TORONTO—Investing successfully in U.S. real estate is increasingly about fundamental principles rather than capitalizing on existing opportunities that existed as the nation slowly started emerging from the financial crisis. It’s about identifying markets with low inventories and good economic prospects.
Brett Immel spoke with Epoch Times at the World MoneyShow held at the Metro Toronto Convention Centre on Oct. 17 about his firm’s approach to investing in U.S. real estate and some current trends in housing markets.
Mr. Immel is senior partner and co-founder at Growth Equity Group (GEG) based in Chicago. Throughout his career, he has touched on all areas of real estate investment including finance, acquisitions, management, and advisory. He is a regular speaker at industry conferences and events.
GEG is a real estate investment company specializing in residential income-producing properties for individual investors. The firm is constantly exploring and analyzing real estate markets to identify emerging and re-emerging markets primed for rapid growth.
Epoch Times: You mentioned in your presentation that excess inventory doesn’t make money in real estate. Focusing on the inventory issue, can you discuss your approach to identifying suitable markets to invest in and how that might have changed since the financial crisis?
Brett Immel: When entering a new geographic market, what we look at is the existing available inventory—what is available in the market today and how much inventory is going to enter the market.
In the United States in 2008, all new housing, for the most part, stopped, especially for investment purposes. There was no housing entering the market. What you’ve seen over the last two to three years in a lot of the markets that were hit the hardest is that investors came in and took the inventory. They purchased the inventory, foreclosed properties, did short sales, and more than likely that inventory was entered back into the market as investment properties. That provided for income-producing properties, but what’s happened in those markets now is that all of that inventory is gone.
Some builders, national homebuilders, are coming back and building more and more. So, as an investor, you want to focus on the markets that didn’t get that hit as hard to ensure that inventory isn’t entering the market at a rapid pace.
We look for markets with a real backbone—a market that has the fundamentals where the supply is not in excess of six months, because if you’re getting into a speculative play again, you could be setting yourself up for failure. Investors want to look at the economics as well as where the jobs are entering the market. You want to see job growth and you want to see inventory less than six months.
Epoch Times: You had identified Virginia as having markets that meet your criteria. Can you give an example of markets that you would not touch and what is the current situation with some of those markets that were hit the hardest?
Mr. Immel: I’m going to go with Miami, Florida, southwest Florida, and a real big one for us that we tried to do deals in several times—Phoenix, Arizona. The problem in these areas is there’s so much housing entering the market that the return you can create off rental income is so low because the rents are trailing in arrears, i.e. they haven’t caught up to the price of the property.
So people are buying, speculating on the rents rising as quickly as the prices, and for us that doesn’t meet our buying criteria. When the economy was hit so hard, rents trailed down to a certain level, and what’s happening now is we’re seeing the rapid increase in prices, in those boom-bust markets, and the rents are trailing in arrears, so it’s very difficult to make money.
We’re not going to come out and speculate on any market. We want to go into markets that are fundamental and conservative.
Epoch Times: Building permits have not reached the level they were at before the financial crisis. In terms of the housing recovery, do you see permits coming to a more healthy level for the U.S. overall?
Mr. Immel: For the nation as a whole, absolutely. You look at the national homebuilders, and a lot of them, the inventory that they’re now building, it was all planned in 2008 and 2009, but they stopped. They simply stopped that development. And now the demand is there so those building permits are actually being re-applied for. That inventory is being built.
What we look for is trends. We look for stable trends in that inventory, because if you go to a Fort Myers, Florida, what you’re seeing from 2011 to 2012 to 2013 to 2014, really 2013 to 2014, you’re seeing almost triple to quadruple the amount of building permits.
What that’s telling us is there’s going to be a high number of inventory entering the market and, from an investment purpose only, that scares us. So we want to watch stable, secure growth.
Epoch Times: In terms of how a particular investment could play out, with respect to Virginia, you said you'd be looking to sell the property in three to four years’ time. How do you balance that time horizon for when to sell?
Mr. Immel: Every market has a different fundamental that’s going to affect the way that we believe the investment should play out. In particular, for Newport News, Virginia, why we look at it as a four-year play is that the Panama Canal expansion is set to open now in the beginning of 2016.
The Port of Virginia is one of the only ports on the eastern seaboard that has the infrastructure to allow for these large Post-Panamax box and container ships to come into the port. What it’s doing to the overall area in the market is it’s creating jobs, it’s creating economic growth, and the state of Virginia is one of the most friendly states to do business in.
We’re seeing this steady growth, and we think if you can take this opportunity today, purchase the real estate, make a great return on the cash flows, and then be the seller in three to four years when the market’s growing at an exponential rate, you’re only setting yourself up well for the future to make the next move in the next re-emerging market.
Epoch Times: You’ve noted the condo construction here in Toronto. It hasn’t been painful yet given all the supply. From your experience, what are your thoughts in how you see it possibly playing out?
Mr. Immel: I’m going to bring this back almost to what we’re seeing in the States, and obviously I see here in Toronto, with the young generation—what they’re calling the millennials. The millennials are becoming the renters of these high-end, luxury properties.
These are professionals who are 25 to 30 years old. They went to college, have a good job, but they don’t want to buy the real estate, or are not able to secure a mortgage that maybe used to be there. An investor can step in who has liquidity to be able to buy these units and rent them.
As long as the job market is there for that generation, I think they'll do well. They’re going to hedge inflation and that’s what’s most important today.
Epoch Times: We had seen the situation where housing had put a lot of wealth into American pockets by the middle of the last decade. Do you see housing being again sort of a major driving engine of the U.S. economy, or has its ability to do that been damaged irreparably?
Mr. Immel: I think what we’re seeing is a comeback. Foreign money coming in really helped us speed up how quickly we got out of the housing crisis. Miami was a disaster only for 12 to 18 months until foreign investments started coming in.
It’s all about inventory. So if the inventory’s not on the market, then we’re going to continue seeing housing grow and really bring back the economy.
I think another good thing that’s happened is that most of those mortgage products that were toxic are no longer in the market. If an investor’s putting down 3 or 5 percent, that’s not okay, because what they’re lacking is “skin in the game.” The secondary markets aren’t allowing them to have the 5 to 10 percent investment property. They’re looking at 20 to 25 percent.
This interview has been edited for brevity and clarity.
Note: As of 2016, Mr. Immel is no longer with Growth Equity Group.
