Co-produced with Beyond Saving
Invest In Real Estate Now, Opportunity Won’t Last
For the past few months, we have been discussing how strong the residential real estate market has been despite the economic impact of the pandemic. While Wall Street has been very skeptical, but the strength is undeniable.
Interestingly, while the fundamentals are proving to be very strong, many residential focused investments are very cheap, with many trading at multi-year-low valuations. Today we take a look at three different ways investors can take advantage of the strong residential market and achieve high-yields from this very strong sector.
Way #1: Non-Agency Mortgages
For single-family homes, homeowner equity continued to climb in Q2 2020 despite the pandemic. Homeowner equity increased $620 billion, or an average of $9,800 per home. This means that the number of mortgages that are underwater continues to diminish and the vast majority of mortgages are under 80% loan-to-value.
Meanwhile, the price for investors to buy mortgages has materially declined. Investors today can buy mortgages cheaper, while the value of the collateral real estate is climbing.
One way investors can gain exposure to this is through non-agency mortgage backed securities (‘MBS’). These are packages of mortgages that are sold to investors who then hold them, collect the cash-flow and have the option to sell them in the future.
Improving equity positions helps non-agency MBS is a few ways. First, a homeowner with significant equity in a home is very unlikely to walk away. If you have a $300,000 home, it might make sense to let the bank foreclose if the mortgage is $290,000+ and you can’t pay it. If the mortgage is 80% “Loan-to-value” (or LTV) and you only owe $240,000, you are not going to walk away from $60,000+ in equity because you are