Market forecasts are essential to determining the various trends that you, as a businessperson, are going to have to look out for in the coming future. These forecasts, formulated from existing historical data, are a handy guide for determining where to bring your business. Scott Carson shares his 2020 market forecast for real estate. He shares his insight on what asset classes and markets will be the most profitable. He also shares the cities that you’ll need to do more homework on before investing or buying in. Keep yourself updated on these trends!

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To Infinity And Beyond: The 2020 Market Forecast

A Lot Of Promise

Thank you for being here. We’ve got some great stuff. You will appreciate some of the research we’ve done to help you identify some markets and areas that you can be making some money here in 2020. One of the big things that we’re going to be doing in 2020 is I’m going to get back on the road a little bit, come on out to some more different things. These are the different markets that are AM/FM radio stations around. You’ve got Long Beach, Vegas, Colorado Springs, Boulder, Colorado, Milwaukee, Philadelphia, Lancaster, PA, Macon, Georgia, outside of Quantico is where the radio station is down there. Tampa, the villages and in Newport, Richie, Florida out there. We’re going to be traveling some throughout the country this year, do some live remotes, live events and get back on the road again.

Let’s dive into the content unless there are any questions about any of that stuff here. We’ll make sure to let you know and give you notification well in advance if you want to come on out and join up with us. Hook up with us live. This conversation is all about infinity and beyond. What I meant by this topic is there’s a lot of upheavals, little nervousness in the market. I’ve talked to quite a few of my friends in the industry, people that I’ve traded with for years, people that I’ve known for a decade-plus in the industry. There’s a little bit of uneasiness in the market. Where is it going to go? What’s going to happen? What’s it going to do?

You’ve got a friend in me to help you identify those opportunities. Let’s dive into those. First and foremost, what does the crystal ball say? I don’t have a clue what the crystal ball says. All I know is what I see as far as trends and things like that to help me identify opportunities in markets that we all have to do. This doesn’t come overnight. This comes from feeling out and knowing what’s going on in the market scene, product coming and going, seeing what markets are doing as far as foreclosures, short sales and the news and all default rates. It’s a lot of insights and not me sticking my thumb up in the air and letting the wind blow on it.

We all know that there have been increased default rates on higher-value properties. By higher value properties, we’re talking like $500 million or greater in a lot of areas, especially here in Texas, $500,000 homes are greater. You can see those in Dallas. You can see those in Houston. Austin definitely, some parts of San Antonio. Those are the ones that have higher default rates because they’re taking longer than the market to sell. We see that with a lot of fix and flippers. I’ve seen some of our buyers or some of our investor buddies in Houston had done some higher-end developments have taken in the pants the last quarter. Lose $100,000, $200,000 on some higher-end builds because they didn’t sit there. They end up having short sales. We all know banks still have defaults even with default rates being down below 3% roughly.

What you have to realize is as an overall, default rates are down, but when you have a lot more lenders in the market, not just banks, 3%, 2.5%, 3.5% default rates still leave a lot of product. It means you have more sources. You’re going to have less large pools and lists, which equates you to have a new more marketing and making more contacts out there. It means going back and honestly having to shake the tree, dial for dollars again. I’m not talking about dropping postcards out in the mail. That doesn’t work with what you’re trying to do, but you’ve got to go out and find those sources that are going to have that stuff for you. There may not have 1,000 assets. There may not be 1,000 short sales here in Travis County.

If it does that, something bad happens, but what I’m trying to get at with you. You talk about a 10% default rate across the country back a decade ago. That number has come down as the markets recovered, but as the markets increased in size, you see a big disparity between the higher end and the lower end. The middle class is getting squeezed and it’s not always going to the high-end side of things. It’s going more to the lower end as people can’t afford things. I would say you’re going to see short sales across the country in your higher-priced homes, not $500,000. I’m talking $300,000 or higher.

