Last week we reviewed what the stock market did in 2019. This week, we focus on the real estate market in an interview with special guest, Mr. Jean Klinkhamer.
If you own a home, are a real estate investor, or have any interest in real estate investing, Jean provides expert insights into the local Phoenix market and shares what might be in store for the new year.
Jean’s mission is to increase the joy in real estate. Jean has been investing in Arizona real estate since 2002. He is the president and fund manager for Klinkloans Fund, LLC, a real estate fund earning monthly income for investors via hard money loans. Jean lives in Gilbert with his family and attends New Valley Church Chandler and is active with Young Life.
Jean, thanks for your time! The “real estate market” is pretty broad. For starters, how was the market for single family homes in the Phoenix metro area in 2019?
I’m glad you’re asking about a specific area. When people talk about a national real estate market, it’s really interest rates and lending policy, but those alone don’t tell you what’s happening in the local market. Those are drivers, but markets are regional.
There’s no doubt that 2019 was a sellers’ market. Locally, values appreciated 8.4% for the year. So, if you own a $300,000 house, you saw an average appreciation of $25,200 last year.
What factors drove the market last year?
What drives the market is supply and demand. Unlike the stock market, the residential market moves relatively slowly and moves in long cycles. Those cycles are driven by supply and demand, and thankfully those both can be measured numerically. We use an index called the Cromford Market Index that tracks both supply and demand.
Our demand is only slightly over average, but our supply is very low. What’s driving this as a sellers’ market is that people just aren’t selling their homes right now. In fact, the supply of homes available is about half of what a typical or “balanced” market would be.
What’s driving the demand?
Two of the most significant factors that drove demand in 2019 are population growth and the job market. Arizona was top three in the nation for net population growth. The second is the job market. What’s encouraging about the job market in Arizona is that it’s more diversified than the last time we had a real estate run. In the early 2000’s, real estate-related jobs, like construction, were one of the most significant drivers of the job market. Now, we are more diversified with other industries, like technology and financial services. So, not only have population growth and the job market helped the real estate market in 2019, but it’s also a positive heading into 2020.
Let’s pick a couple of your favorite segments of the real estate investing market. What are they and how did they do last year?
Let’s talk about two segments–multi-family rentals and Airbnb.
If you are a landlord, rents have increased and are continuing to increase. Rentals are also driven by supply and demand. There is more demand because more people are renting. On the supply side, supply is lower. There are fewer homes to rent, partly because new construction hasn’t kept up to the demand. Also, more landlords are converting their long-term rental properties to something like an Airbnb which takes them off the (long term, 1-year leases) market.
So, not only have rents gone up, but when rents increase, this drives up the value, especially for multi-family units (duplexes and up including apartments) since their value is driven by the income that they produce.
You mentioned Airbnb as one of your favorite segments of real estate investing—tell us how you are viewing this market right now.
Airbnbs can be referred to as short-term rentals. On the investment side, the net rents (even after higher expenses) are much higher than a long-term rental. It’s more work, obviously, but there are property managers that can do this work for you.
We get a lot of our market data for the Airbnb market from a website called AirDNA. In short, the demand for short-term rentals in Arizona still far exceeds the supply. In Phoenix, even though we’ve added a lot of units, there is still lots of room to grow. I think the data is strong to show our market is not oversaturated with short-term rentals and this will continue to be a hot and profitable market for investors.
Let’s look ahead to 2020. Will we continue to be in a sellers’ market?
The Cromford Market Index is around 200 right now. When the index is 100, it’s a balanced market between buyers and sellers and there’s no real price appreciation or depreciation. At the peak before the last housing bubble, it was at 350. So, we’re not near that number, but it is still a strong sellers’ market.
Because the Cromford Market Index is a leading indicator, it can tell us what’s going to happen over the next six to 12 markets, barring any unforeseen natural disaster or something radical. Bottom line is we can expect continued appreciation in 2020 likely for most or all of the year. Based on the current supply/demand measurements and given it takes nine to 12 months to see significant changes in values from index changes I see price appreciation probably even higher than 8.4% next year. We are coming into the year with a much higher Cromford Index than last year.
Sounds like this is good if you want to sell your house. What does this mean for a buyer?
For buyers, the value of the home you buy now is likely to go up over the next year. However, you have to know that it’s a challenging time to buy. It’s very competitive with more buyers than sellers and you should have this expectation going into your search. To be a successful buyer, you’ll have to be patient to find the right home, but then you’ll have to move quickly.
Real estate can offer attractive returns, but not everyone wants to get into ownership and manage a rental property or directly deal with those risks. How does Klinkloans Fund seek to bridge this gap for investors?
We offer an investment opportunity where people can get the returns of real estate without the work and with lower risk.
Instead of buying properties, we make real estate loans to investors, like “fix and flippers.” The loans are secured by the real estate and these loans make a monthly payment back to the fund, which we distribute back to our investors, which gives our investors a monthly income. So, not only do we reduce the risk by being in a lending position, we also reduce our risk through diversification. Currently, we are diversified through 35 different loans across the Phoenix metro area.
Our fund is currently restricted to accredited investors, which is determined by a net worth of $1 million, or an annual income of $200,000.
How does the current real estate market affect your fund?
There is strong demand for our type of financing (hard money loans) in a market like this. This allows us to get a high yield for our investors with relatively low risk.
In a low supply market, buyers really want to get a house. If they can get a house that’s done and fixed up, those houses sell really well. Our fund meets that need in the market by providing quick financing for those investors. Because we’re in a lending position, for example, for a property with a value of $100,000, our loan would be around $70,000. This gives us a cushion to be able to absorb if there’s a problem or if values go down, so the value of our investment is protected.
Jean—thanks again for your time and sharing your expertise! How can people learn more about Klinkloans Fund and other investment opportunities?
My pleasure! They can visit our website, klinkloansinvestors.com. We also were on back-to-back episodes of the Defining Stewardship podcast in July talking with Jeremy about how to successfully own a rental property and how to get into the short-term Airbnb market.