Author Brendan O'Brien
This was the second year in a row that I braved the Black Friday/Midnight Madness sales at my local retailers.…
A couple of years ago, I was talking to a customer for my property management software who was based in Ulan Bator, Mongolia. “Mongolia!” I said. “Holy cow! Why are you investing out there?”
My customer wasn’t from Mongolia, and he wasn’t particularly concerned with the fascinating and exotic nature of the country, although he appreciated it. (Mongolia once controlled almost all of Asia, and was ruled by colorful figures such as Genghis Kahn.) No, he was in Mongolia to make a profit.
I thought of my Mongolia friend the other day when I saw another real estate pundit talking up the virtues of Cyprus and Spain. Does it really make sense to invest overseas? Does it make more sense now than a few years back?
Last week, I started looking into the Washington, DC Metropolitan Statistical Area (MSA), which consists of the District of Columbia, Northern Virginia and parts of Maryland. Given the growth in the federal budget over the last few years, I wasn’t surprised to see that the DC MSA was “the most educated and affluent metropolitan area in the United States,” according to Wikipedia.
The District of Columbia itself has made great strides in recent years, including greatly reducing the rate of violent crime. You may recall that it was known as America’s murder capital during the crack-filled 1990s. However, the city’s unemployment rate is actually fairly high, at 11.1%.
Maryland and Virginia, on the other hand, are very prosperous. Both are among the most economically successful states in the country.
Maryland’s Doing Pretty Well…
Maryland, DC’s (mostly) northeastern neighbor, has seen fairly consistent population increases and has a well-below-average unemployment rate of 7.2%. It actually has the highest median household income of any state, although this can be deceiving – the cost of living is also very high there. (The second highest median household income is in New Jersey, which is not currently an economic paradise.)
Note to readers: I’ve been criticized for some blunt statements about real estate markets in the past. You can disagree with me, but I ask that you not doubt my integrity. I have no real estate interests outside New Hampshire and am not representing anyone.
When I started researching the Washington, DC real estate market, I was impressed by the stability of institutional markets in general and astonished by the growing disparity between federal government and private industry employment. Put bluntly, the federal government has become the best employer in America. It is the most stable, with a headcount that grows annually and essentially guaranteed salary increases. It also offers the best benefits and salaries, except for the very top (the government’s CEO, President Barack Obama, makes $400,000 per year – a nice paycheck, but lower than that for almost any CEO in the Fortune 500).
As you might imagine, having the biggest employer in the country in your back yard is a good thing. When that employer can always be counted on for a raise, that helps. Partly as a result of that, the DC real estate market is looking pretty darned good.
Researching the Washington, DC real estate market, I came upon some facts that shocked me. I started looking at federal government employment, knowing that the government is the biggest employer in the Washington Metropolitan Statistical Area (MSA).
In fact, the federal government is the biggest employer in the country, with about 1.8 million civilian employees. While times get tougher for those of us who don’t work for the government, life for those in government continues to be pretty peachy. In fact, things have gotten a lot better over the last ten years.
The growing discrepancy between the government economy and the “real” economy is causing many problems, but one is a growing disconnect between the government mindset and the private industry mindset.
Many landlords are attracted to markets with a large institutional presence because they offer stability. Hospitals, universities and government agencies rarely make major cuts in employment, and they very rarely close. That means your prospective tenants are not likely to leave.
This also used to be the case for military bases. Years ago, career soldiers could build very comfortable nest eggs by buying a home in every base where they were stationed, and keeping it when they were transferred. They would always be able to find other soldiers to rent their homes. That’s changed to some extent because of the number of base closings over the last couple of decades. However, the largest bases will remain active for many years.
Are these markets really stable?
Big institutions almost never make up more than half of the employment in any market, meaning those markets are still subject to other private industry employment losses and gains.
A while back, I mentioned my project installing a bathroom ceiling fan as an example of something automated systems wouldn’t help with – a dirty, uncomfortable job I had to do myself.
That doesn’t mean the job had to be nearly as difficult as it was. I could have saved a huge amount of time if I had taken some steps to learn the building beforehand.
A Hugely Annoying Day
Like most bathroom ceiling fans, the Broan 678 actually attaches to ceiling joists. This means that to install it, you really want to work from above. It’s pretty darned difficult in a building like mine because there is no easy access to the attic. I knew of three possibilities:
- Image via Wikipedia
One of my favorite economics bloggers, Megan McArdle, wrote a post recently on the Washington, DC real estate market, extended to the state of the market overall. It appears to her that the single-family residential market has bottomed out, while multifamily still has a way to go.
Megan also posed the question of when, and if, a boom will begin again. Possibly, in her view, there won’t be a boom. After all, the last nationwide (really, worldwide) boom was driven by a couple of unusual factors: historically low interest rates, and a big, competitive market for subprime loans.
Megan is one of the smartest economic bloggers, and a lot of what she wrote here makes sense. Still, the post bugged me, because it focused on macro-economics, which is not the world in which most of us live.
We know that real estate investing success comes from a million factors, only one of which is the boom-bubble-bust cycle. Outsiders don’t see a lot of difference between real estate investing and stock market investing, but there is a huge difference. In stock market investing, there are really only three factors:
- You decide which stock or mutual fund to buy
- You decided when to buy it (what price)
- You decided when to sell it (what price).
All those apply, in a sense, to real estate investing. You have to decide what and where to buy, pick one or more properties at what seems to be an appropriate price, and figure out when to offer them for sale, at what price. But there are also these factors:
Price Factors Exclusive to Real Estate
- What can you do to cut ongoing costs?
- How are you going to treat the tenants?
- How can you renovate the property to make it worth more?
- What can you add to the property to increase the income it generates?
You can probably think of a few more. The point is that in between the buying and the selling, most stock market investing is essentially passive. Once you own it, you’re waiting for the right time to sell it. You really have no say over how the company is run.
To start this game of let’s-pretend, take all the money out of your wallet except for $25. If you have less than $25, put in the additional cash to get to $25. If you don’t have the additional cash anywhere, skip to the end of this post – you don’t need to play this game.
$25 is actually a pretty useful amount of money. You could fill the gas tank of a small car, buy a couple of pizzas, or take your honey to the movies, complete with popcorn. $25 feels pretty comfortable in the old wallet.
However, you can’t afford to have fun with your $25. You have to live on it. It’s all the money you have in the world until you can make some more. What’s more, nobody’s going to loan you any money. You don’t have a credit card or any friends or family members you could squeeze for a few extra bucks.
Last year I had a gas bill for $1400. That was almost one-third of my entire rent for that property for the month. This year, however, I could get bills that are even higher. Meteorologists are predicting the coldest and snowiest winter for the Northeast in years.
In this property, I currently pay for heat (natural gas) and water/sewer. The water/sewer bills aren’t actually that high around here, although they are the lion’s share of utility costs for many property owners in Western states. Regardless of location, however, utility costs are killing landlords. They are rising much faster than inflation. Rents, on the other hand, are rising much more slowly than inflation, if at all.