There’s some stuff that is popping up in our neck of the woods here on the north side of Austin, Racine. Nice neighborhoods, which would be $1 million homes out to you guys and gals in California, but they’re making a comeback. The short sale agents that we work with, they’re getting stuff all across the country. They see it in higher-end pricing more so than the lower end. Flipping the script to the commercial side, you see smaller balance commercial loans. What do I mean by a smaller balance commercial? I’m talking sub-million-dollar loans. Banks love the big stuff. They love the bigger mortgages on their commercial stuff, $5 million or greater. Those things rarely default. It’s a smaller balance commercial that you’re already seeing a lot of stuff that’s starting to default in other areas too besides your strip malls or your one-offs.

What I mean by this is there’s a lot of opportunity in secondary markets. I’m not talking about secondary marketing managers. I’m talking like secondary markets. Austin would be a primary market. We can say that maybe Waco would be a secondary market or Fort Hood. Colleen is a secondary market north of us here. Oklahoma City would be a secondary market or maybe Tulsa. You want to start looking at those secondary markets because you’re going to see more success in those areas, especially on the smaller balance commercial stuff. You’ll see some good stuff there.

 

It doesn’t mean there are no buyers for that. There are no opportunities there. You’re going to get a better price for your point because everybody’s going into these primary markets first and foremost. We all know that’s how it works. Looking at your rural markets but the markets outside the major cities for the most part. The asset classes that are going to drive 2020, and this is something you may make a point of, are self-storage facilities. Self-storage facilities, especially mom-and-pops, if you can fix some of these up.

I had a great interview with my friend, Stacy Rossetti, who runs the South Atlanta Real Estate Club. She has picked up 6 or 7 self-storage from smaller mom-and-pops. It’s funny here, not postcards, not emails, but driving for dollars in outer area stuff, picking some stuff up on her finance, wholesaling, some of that stuff to other people. That’s a smart play. You’re going to see more of that. Here in Texas, we’re one of the biggest states for self-storage. We see a lot of this. I’ve got to pay more attention when I’m driving around, get out and a little drive up for dollars in some of these areas. Here’s one of the things I’m planning on doing a little bit more.

When you are part of Note CAMP Commercial, we had Scott Myers get on there to talk about that. Carrie Garner from Note CAMP Commercial talk about self-storage. There are some opportunities there. You need to know where to look. You’re going to see the smaller market stuff driving it and stuff that needs some work. You’ve got mom-and-pop turning into a business. There are a lot of opportunities there to be able to come in and put some good work to it. Turn it into a note deal where you’re picking it up at a substantial discount because you’re taking over the note or they’re owner financing a property to you or a master lease or an owner financing issue.

Affordable housing, we’ve all heard about this for years. The squeeze on affordable housing, the lack of affordable housing. We see that in Austin. We see many of the bigger markets out there. That’s why I think you’re going to see a lot of opportunity in stuff that’s outside of the town, maybe 30 minutes of your major areas depending on the traffic that turned into smaller, tiny house communities. I’m not talking apartment. I’m talking like a tiny house community taking stuff that’s maybe 5, 10 acres. Not like a mobile home park. I’m talking a little bit higher-end on tiny houses. You’re going to see that. We’re starting to see some of that here in Austin.

I’ve got some friends here who have put together those storage container housing. Our friend, John Keith, from Direct Source is doing some of that in different parts of the country and Arizona. You can put a house together for $30,000, one of those or less and be able to rent it out at $700, $800 a month. You don’t have to be smart to figure that out, but that’s a good yield. It’s a matter of finding the right spots for that stuff. I’ve got some friends who’ve been working on this in the last couple of years and I was talking to them over the holidays. I believe what they say. When you look at all the news of all the retail or the big box, the Walmarts, the grocery stores, your retail stores, they are going out of business.

Taking those big empty buildings and converting them either to a mixed-use an office park or executive suites turn to a storage facility. I’ve seen that happen in some of the different larger grocery stores or the Walmarts that have been left behind or even doing what they’ve done in Nashville or some of the other areas, taking some of those older storage buildings and turn them into actual apartment buildings. It’s something that you’re going to see a lot of in the next couple of years.

