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December 5, 2023

Investing in Real Estate: Market Insights and Strategies with Omar Khan [Ep182]

In this episode, we are joined by the insightful Omar Khan, a prominent figure in the multifamily space. Omar shares invaluable insights garnered from his extensive experience in completing numerous projects across Texas, Georgia, Florida, and South Dakota. From the impact of rising rental prices to the challenges facing real estate syndicators, the conversation covers a range of crucial topics. Omar delves into the importance of selecting the right development team, market, and debt terms to mitigate risks. Listeners are treated to expert advice and practical wisdom. Join us as we explore the dynamic world of real estate investing. Gain valuable knowledge from Omar Khan's wealth of experience and expertise.

Episode Timestamps

  • 01:21 Opportunistic approach in investment banking pays off.
  • 04:05 Texas and Florida markets have financial challenges.
  • 08:57 Investors prefer Texas and Florida for comfort.
  • 11:38 Real estate math applies to climate changes.
  • 14:22 Rent stagnant due to uncertain future income.
  • 18:54 Interest rates dropping helps, but may not suffice.
  • 21:12 Rising property values lead to higher taxes.
  • 25:32 Execution risk is the biggest concern for investors.
  • 26:41 60% preleased, 38 months to solve issues.
  • 30:54 Consumer struggle with rising rental prices and incomes.
  • 35:10 Received unexpected $500,000, uncertain about future.
  • 38:29 Timing and home equity are critical concerns.
  • 42:51 Focus on the fundamentals, control what's possible.

Episode Table of Contents

  • Market Insights from Omar Khan's Real Estate Perspective
  • Market Insights on Tracking Rental Income Dynamics and Surging Operational Costs
  • Strategic Market Insights
  • Market Insights, Reactions, and Affordability Gap

Market Insights from Omar Khan's Real Estate Perspective

Market Insights from Omar Khan's Real Estate Perspective
Photographer: Philip de Leon | Source: Unsplash
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Omar Khan's Views on Growth Markets

Omar believes that previously strong growth markets like Texas and Florida are no longer attractive for real estate investment. He points out that costs like taxes, insurance, and payroll have been rising rapidly in these states, leading to very thin profit margins. Omar states that while these markets seem enticing on the surface due to population growth, the challenging cost structure makes new investments far less viable. He cautions that buying deals in major Texas and Florida metros now will likely lead to financial struggles down the road.

Market Insights on Uncovering Stable Real Estate Markets

In contrast to Texas and Florida, Omar sees South Dakota as presenting a stable market to build a real estate portfolio. He highlights the state's landlord-friendly policies. Lack of income tax, and significantly lower development costs compared to other parts of the country. Omar gives the example of his own new construction project in South Dakota, where he is achieving strong rental rates on par with major metros but with far lower upfront development costs. While the returns may not be as high, Omar sees value in having a fixed-income component to balance a portfolio.

Rising Property Taxes: "Even your taxes are too little. Why are taxes through the roof? Well, if people are flipping properties every year and making 2 x the money, the value, as in the market value of their property, has gone up."— Omar Khan

Market Insights on Assessing Value-Add vs. New Development Opportunities

When examining value-add vs. new development opportunities, Omar firmly believes the value-add market no longer offers viable returns. He explains that lenders are very skeptical of the value-add business model in today's climate of rising operating expenses combined with negligible rent growth. Omar bluntly states that the value-add story "does not exist right now". He warns against buying into syndicators still pitching these deals without proper caution. In Omar's view, new development is currently the better play if the right market and team can be secured.

Market Insights on Tracking Rental Income Dynamics and Surging Operational Costs

Market Insights on Tracking Rental Income Dynamics and Surging Operational Costs
Photographer: Nick Fewings | Source: Unsplash

Rental Income Dynamics

Omar Khan provides an example of a 2-bedroom, 2-bath apartment on the top floor of one of his properties, noting it generates $2,600 to $2,800 per month in rental income. He points out the importance of achieving sufficient margins in real estate investing, especially in markets where costs are trending upwards. Tracking rental income trends and projections is a critical component of evaluating investment opportunities and maintaining profitable operations.

