The new normal that hit us in 2020 left investors in all kinds of assets nervous about the future. Stock markets crashing, real estate owners are not getting their rents, and bondholders are skeptical about ever getting paid. But there’s one type of property that is performing exceptionally well.
Never having to worry about getting paid again is something that attracts investors. Every time someone puts their money away to invest in something, they want to know three things: how do I get in, how much will make, and how do I get out. And the lest question is the most important to be answered.
Investments come with risk. Always. There is no such thing as “risk-free” investment. Even saving your money at home has its risks: inflation, getting robbed, a fire. So, when you find something that gets close to having no risk, you pay attention to it.
Imagine not having to work for money anymore; having a source of income that is [virtually] perpetual, with very low risk. Imagine waking up without the anxiety of having to make money to pay your regular expenses, like rent or mortgage, lease or car finance, utility bills. That’s freedom.
Section 8 is a program where the Government helps low-income families and individuals to pay for their rent, in full or partially. Those who seek the benefit need to qualify, as well as the property owners who would like to have their assets rented.
What attracts investors to this kind of real estate investing is knowing that is the Government who will pay the rents, not the tenant. This reduces the default risk to meager standards. You won’t have to worry about getting paid, hiring lawyers to receive your rents, or pursue an eviction order if your tenant defaults. It’s the dreamland of investing.
Crisis Proof Cash Flow
Residential income is proving itself the be the best kind of cash flow investment in real estate. Usually, investors default into commercial or industrial leases looking for a safety net. By having corporations and businesses as tenants, the risk of default seems lower on those cases. But that’s not true.
Being an Economist, I observe how economic agents (Government, Individual, and Business) make decisions. When there’s a crisis, businesses close their offices, stores, and warehouses. They don’t need a lot of space when there’s not enough action in the market.
The Government will try to please everybody. When it can’t, he will look to the voters. What do they need, and how can they be helped? And cutting off assistance will be the last thing they will do.
Individuals have needs. And a roof above their heads is a top priority. They might downsize their properties, move in with friends and family, will cancel their car leases, and reduce their expenses. But the last thing they will give up is from having a place to live.
So, when you are choosing were to invest in real estate, you need to ask yourself: what kind of asset will always, no matter what, have demand and present the lower risk of not getting paid? The answer for the first one is “residential,” and for the second is “guaranteed by the government.”
More bucks for your dollars
Let’s talk about efficiency. The more you can get off a property will tell you how efficient your investment is. A government bond pays about $2,00 for each $100.00 that you invest. That’s very low efficiency. But there’s a reason for that: the risk is low, because you are lending money to the Government.
Now, if your real estate investment pays you $13,00 for each $100.00 that you put it, that’s a very efficient return. One might say that “the higher the return, the higher the risk.” And that’s true. When you play the Lotto, you risk losing 100% of your investment to win a lot of money. High risk, high return.
But when you invest in Section 8 properties, the most significant part of your risk is the Government, after all, you have a real asset in a good location (your principal is safe). So, if you trust the Government enough to pay you $2,00 for lending them your money, you mind as well trust them to pay the rent for the family that lives in your property.
Following Under Armor
The headquarters of the clothing brand Under Armor is in Baltimore, the same city that has one of the most important ports of the East Coast of the United States. Close to Washington, thousands of people commute every day from the city of the Orioles to DC because it is just cheaper to live there.
Being the city with the most prominent cap rate in residential real estate in America helps to understand why investors are buying properties there left and right. The John Hopkins hospital and University are significant drivers of the population to Baltimore. And the growth of the metro area is eminent.
Combining a guarantor such as the US Government with a city that has the highest return on rents in the country is a great way to boost your investments, especially during a time where everything is more complicated. Protecting your assets with real property and assuring the generating of income are two of the most important actions an investor should be doing in 2020.
Be safe (and get paid).