January RIA Roundup: 2022 Year in Review
Lead Story: 2022 Year in Review
For real estate investors, 2022 was another banner year. Home prices and rents climbed strongly for the third straight year, driven by numerous underlying factors including strong demand from millennial homebuyers, shifts in demand due to work-from-home and other growing trends, and the persistent undersupply of built homes.
But it was also the year we were reminded that interest rates don’t have to stay low forever. They can up — quickly. In just a few months, mortgage rates increased from 3-4% to 6-7%, levels not seen for well over a decade. We almost forgot it was possible.
Around mid-year, the data began to show evidence of shift in the market, largely in response to those higher mortgage rates: home price increases were slowing down markedly, inventory was growing a bit, and whispers began anew about another housing crash. (“They” have been predicting that decline in home prices for about two years now, so they’ll eventually be right, I suppose.) We also began to see a bifurcation in performance between markets: the high-flying markets that had seen the largest price and rent increases were also the first to show signs of declines, and are likely to see much steeper losses than ho-hum cash flow markets.
In the backdrop of all this were the two big stories of 2022: inflation and the war in Ukraine, which themselves became entangled to some degree due to the war’s disruption to the supply and distribution of energy and other important commodities. Inflation has very clearly peaked now, as seemed likely several months ago, while the war in Ukraine grinds on, an increasingly bloody and senseless stalemate with no clear end in sight.
It was also a year that saw the implosion of the crypto and NFT markets, as I wrote about in November. In parallel, Sam Bankman-Fried — the “the King of crypto” — became the latest icon-turned-fraud, joining a parade of (un)worthy predecessors like Adam Neumann of WeWork, Elizabeth Holmes of Theranos who was sentenced this year to 11 years in prison, and Trevor Milton of Nikola who was convicted this year of fraud. (Oh, and those guys who cheated in the fishing competitions! It was also the year of cheating scandals.) The latest in this line of start-up scammers is Charlie Javice, the young CEO of the company called Frank, who allegedly scammed JPMorgan into acquiring her company for $175M by building a fake email list, for which she is now being sued. Then George Santos, a wanted criminal and former drag queen in Brazil, somehow outdid them all by Frank Abignale-ing a persona and resume from whole cloth and getting elected to Congress. Elon Musk had a pretty embarrassing year too, such that anyone still calling him a genius would rightly be laughed off the stage. The mighty fell pretty hard in 2022.
But there was some good stuff too. In science, there was a breakthrough in fusion energy, and the remarkable James Webb telescope was successfully launched and is now doing amazing science from its position nearly a million miles from Earth. In Washington, same-sex marriage was protected in federal law, and it was finally (FINALLY!) infrastructure week for real with the passage of a $1T bipartisan law to invest in our roads, bridges, ports, energy grid, internet connectivity, and more. In the U.S, renewable energy sources like hydropower, wind, and solar produced the largest ever share of total energy, surpassing coal and nuclear. And unless you live in China, we continued to return — slowly but inevitably — to the rhythms and rituals of life we remember from before the pandemic.
What will 2023 bring? We’ll have to wait and see. But if there was altogether less about Prince Harry this year, I’d be just fine with that.
Portfolio Updates
With the year coming to a close, I sat down to put all my annual numbers together, and published my 2022 Annual Portfolio Report. It was another good year, with over $73K in net cash flow. The article contains all the details and an in-depth discussion, but here is a dashboard including all the key metrics for the year:
It was another good year for price appreciation (10.7%), which drove all of my ROI metrics into lofty ranges. I also achieved very strong rent increases (10.2%), and excellent occupancy (98.8%).
However, there were two learnings and takeaways as I look forward with my portfolio. First, maintenance & repair expenses were higher than budgeted for the third consecutive year. This forced me to change the way I set those budgets going forward, so they’re indexed to the current price of the home rather than the original purchase price. This seems perfectly logical in hindsight, and perhaps I should have done it that way from the get-go. Making this change to my model reduces my expected returns by over 10% in 2023, but I think it will be a more accurate predictive model.
Second, turns continued to be less frequent than anticipated, but more costly. The low frequency is terrific, and I hope it continues; the high cost will just be a fact of life for me until I get through the “first turns” on all my properties. Many of my properties were purchased with tenants in place, and have never been turned since. Those properties tend to need quite a bit of work the first time, which is ballooning my average turn costs.
As part of my year-end number crunching, I updated my individual Property Spotlight articles with annual numbers on individual properties. If you’ve ever wanted to see how an individual property performs over a multi-year period, check out the Annual Updates section at the bottom of each of these articles:
I’ve also recently published new articles with all the details on Property #21 and Property #22, new additions to my portfolio that I bought late last year. I have several more Property Spotlights to publish in the coming weeks, taking me all the way to Property #25 which closed a few weeks ago.
In Other News…
Mortgage rates fall. With inflation cooling, mortgage rates have followed suit, and are now at their lowest levels in over six months. Check out the current trends here.
Private REITs halt withdrawals. Several prominent private REITs (Real Estate Investment Trusts) have limited or halted withdrawals due to investors asking for too much of their money back. This is sorta like going to the ATM and getting a message that says “Nah…please come back later.” These types of risks are one of the reasons I’ve always avoided private REITs, real estate crowdfunding, and other investment vehicles where you’re forced to give up nearly all control.
Rents tick down. Rents have begun to fall, most acutely in markets that saw the biggest rent increases during the pandemic. There’s an in-depth analysis here if you want to take a deep dive.
