With 2018 fast-approaching, many investors are evaluating their investment portfolios for the new year. They are also assessing which asset classes will perform best. The stock market is reaching all-time highs and there is red-hot hype around emerging asset classes, such as Bitcoin, raging on. There may be many investors overlooking conservative assets such real estate. Perhaps we can’t blame them after the volatility and downright bear markets we saw in U.S. real estate in the early 2000s and the negative outlook from analysts that ensued.
However, to neglect the asset class as a potential high-performer in U.S. real estate may be a mistake. In fact, the S&P/Case-Shiller U.S. National Home Price Index recently reached a new five-year high which has returned the index back to the levels previously seen before the recession of 2008. Large residential real estate investors, such as Cody Sperber of Clever Investor, which has acquired over $100M in residential real estate, suspects that many small investors have avoided the housing market of late. This is because of misconceptions about the market’s recovery and the different types of exposure to real estate you can add to a portfolio.
However, opportunities exist in U.S. real estate markets. There are leading indicators pointing to a strong 2018 for the sector. If you are considering adding this asset class to your allocation or increasing your current allocation, here are some of the most important considerations.
REITs May Struggle
There is one area of real estate that has consistently not been strong and it not expected to improve much in 2018: retail. As scores of shoppers continue to rely ever increasingly on online shopping for almost all of their needs, retail sales in brick and mortar stores continue to fall. The impact this has had on retail U.S. real estate, such as storefronts, has been referred to by some as a “retail apocalypse”. This has been a major source of pain for many REITs. This is because they hold retail real estate in their portfolios.
Residential is Often More Accessible for Small Investors
There are experts who think both residential and commercial markets in U.S. real estate are poised for strength in 2018. However, a key advantage in residential real estate for smaller investors is that it is more accessible to buy. Residential investment opportunities exist in a much more diverse range of investment levels than larger commercial properties.
Sperber advises his clients that single family residential properties are worth considering for their simplicity when one is a new investor. However, multi-family properties is ultimately where he recommends building long-term wealth. This is because it allows investors to spread their vacancy risk across multiple units.
Federal Reserve May Raise Interest Rates in 2018
The Federal Reserve has given some clear signals that they intend to raise interest rates in 2018. A rise in interest rates generally make borrowing more expensive. This could lead to less demand to buy homes. And, this could actually present an opportunity to residential investors. Less demand to buy homes often results in greater demand to rent.
This represents a boon for investors who rent out their U. S. real estate, whether it’s single family or multifamily. There have actually been a multitude of factors that have led to a greater consumer demand to rent instead of own.
As demand for rental properties increases, so will returns. It’s especially important to pay attention to the trend in increased rental demand from millennials who clearly prefer to rent over own.
Take Advantage of Winter Season to Buy
It’s typical in any market cycle for demand for real estate to fall during the winter season. This often leads to opportunities to acquire properties at discounted prices. Many experts recommend the winter season as one of the best buyer’s markets.
Sperber noted that he acquires many of his best deals during the winter months. “The fourth quarter is my favorite time to purchase real estate because of the motivation in the marketplace. The Winter season slows retail house sales, widening the opportunity for investors to pick up properties at a discount.” When you’re buying bank-owned or foreclosed homes at sharp discounts, banks are often more motivated to get assets off their balance sheets before the end of the year. This prompts them to mark down their prices.
Even in bull markets, prudence matters above all else. Unlike stocks, bonds, and other assets, real estate is significantly less liquid. This poses a unique set of risks. These are associated with not being able to exit an investment as quickly as you’d like.
Therefore, educating before buying is critical. Take the time to study a market and run your due diligence. Also, make a calculated decision for both acquisition and exit strategy prior to pulling the trigger on a deal. This is more important than potentially missing out on an opportunity before you are ready. Sperber acquired his first property in his early 20s through self-education.
New investors should spend a significant amount of time educating themselves first. Then, they can start investing a single dollar into a property within U.S. real estate. “Learn the language of real estate. Learn the different investing strategies, learn how to analyze a deal from a dud, and it’s very important to know how to properly put together the paperwork so you don’t get into legal trouble.”