152: Are You the Next Major Real Estate Investment Market?

SHOW NOTES FOR EPISODE 152: ARE YOU THE NEXT MAJOR REAL ESTATE INVESTMENT MARKET?

As buy ‘n hold real estate investors, we are always looking for the next great market.  Sometimes it’s a location, a city or MSA where there is great job growth, population increase or other factors that would create a demand for rental property.  Sometimes it’s a group of people, a segment of the population, that has similar characteristics and may also have a need for rental property.  In this episode, Bill looks at “baby boomers” and a shift that is occurring that will create great rental demand in the next 3-5 years.

As a multifamily buy and hold investor, for years now I have heard endless talk of how Millennials are the renter demographic. They don’t want or can’t afford to buy their home, and we as rental owners should be targeting this demographic and appealing to their preferences. This may be true, but behind all this hype of the Millennial generation creeps this massive wave of rental demand from what has been the largest demographic for the past 50 years.  What I’m talking about is the Baby Boomers!

The Baby Boomers have been a background thought when it comes to renter demographics.  As an active buyer, I believe this has left an opportunity in the market that other buyers are missing.  As real estate markets around the country continue to climb and competition also increases with them, I have been looking for a way to break away from the herd and find an opportunity, a niche, a market that the masses are not chasing.

What Do We Know About Baby Boomers?

It is my belief that over the next 1-5 years, Baby Boomers will be substantially underserved in their demand for rentals, specifically affordable market rate rentals that cater to senior living preferences.  To clarify, this does not mean 55+ zoned communities, but rather market rate rentals that simply have characteristics that a senior would desire.  In this podcast, I will back up that statement with real data and common sense to piece together these not-so-complex ideas that expose the opportunity that seems to be cloaked by the Millennial renter craze.

Now, lets start from the beginning with a basic overview.  Who are the Baby Boomers?

• Baby Boomers, according to the S. Census Bureau, are the demographic group born during the post-World War II baby boom, approximately between the years 1946 and 1964. This includes people between 53 and 71 years old in 2017.  Over this period, over 76 million babies were born in the United States, and factoring in immigration, the current estimates of the Baby Boomer demographic are close to 80 million people.
• In 2017, the median age of a Baby Boomer is 62 years old. In the United States, 62 years old is the first year individuals can retire and begin to receive social security benefits.  Many Baby Boomers have lived their whole adult life aiming to retire between the ages of 62 and 66 using their social security benefits to support them in their remaining retired years.  In fact, the math tells us that over 12,000 Boomers will be retiring every day for the next several years. [(80,000,000 Boomers/18-year age span)/365 days per year = 12,176 retired Boomers per day.] Of course, some of that figure will not retire, and some will die, but the point is not to be exact but rather to show that there is going to be a massive wave of retirees in the United States in the next 1-5 years.
• Unfortunately, of those tens of thousands of retirees per day, only a small percentage are actually financially ready to retire. According to a study by the Insured Retirement Institute, 24% of baby-boomers have no retirement savings—the lowest number since the study started in 2011.  Only 55% of Baby Boomers have some retirement savings, and of those, 42% have less than $100,000. Thus, approximately half of retirees are living off of their social security benefits.

When I read that half of all retirees were going to be living off social security, my next question was, “How much is the average social security payment?” According to the Social Security Administration, in January 2017, the average payment is approximately $1,317.

So there is a wave of 80 million Baby Boomers that is cresting in 2017 and that will begin its peak retirement at staggering pace in the tens of thousands per day. But 74% of them are not financially ready to retire.  Why?  There is not a hard and fast answer to this question, but I believe it is a multitude of things.  The 2008/2009 crash spooked many Boomers.  They may have lost precious pension funds and many have sold stocks at the bottom of the market, resulting in them missing the resurgence of the market in the following 8 years.  It could be that wages have been stagnant for 10 years; it could be that true inflation has been eating away at their savings and boosting their cost of living.  Or maybe it’s just that the savers had such terrible interest rates to save in for the past 10 years. Maybe it’s all of these things combined.  Maybe it was just mismanagement or lack of planning.  It was probably a little bit of everything.  Why it happened is less important than what needs to happen moving forward.

What Freddie Mac’s Survey of the 55+ Population Reveals

What will happen moving forward with the Baby Boomers?  Well, fortunately, in July of 2016, Freddie Mac noticed the things I have mentioned above and conducted their first ever Freddie Mac 55+ survey of housing plans and perceptions to help answer that question.

Here are some key findings from that survey:

1. They plan to rent versus buy their next home

Among those 55+ renters who plan to move again, 71 percent of respondents plan to rent their next home.  For many, this may be a renter-by-choice decision, as 38 percent say they have enough extra money to go beyond each payday, including funds to be added to savings.  Further, more than half (59 percent) think it makes financial sense for people their age to be renters.  This view is held by 67 percent of multifamily renters.

I might also add that for some boomers, their homes are their retirement package.  Whether they hold on to it and draw from equity or institute a reverse mortgage, they are looking at that home as the source of future retirement income.

2. Their top attractions are affordability and amenities

Among the top “very important” factors influencing their next move, respondents picked affordability (60 percent), amenities needed for retirement (47 percent), living in a community where they are no longer responsible for caring for the property (cutting lawns, etc.) (44 percent), and being in a walkable community (43 percent).

3. They don’t want to move far

Among those who plan to move again, 55+ renters would like to relocate to a different neighborhood in the same city (31 percent) or a different property in the same neighborhood (23 percent) compared to those who would like to move to a different city in the same state (18 percent) or move to a different state (24 percent).

As real estate investors chase the Millennials and cater to their lifestyle and their renting desires, they are missing the opportunity to serve the massively underserved demand of the Baby Boomer generation.

The question is then,  how does all this data translate into applicable real estate investing?  This is where the common sense approach comes in. It ’s pretty clear what this is showing us. There is and will continue to be a staggering amount of Baby Boomers entering in the renter market, and if you can meet their needs, demand will be so great that the probability for investment success will increase significantly. I believe those needs are catering to the senior lifestyle, while also remaining highly affordable in areas that Baby Boomers already live.  For some investors, that may mean purchasing apartment communities with no steps, small unit floor plans, larger property footprints with more landscaping, and nearby grocery stores and medical offices.

The trick is balancing these senior needs while also investing in a market where there is also growth in jobs and population.  It would be great if you could fill the needs of all the Baby Boomers for the next 10-20 years, but what happens when that ends?  If you can satisfy the undeniable demand Baby Boomers have for the next 10-20 years, you will have one of the most predictably consistent renter demographics on the market.  Do that in a market that also shows the fundamentals to maintain or grow past the Baby Boomer generation, and you are in line to make a terrific investment.

There is no doubt the Millennial generation is one to be watched closely, but the point of this podcast is to note that there is another massive trend in renter demand – namely Baby Boomers — happening that is getting only a fraction of the attention it deserves.  I would also argue that the Millennial generation is far more unpredictable than the Baby Boomers.  We don’t know how they will behave.  If we have one, two, or maybe three more years of strong economic growth, and the Millennials begin to feel secure and have paid off some of their student loans, they may just decide renting isn’t for them anymore and decide it’s time to buy.

I have no idea where that Millennial demographic is going to be in 5-10 years, but for us Baby Boomers, it seems more predictable—and when you are a long term buy and hold cash flow investor like me, predictability is invaluable.

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