AirBNBust continues. As the short-term rental market is increasingly saturated with inventory, it’s getting tougher for investor owners to make the returns they’re used to.
Canada blocks foreign investors. A new law in Canada took effect banning foreign buyers from buying residential properties as investments for the next two years. They’re attempting to cool off an overheating housing market and give preference to domestic homebuyers. (And I get why they’re doing it — if you think real estate is expensive in NYC, SF, or wherever you live, check out Toronto or Vancouver!)
Work-from-home pendulum swings back. A slew of companies announced return-to-office plans, including Disney and Starbucks. Companies seems to be coalescing around 3-4 days per week in the office for most functions, which seems reasonable. If I were still working the kinds of corporate jobs I used to, I’d argue that 3 days per week is the sweet spot.
The ozone hole heals. The damage done to the ozone layer decades ago is continuing to slowly heal, and should be fully reversed in a few more decades. This isn’t a miracle — it’s because there was an effective international agreement to stop the production of the thing that was causing the damage. (Hmm, I wonder what else that could work for…)
Bank robberies eliminated in Denmark. Twenty years ago, there were over 200 bank robberies annually in Denmark. Last year, there were exactly zero, thanks to a strong push to eliminate cash altogether across the Danish economy.
Boeing delivers the last 747. The very last Boeing 747 to be built has just been delivered. The original jumbo jet was known as the “Queen of the Skies”, and changed consumer aviation forever. The development of lighter building materials and more efficient engines doomed the 747 — but to me, it’s still the best-looking plane ever made.
Exxon knew about climate change. Exxon undermined the science of climate change for decades to protect its business, but its scientists knew exactly what was happening all along. (Shocker!)
Research into aging progresses. Long the bastion of cranks and pseudo-science, formal research into the underlying mechanisms of aging is accelerating. And it just got VERY interesting.
China’s population falls. Just a month after the world population crossed the 8 billion mark, China announced that its population fell for the first time in over 60 years. This is either awful news or great news, depending on who you ask.
Online platforms get worse. Ever wonder why online platforms that start off great get gradually worse and worse over time? This excellent article explains why.
Final Thoughts: Debt
I learned to play golf at a young age, and my Grandpa was a big influence. He was an excellent golfer in his day, and had a roster of off-color golf jokes always at the ready. My father and brother rounded out our usual foursome, and we would sometimes play for very small amounts of money — the most that could be won or lost was two or three dollars. But Grandpa was a stickler for paying those debts promptly, no matter how small: “You gotta pay your debts.” It was an unequivocal statement, tautological, not up for debate.
The House of Representatives, led by newly-minted Speaker of the House Kevin McCarthy, appears to be winding up for yet another fight over raising the debt ceiling. Like most modern economies, the United States regularly runs an annual deficit, which means we spend more money than we take in from taxes. The accumulated deficits over the years, plus interest, are the national debt, and with each year of deficits, the total debt increases. Due to a quirk of our laws, Congress must actually vote to authorize the increase in the “debt ceiling”, even though those debt levels are guaranteed by the levels of spending and taxation dictated by other laws Congress has already passed. In other words, we’ve already spent the money on things like infrastructure and defense, and raising the debt ceiling is simply akin to paying the bills.
We’re once again getting uncomfortably close to that debt ceiling. The Treasury is already taking “extraordinary measures” to extend our financial rope as long as possible, but this will only buy us a few more months. If we refuse the pay the bills by not raising the debt ceiling, the United States will default on our debt obligations, which has never happened in our history. Everyone basically agrees that the results of this would be calamitous. A default would likely lead to an immediate downgrade in the country’s credit rating, higher interest rates for all Americans (including on mortgages), and a huge global financial shock and recession given how entangled U.S. debt is in the global economy. This would materially hurt every American, and would be particularly bad for real estate investors.
So why wouldn’t we just raise the debt ceiling, and avoid this self-inflicted disaster? Because Republicans in Congress want to use the threat of default to force policy concessions that they couldn’t otherwise achieve through ordinary legislative means. (If this whole thing sounds familiar, it should — they have tried this play before on several occasions over the last decade or so, and seem strangely undeterred by the fact that it has never gone well for them, politically or otherwise.)
But this is not a “negotiation”, whatever you may have heard. The proper word for this is extortion. This is economic hostage-taking, pure and simple, and the ones being held hostage are not Congressional Democrats — it’s US, you and me, ordinary Americans staring down the barrel of the gun.
We should be hostile to anyone willing to engage in this kind of brinksmanship to achieve their policy aims. There should be healthy debate in Congress about the proper role of government, the merits of deficits, and how to reduce deficits (if desired) through spending cuts, revenue increases, or both. But the time for that debate is BEFORE we’ve spent the money, not AFTERWARDS when the bill is due and the threat of default, with all its dire consequences, is looming.
Because my Grandpa had it right when he said “you gotta pay your debts”. So must our country.
Happy investing,
Eric
About the Author
Hi, I’m Eric! I used cash-flowing rental properties to leave my corporate career at age 39. I started Rental Income Advisors in 2020 to help other people achieve their own goals through real estate investing.
My blog focuses on learning & education for new investors, and I make numerous tools & resources available for free, including my industry-leading Rental Property Analyzer.
I also now serve as a coach to dozens of private clients starting their own journeys investing in rental properties, and have helped my clients buy millions of dollars (and counting) in real estate. To chat with me about coaching, schedule a free initial consultation.
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