A Bigger Bang For Your Buck

Retail conversion, let’s talk about this. A lot of retail stores going on business such as the big box, the same thing is turning it into a mixed-use office space. Even some smaller apartments because you can get a bigger bang for your buck on a square-footage side. Down the road here, I was looking for an office space. There’s a big dentist’s office on the second floor. That whole building, the 2nd and 1st floor are empty. I’m like, “Why are not people moving into these things? Why are not offices?” A lot of offices, especially businesses are having to constrict their expenses. Rent is one of the biggest overheads there besides labor.

When you talk about increased costs with them talking about increasing wages and things like that, that’s going to put a squeeze on businesses. Especially what a lot of the fast-food industry is doing, going to automated machines versus having a person. For businesses to survive, they’ve got to make ways to make things happen. Mobile home parks will be popular. It’s the same thing with affordable housing. We see more of that. Florida and Texas are two of the biggest states for that. Arizona is bumping up in that as well, but you see more of a conservative effort for those things to come back into, especially secondary communities as it becomes a need for more affordable housing.

 

You’re going to see mass releases on commercials make a big comeback. What’s a mass release? It’s a wraparound mortgage and owner finance aspect of things where you’re paying a $4,000 a month flat fee each month to the landlord. You’re getting anything above and beyond that amount on a mass release aspect. We’re going to see an increase in that, especially as the values suffer a little bit in commercial stuff. People come in, “I want to operate something here. I’ll run it, but they may not necessarily take over the debt.”

It’s an amount to cover the debt ratios and let somebody else deal with the operations. My good friend, Jason Bible, has been killing it with Airbnb rentals. You’ll see that if you’re in a city that allows that. Here in Austin, that’s not allowed. You’ll be outside the actual Austin City limits to do Airbnb. That’s going to be a big thing for people, especially in markets that they can get that stuff up if it’s around touristy areas. If it’s around traffic where tourism is a big part of that city or the things are going on.

Airbnb is a smart play to make even if you’re doing it for your bedroom or an extra way to drive some income in, that’s going to be a valuable thing. That’s what’s made Uber and Lyft valuable as people using side gigs. You’re going to see more of the side gig aspect, especially when it comes to housing. It’s already happening. You’re seeing a lot more of it throughout this year into the next. Affordable housing is going to rule. Even though that’s a lower default rate a lot of times as far as affordable housing because you’d have people that are staying in their house. They’re bringing two households in.

You’re going to see a higher default rate when we always do first time home buyers, they get in and they don’t understand what they’re getting into. The tax values change. They lose their job. They’re on a budget mindset. They can no longer fit their budget because they’ve lost their job. They’ve lost hours. You’re going to want to look at the wage gaps versus lower-priced homes. What’s going on in a city as far as the average wage versus the lower home prices and take notice of that. One of the things I did, I dove into and pulled up some lists of markets that are going to be valuable that you want to take a look at and markets you’re going to want to avoid as well downright.

Here are the cities that have the largest inequality gap, 1 through 50. What they did is the inequality growth, how much has grown over the last couple of years from 2008 to 2019. Philadelphia surprised me. New York has inequality growth at 12%. New Orleans, Boston doesn’t surprise me. San Francisco and Miami don’t surprise me. Memphis was a number that surprised me along with Detroit, those two cities with inequality at 13.4%. That’s a scary thing. The growth of that 17% almost in Memphis is a higher rental market. It’s a rougher market. You see a lot of that growth.

People can’t afford the rents. Detroit, Providence, Rhode Island, Chicago, Illinois. Houston, Texas surprised me on that one. Birmingham, a much smaller geographic area, but still 12.6% and a 12% inequality growth. Cleveland, Ohio doesn’t surprise me, Pittsburgh, PA, Baltimore, Maryland, Milwaukee, Wisconsin. Cincinnati, Ohio was picked as number twenty. We have a question, “What’s the definition of inequality growth?” It means housing costs are increasing faster than the wage gaps or the wage gap is going north. They can’t afford as much as they used to.

There’s been a bigger growth between the lower class and the upper class. As far as they’re not making as much money to lower class, but the cost of living in a city has grown. It’s been a decade for the most part in most states where they’ve done a pay increase. Hartford, Tampa, Orlando, Orlando didn’t surprise me at all. The average wage there in Orlando is $19 an hour. It costs a lot more there to live. There are no affordable apartments inside the Orlando area. Tampa doesn’t surprise me, big rebound as well.

