Source: shutterstock.com/CHOTTHANIN THITIAKARAKIAT
After a highly turbulent year, real estate markets don’t show signs of calming down. As October 2022 turned to November, 30-year fixed-rate mortgages averaged more than 7%, a milestone that the housing market hadn’t seen in decades. This has been driven by the Federal Reserve’s ongoing interest rate hikes.
For some investors, this trend is concerning. It casts some uncertainty over home prices for both buyers and renters. According to data from Fortune Builders, housing market prices have jumped more than 14% over the past fiscal year. What’s more, the factors that have pushed prices up have not ceased. For that reason, real estate prices may keep rising.
That doesn’t mean it’s all bad news, though. InvestorPlace’s Thomas Yeung offers some insight, saying the numbers are on the side of the real estate investor:
“Experienced investors will know that home prices are more correlated with inflation than with mortgage rates, making today’s inflationary environment a positive for both rental income and price appreciation. (Just don’t live in that house). And deal-seeking investors will quickly find mortgage promotions that reduce future refinancing costs to help keep rental income in line with mortgage expenses.”
This isn’t the only bright spot for investors seeking to gain exposure to housing market opportunities. Mitch Rosen of private market investment firm Yieldstreet recently spoke to InvestorPlace about opportunities for non-accredited investors.
Private Market Investing in the Current Housing Market
In addition to serving as a managing director at Yieldstreet, Rosen is the firm’s Head of Real Estate. As he outlined in an exclusive interview with InvestorPlace, the firm has two funds open to non-accredited investors.
The Prism Fund invests across many asset classes, including legal finance, debt and equity. However, its primary asset is real estate, which accounts for 40% of its holdings. In February 2022, Yieldstreet also launched the Growth & Income real estate investment trust (REIT). This fund has three investment vehicles to date focused on multi-family housing. As of this writing, its holdings consist of properties in Dallas, Tucson and Atlanta. The Prism Fund requires a minimum $2,500 buy-in while the Growth & Income REIT requires a buy-in of at least $5,000.
Like many firms, Yieldstreet sought to address a problem through the launch of these funds. In its case, the firm is providing opportunities to small investors and recognizing the current state of the market:
“[We subscribe] to the mantra and the belief that there is a lack of affordable housing and housing in general. And with rates being where they are, we’ve tended to basically invest alongside the view that people will rent for longer by necessity, not by choice.”
These funds are unique in some key aspects. Rosen can’t recall any other private credit vehicles that offer the type of investments as Yieldstreet’s Prism Fund. Meanwhile, although there are other REITs available for prospective investors, Rosen believes the Growth & Income REIT does an exemplary job of finding the “right properties and the right partners in the right markets with a fairly low minimum.”
Why Should Investors Care?
Yieldstreet has made its real estate investments with the mindset that people will be renting for longer by necessity. The firm sees this trend as providing a floor for growth in the rental space. It’s for that reason that the firm has a “strong, positive view” of multi-family property investments.
That said, Rosen also believes the current lending environment can help generate opportunity, as many lenders have retracted from the broader marketplace.
The debt side of the sector is not without its complications, though. Rosen notes that investors commonly misunderstand the “different risk profiles between debt and equity,” sometimes failing to grasp the importance of allocating amongst the two. Looking forward, he says that opportunities may be “few and far between […] but debt can be somewhere [to] find an attractive risk of adjuster returns.”
For further context, debt and equity are the two primary options when it comes to real estate investing. The former centers around the process of lending money to a prospective buyer, while the latter involves actually making a purchase and, in this case, becoming part of an owning group. Yieldstreet laid out the differences further back in April. Both types of financing play key roles in real estate buying, particularly for retail investors.
These aren’t the only reasons why investors should be focused on real estate investment opportunities, however. Thomas Yeung also says prospective investors should watch the sector despite current volatility because real estate investments offer protection from inflation.
Yeung also points to high capitalization rates, the rental income percentage that investors can receive for a given investment. He notes that housing market starts collapsed in 2020 and are still considerably lower than they were before the 2008 crash.
Finally, Yeung says borrowers can use subsidized government funds to get “cheaper-than-market mortgages.” This allows an individual to borrow at a rate of 6% per year for a 30-year period to invest in property. This power is unique to them. As he says, “Even Exxon can’t convince banks to do that.”
What to Expect in 2023
Many investors have already set their sights on what the housing market will look like next year. Plenty of experts also believe that the trends that have pushed the market down in 2022 will continue to do so in 2023. InvestorPlace’s Shrey Dua reports that Redfin (NASDAQ:RDFN) CEO Glen Kelman sees the housing market crash dragging into 2023 as demand problems persist. Kelman isn’t the only one. Enrique Martínez-García, a senior research economist at the Federal Reserve Bank of Dallas recently predicted that home prices could fall by as much as 20% in the coming year.
As The Wall Street Journal reports, 2022 has been marked by private investors snapping up real estate projects while larger-scale REITs and investment firms exercise caution. This trend may continue into 2023, particularly if other macro headwinds remain.
All told, Rosen sees real estate as a powerful weapon for investors seeking to guard their portfolios against inflation. It’s also more accessible than some may realize.
“Real estate, we believe, has a great inflation hedge. People understand real estate […] People own homes, people pay rent, People go to office buildings and they go to retail buildings. They understand how real estate works.”
On the date of publication, Samuel O’Brient did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Samuel O’Brient has been covering financial markets and analyzing economic policy for three-plus years. His areas of expertise involve electric vehicle (EV) stocks, green energy and NFTs. O’Brient loves helping everyone understand the complexities of economics. He is ranked in the top 15% of stock pickers on TipRanks.
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