What is the Next Big Disruption in Real Estate Investing?

Real estate

It is easy, trendy, and many times, the right thing to do when it comes to talking about aging Baby Boomers. From Social Security taxes to politics, they are an easy target because Millennials and the like are paying for their decisions and non-decisions (like getting older). Well finally there is something good to say about this aging demographic. They are leaving their real estate behind.

What many people don’t know is the Millennials are the next largest group of Americans coming up to take over the country. They already make up the largest part of the workforce, and when compared to previous generations they are better at saving money. All this sets the stage for the next disruptive force in the real estate market.

Consider the fact that Millennials are the heirs of not only money, but real estate as well, and an entirely different picture of the market is sketched. About 1 of every 3 Millennials are looking for or buying a home, so they haven’t taken to living in the wilderness or studio apartments. In fact, one study points to a trend that has them buying not single residence dwellings, which are becoming more expensive and scarcer, but multifamily units. A full 52 percent are more likely to go down this real estate investment road.

Given many of the Millennials had to deal with the Great Recession during their working years, it is almost a financially natural act to look to real estate instead of stocks, bonds, or the more traditional investment vehicles. Instead of being beholden to a small group of people who have the means to manipulate financial markets, the independence of real estate makes it a very appealing and sensible choice.

Millennials, being the data analytics they are, are using numbers to make this switch from traditional investments. The first, obvious to any Millennial who wants to stick their head up out of the sand, is real estate is outperforming stocks at a 2 to 1 clip. By the numbers, the annual rate of return on real estate since 2000 is 10.71%.

This is all clearly a disruption to the status quo, but unfortunately not every Millennial is positioned to take advantage of it. The first is that a simple rule of borrowing money (for real estate) is the lower the credit score the higher the interest rate. That translates into more money for the financial institutions they have been avoiding and less bottom line profit for them. Based on recent data, the average Millennial credit score is a weak 652. That gets you started, but if you can’t boost it up sharply in a few years the cost of real estate may be beyond your reach.

One reason for the meh credit score average is the amount of debt they have ran up. Back to averages, the average Millennial has $36k in total debt. This unfortunate number can be a huge obstacle in buying investment quality real estate. Even more troubling is that much of that debt is from student loans and credit cards, two of the biggest pools of public debt. The first factor that makes this reality even more weighty are the virtual impossibility of getting rid of student loans except through paying 100% directly, and that includes accumulating interest.

The second is that credit card debt often carries with it a high APR that once again benefits the very financial institutions investing in real estate is intended to avoid. For example, back in the 1970’s the average Baby Boomer saver could expect to get 5.25% on their savings account. That would mean if left alone, their money would double in about 7.5 years. Now flip that number around and make it what a Millennial pays in credit card interest. The total debt, if left alone, will double every 7.5 years. But since few Millennials get a 5.25% APR we can double it to 10.50% and cut the doubling time in half – to 3.75 years. Just by using multiples of 5 and .5 it’s not hard to see how hard it is to get out of credit card debt. And none of these calculations include credit limit increases – the joy of the average credit card holder.

In order to get this coming wave of disruption any meaningful momentum, Millennials need to get their financial house in order or risk creating a second disruption that will leave many behind the financially responsible – a disconnected socioeconomic class that is potentially worse than the current haves and have-nots. It will require some short term level of discomfort for some, but the long term rewards will be well worth it. Paying down your current debt and starting to save something every month will go a long way to positioning yourself for the upcoming disruption in the real estate market.

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