Despite best efforts by the Fed and a Q4 rally, the broader economic woes of inflation, rising interest rates, and equities devaluation will remain the top financial stories from 2022.

Yet all this spells opportunity for real estate investors armed with capital…

Increased Rental Demand

The demand for rental housing has surged in this recessionary period. As single-family home supply falls and the cost of debt increases, more Americans are pushed to rent as of November 2022, year-over-year change in home sales dropped 35.2%, and the average home price (excluded financing cost increases, further adding friction to the buying process) is roughly $100,000 more than pre-pandemic. This pattern is worsened by supply—both a lack of building, the oft-discussed supply chain issues forcing a slower pace for developers, and what Fannie Mae VP and Deputy Chief Economic Mark Palim calls the ‘lock-in effect:’ those homeowners who did secure fixed-rate financing pre-pandemic are hesitant to move. 

Underwriting Methodology

We keep our underwriting metrics and methodology up to date with the market, especially where it comes to “stress testing” for more the conservative view on deal outcomes.

When modeling any new acquisition, standard effective interest rate for “probable case” outcomes is underwritten at 7.5%. Depending on the scale of the subject market, standard exit cap is underwritten at 6.5 – 7%. More aggressive and conservative metrics are used to stress test the models.  

Given the increase in deal flow, we have always raised expectations for the return of the portfolio. While the Fund’s targeted return remains 22-28%, we are pursuing only those projects which are modeling a return well above that—sometimes as high as 40%.  

Deal Pipeline

Deal flow has picked up even in the last three-four months, seemingly as a result of the aforementioned, macro-economic trends.  

Our typical seller is an inexperienced individual (or small institutional) investor. Their subject properties have spiraled out of control because of a lack of capital, deferred maintenance, poor strategies for leasing and collections (the latter of which feeds the lack of capital). For this cash-strapped owner, the increased cost of debt is catastrophic, and sometimes the difference between being underwater on an asset. 

This environment generates once-in-a-generation buying opportunities, where properties are offered well below their underlying value.   

Anecdotally, we are seeing this play out with offers submitted just last fall: LOIs that were then discarded for being well below the desired sales price are now being countered. With many sellers, we will not reach a mutually agreed price, but this kind of behavior is exactly the indicator of a market shifting from seller to buyer.  

Predicting the “Valley”  

Finally, a thought on timing and the market: Economists, investment professionals, and pundits alike agree that this is a difficult moment for the economy. Where they disagree is whether we are at the bottom of where the market will fall, if we have further to go, and when / how we will recover.  

Thankfully, our Fund’s strategy doesn’t rely on such projections. With our plan to deploy capital over the next 24 months, we should be taking advantage of the lowest basis buying opportunities—whether that’s happened. This kind of diversification and time-costing is one of the reasons we were eager to launch a fund at this moment. 

Seeking additional information? Contact Investor Relations: IR@clearinvestgroup.com

Clear Investment Group, LLC