Buffalo, New York, you can see it’s only 6.5% inequality growth. It’s been a slower growth. Louisville, Kentucky as well. San Diego, this was what surprised me. They haven’t had much change. They’ve been completely unaffordable for the last year. Oklahoma City stays there Riverside, California, St. Louis, Missouri, Atlanta, Georgia, Columbus, Ohio, which we think it gets a great market, has stayed the same last ten years as far as inequality growth.

 

Only 0.5% but still 11% in Rochester, New York, Phoenix, Arizona, Seattle, Washington was a surprise one on there. It’s crazy the things they’re doing, especially Portland, Oregon as well as expensive that’s getting there. Indianapolis, Washington, DC, Richmond, Virginia, Dallas, Texas, Vegas, Nashville, Denver, Colorado, Austin, Texas, that one was surprising, a negative inequality growth. You can see Missouri, Raleigh. Does that mean you won’t be buying in those areas? Not all of them, no. I wouldn’t be buying in Austin, Texas. I live here. I love this area. That’s Austin itself on the whole area. In most of these areas, the gap is too high. We live here. We live nice and live comfortably.

Steph and I have talked about how it’s getting out of hand here locally. We’re looking for other areas. Other people in San Diego or LA, San Francisco feel the same thing. We’re looking for places that are much more affordable. These are the top 50 cities. We’re going to be the biggest inequality growth based on some numbers by the census bureaus and the labor statistics boards. There’s another one we did here. This is the top fifteen most unlivable cities where the average cost of living and how many hours a week you would have to work to live in an area. They ran some numbers. We all know these average numbers are skewed a little. They ran these numbers. San Francisco did not surprise me. New York City does not surprise me. I know how expensive it is to live there.

Jersey, San Jose, Austin, Texas doesn’t surprise me. Oakland, Honolulu, Virginia Beach, Atlanta, Anaheim, Arlington, Texas, Newark, you see some of the same names on here of why they say it would take a while for you to work. You’re starting to see that you’re going to put 56, 40 hours to break even. The bottom 50 becomes some more of the more affordable cities as they say like Bakersfield, California was the most affordable on the top 75 markets, Fresno, Toledo, Lincoln, Tucson, Cincinnati, Phoenix, Detroit, Mesa, Arizona, Cleveland, Ohio, Colorado Springs and Stockton, California.

What have I done by sharing this stuff with you? It probably confused you a little bit. You have to take a look at these numbers with rose-colored glasses as best you can or filtered glasses to understand that these are skewed because they’re taking average numbers and average things. You’re going to have peaks in values in every market. You can have overpriced stuff and underpriced markets. The thing you need to look at more so than anything else is to look at the minimum wage of the area around where you’re buying it. What’s the median income level in those zip codes?

Understanding that if it’s a $60,000 house that you expect to sell, taking that $60,000 number and taking a third of that comes to $20,000. As a mortgage banker, mortgage broker, the most that we would probably approve somebody at for a loan would roughly be around 40% of their housing ratio. That means housing cost, if you take 40% of $60,000, that means they need to be making at least $24,000 a year is what they would be paying towards housing. For a $60,000 house, they’d be making at least $40,000 a year. Bumping those numbers up depending where you’re living so start looking at where you’re buying assets, looking at those areas or the zip codes as far as earnings.

One thing I’m always a big fan of is not buying anything below $500 a month in rent. It’s too low and it’s going to be rougher for you. You’ve got to take the step up in there, but you don’t want to be going too far up the rent ladder where it’s the two high-end that it comes unaffordable at some point. In other areas, we talk about home affordability. Rent rates are higher than ever and vacancies are all-time lows. We’re at less than 1% here in Austin, Texas. It’s not what I’m buying here. They charge you more for rent. It’s great if I own stuff, but it’s also bad because stuff is pricier here if I do find anything. That’s why you’ve got to start looking in some of these other areas. We’re seeing a contract for deeds getting recycled at this point for the most part.