Real Estate Investment Strategies: "People that confront their problems head on. By the way, developers, indicators, whatever, those people are going to be given a lot of leeway by lenders and even by their investors, I feel. But people that push things under the carpet, they keep telling you that it's really good."— Omar Khan

Surging Operational Costs

According to Omar Khan, operational costs have escalated across numerous expense categories. Including repairs, maintenance, turnovers, payroll, insurance, real estate taxes, and interest. He notes that syndicators in particular face challenges as the costs of operating investment properties surge. Monitoring operational costs and accounting for inflationary pressures is vital for real estate investors and operators seeking to preserve margins and cash flow. Rising expenses reinforce the need for careful underwriting and planning when assessing potential acquisitions or development projects.

Strategic Market Insights

Strategic Market Insights
Photographer: Daryan Shamkhali | Source: Unsplash

Market Insights on Surging Insurance Costs in Texas and Florida

Omar Khan discusses how rising insurance rates are impacting investment decisions, especially in Texas and Florida. He notes that while these markets are often seen as high-growth areas, the reality is they now pose major challenges for real estate investors.

In particular, Omar highlights how costs like taxes, insurance, and payroll have been escalating in Texas and Florida. He states insurance rates specifically have "skyrocketed" due to climate-related events becoming more frequent. With 1-in-5000 year type events now happening annually, insurance companies are taking massive losses that they need to recover.

Execution Risk in Real Estate Development: "Before you even get to the absorption stage, the biggest risk for you as an investor is to figure out, can this team actually even do this? Can they even develop this thing?"— Omar Khan

Market Insights on Diminishing Investment Viability

As a result of these rising costs coupled with tepid rent growth, Omar emphasizes that profit margins have become extremely thin for real estate in Texas and Florida. He cautions that buying deals in major cities like Houston, Austin, or Tampa currently will likely lead to struggles down the road.

This insurance impact extends beyond just Texas and Florida as well. Omar notes it is an issue across the country, compounding the lack of opportunities for syndicators in pursuing value-add deals. With revenue stagnant but expenses climbing, he says the value-add rationale makes little sense in today's market from a lender perspective.

Market Insights, Reactions, and Affordability Gap

Market Insights, Reactions, and Affordability Gap
Photographer: UnKknown Traveller | Source: Unsplash

Market Insights on the Growing Affordability Gap in Residential Real Estate

Omar Khan discusses the massive affordability gap between buying and renting residential real estate due to the significant rise in mortgage rates. He notes there is minimal rent growth occurring, so this gap in affordability between owning and renting may persist for some time. With higher mortgage rates, the monthly cost to buy is much higher than the cost to rent the same home. This disparity between rising rents and stagnant incomes is placing strain on tenants.

Renter Responses

Given the affordability gap, Omar anticipates people may increasingly double or triple up in rental units to afford the rent. For example, a two-bedroom unit may end up housing four individuals to pay the same total rent. This could lead to increased wear and tear on rental properties from overcrowding. Landlords may not be raising rents substantially, but the impact on the property could be pronounced from more occupants per unit.

The Future of Rent: "Rent is nonexistent right now. And for foreseeable future rent growth and foreseeable future, I mean, 6 months to a year because I don't have that much intelligence looking forward."— Omar Khan

Market Insights on Navigating Rising Interest Rates

The discussion also covers the impact of rising interest rates on syndicators and investment properties. Omar believes interest rates would need to decrease significantly, not just marginally, to provide meaningful relief. Many deals were structured based on lower floating rates. Unless there is a sizable dip in rates of 0.75% to 1% or more, lowering rates incrementally will not resolve the systemic issues.

Strategies for Navigating New Developments and Investments

Omar Khan stresses the criticality of picking the correct development team, market, and debt terms to mitigate risks in new developments. He explains that his company's approach is rooted in being opportunistic with investments and investing a substantial portion of their own capital. This highlights the importance of patiently waiting for the right investment opportunities.

Omar outlines the myriad challenges confronting the real estate sector, including absent rent growth, skyrocketing insurance and payroll expenses, and escalating costs for unit repairs and maintenance. At the same time, lenders are displaying unwillingness to accept the "value add" narrative, pointing to factors like flat or negative rent growth and climbing operating expenditures.

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Where To Find Omar Khan

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Darin Batchelder


Wealth creation through real estate provided me with a new passion to get the word out and let others know that they have an alternative to investing in the stock market.

If I can inspire and educate just one person to take action that results in life changing wealth creation then the work to launch and grow this podcast is well worth the effort.

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