of housing directly at the hands of local and state government, through restrictive land use, and high impact fees.
And all kinds of expenses and charges that raise the cost of building housing. There was a study by John Barnes consulting, I believe is the source, of years ago that in California, on average governmental costs before a builder can even build a house are between $80,000 and $90,000. That’s not land costs, that’s governmental costs, environmental permitting, impact fees, and others.
So it’s no wonder that in major metropolitan areas, which are booming economically and thriving with jobs, particularly for young people can’t possibly provide the housing that those people can afford and need. And it’s because of their own policies and restrictions on housing development. They’re not going to solve the problem by simply taxing high-end housing and people who have to sell or desire to sell for whatever reason, within a short period of time. What it’ll do is kill the housing market further and you’re not going to solve affordability doing that.
Will 2019 Be the Year of the Millennial Buyer?
Lastly, let’s talk about 2019, the year of the millennial home buyer. Now, we’ve addressed this before in a previous podcast, and everybody wants to say that the lack of millennial home buying is due to student loan debt. Everyone says, “Well, they’re indebted.” But in a realtor.com study, which we discussed in a prior podcast, their research showed that that in fact, wasn’t the top problem of millennial households.
It was the lack of a down payment. And we commented that many of these millennial families, whether they’re single people, or people living together, or married couples, that they look to their families in many cases. In some cases, there are nonprofits that help and of course, we have FHA, we have the ability to do that.
I think 2019 is going to be a great year for millennial home buyers. And by the way, Gen Z is coming up too, oldest of them are now in their 20s. Why now? Well, mortgage rates suddenly over the last 90 days backed off 35 to 45 basis points. And because of the lack of demand, they may go lower.
Number two incomes, household incomes and jobs are suddenly plentiful. And there are wage pressures throughout the economy. That’s great for workers. That means everyone has the opportunity to find a better higher-paying job. In most segments of the economy there is a shortage of qualified workers.
This all benefits those because higher incomes lead the ability to save more and or to invest more and to afford more housing. So you combine that with a softening, housing market, softening sales and prices starting to soften a little bit and sellers having to get a little bit more realistic. We think indeed, that 2019 will create some of the most favorable housing economics for young first-time home buyers that we’ve seen in the last 60 years.
Listen to Other Episodes
More on this later from REAL Trends. Learn more about industry trends, marketing, and technology strategies, as well as listen to past REAL Trending episodes on our website. This has been Steve Murray. Until next time.