We see not as many non-performing portfolios, but we are finding some good deals on an individual basis. You’ve got to double down on your marketing, double down on your asset manager list. I would say especially here in the first quarter to find stuff that didn’t get moved off their books in the last year. The note business is still going to be around forever and that’s the biggest thing. You need to know your markets that you’re buying in. You need to know your market is better than ever than you used to.

I’ve seen many fix and flippers that made their money fix and flippers and they’re like, “The days of the $40,000 checks in fix and flipping are gone.” You’ve got to understand the cashflow game. You understand your longer-term expenses. Are you going to be able to increase your market rents by $1,000 in an apartment complex overnight when you’re taking down a note? That’s what I’m saying, look at your stuff. You’ve got to make sure more so than ever that it’s going to make sense if you get a re-performing, if you’ve got to take it back as a rental, if you’ve got to put some work into it.

 

Cashflow is a game you’ve got a look at. I’ve not enjoyed rentals. I’ve avoided rentals for the most part if I can. It’s important if you’re going to buy stuff, make sure you know your market. Make sure that if you do have to take it back as a rental, you’re okay with the neighborhood. There are areas that we bought in the past like, “We’ll sell it as an REO. Let somebody else come in.” These days since the market pricing is going up a little bit, you’ve got to make sure it’s going to make sense. If you do have to take it back, it’s going to make sense for you.

That’s why I said know your markets, look at some things here, get out, drive for dollars. I hate to say that because it’s been a long time due, but I’m doing that in some of the small commercial stuff and see if I can’t take some of the stuff over for operators or even stuff that I don’t mind taking now. There are enough people out there that I can come in. There’s a self-storage facility that I can come in or even a piece of land where I can throw some mobile homes on that I can take down or even put some tiny homes.

There are enough people out there locally and vendors-wise that I don’t have to do all the heavy lifting. I can be a deal maker and put some things in place and turn that into a paper with owner financing or offering them financing to buyers to come in and do those things and turn it into a paper game. You’re not going to get a traditional bank to finance you at $50,000 even though a nice small house, but that’s where you’d be in the bank if you can take some of this stuff down and make some things happen.

That’s all I’ve got for you. I don’t have that much. I want to go through a little bit of what you need to be doing is thinking what’s going on, what markets are around you, whatever areas around you that may be within an hour drive where you’re at, 30-minute drive where you’re at. Take it, pull out a map, circle on it or circle on where you’re looking at or pick 2 or 3 cities and focus on those cities and get to know it. That’s one of the things we’re looking at doing and join us as we hit the road a little bit more this year. Hitting down some of the markets and doing some one-day buying tours or one-day market previews as we look at 2020 and see what’s going on.

I know many people are like, “We’re going to war with Iran. What’s the election going to do? Is Trump going to get impeached?” You can’t sit around and wait for those things. Those things don’t affect us on a daily basis. What you do and all the offers you’re making in the marketing doing for deals. You’re joining the self-storage facility membership of Texas or Florida or mobile home associations and marketing that way. That might be some of the things and look at doing it as a way to help you leverage your time and money in that way. You can do some due diligence on the financial side of things and up your game.

That’s it for this Note Night in America kickoff, one short and sweet, so you guys can go out and do some things and get rock and rolling here in 2020. We probably have four workshops. We’re doing a smaller one in person here in Austin, Texas. It’s been a while since we’ve done that, but we’re doing some stuff. We tweaked some things up our education classes as always. A couple of things that we’ve tweaked up too also we have our two-day one-on-one. You can come and spend two days with me here in Austin. You pick a day, Monday through Saturday. We’re no longer doing Sundays, but Monday, Tuesdays or Friday, Saturdays. Pick two days yourself plus your partner, come on in and spend two days with us. It’s $10,000. Trust me. You’ll walk out and get rock and rolling. Our last couple of guys have walked out with at least 4 to 6 deals either under contract or bids. I know one has already closed on three deals. It’s stoke for him. Give me a phone call. Scott@WeCloseNotes.com is our email address. We’ll see you at the top.

 

Important Links

• Stacy Rossetti – previous episode
• Scott@WeCloseNotes.com
• http://www.NoteBlueprint.com/

 

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