Not many people talk to their financial advisors about alternative investments like buying a property, but real estate can be a good strategy this year. It is a solution that most high net worth investors seem to use to deal with market volatility.
A December 2018 survey by Millennium Trust Company found a growing preference for alternative investments, including real estate. Of those surveyed who owned real estate, 73% were in favor of single-family rentals.
Robert Mulcahy, senior vice president of production and strategic initiatives at Angel Oak Prime Bridge in Atlanta, says a rental property investment is a great strategy for any investor, regardless of their net worth. Market fluctuations in 2018 and the outlook for real estate for the coming year are compelling reasons to consider the benefits of owning rental property.
“Since markets don’t exist in a vacuum, there is usually a beta between the rental market and the stock market,” says Jason Haber, real estate agent at Warburg Realty Partnership in New York City. The difference, he says, is volatility.
“The rental market is reactionary to the general direction of the stock market,” Haber explains, meaning that daily fluctuations in stock prices don’t affect real estate investors like equity investors. “Real estate investing offers more stability, and many markets can outperform the Dow and the S&P 500.”
It can be music to the ears of investors tired of volatility. Here are three reasons why now is the perfect time to consider a real estate investment:
- The outlook for 2019 is solid.
- Housing is supported by a low unemployment rate.
- The profiles of tenants are changing.
The outlook for 2019 is solid
Quinn Palomino, co-founder and director of Virtua Partners in San Diego, is optimistic about the rental outlook.
“Demand is high and supply is still limited, especially for entry-level housing,” she says. “We expect rent increases to exceed the overall commercial real estate market, by between 5 and 7 percent.”
Palomino says these rentals are positioned to outperform stocks in 2019, as the market reacts to slowing economic growth and fears of a recession. She cites the Great Recession, during which “single-family rentals have not seen a year of declining occupancy or rental rates.”
Housing is supported by low unemployment
Haber says that while the fundamentals of individual rental markets differ, two things are driving the momentum: jobs and interest rates.
“Generally speaking, an environment of low unemployment translates into a stronger housing market,” Haber explains. “Right now we have both low unemployment and low interest rates. This dynamic has made it possible to maintain the health of the housing market.
Further rate hikes could give the single-family rental market a further boost, said Nick Giovacchini, director of client services at AlphaFlow in San Francisco.
“With the Fed waiting for two more rate hikes this year, mortgage rates are expected to rise further,” he said. “(This) could potentially exclude some newer homebuyers from the market and keep them focused on renting.”
Tenant profiles are changing
As low interest rates and job growth leave a positive mark on housing, Kevin Sneddon, founder and managing partner of the private client team at Compass in New York City, says there is a broader dynamic to consider.
“Renting single family homes has become a new normal,” says Sneddon. It identifies three specific tenant profiles that are fueling the new standard in the housing market.
The first is tenants who cannot afford to buy because they do not have a down payment on a mortgage. The second is those who don’t want to buy because they want flexibility. And the third group includes those who choose not to buy because they believe real estate values will go down in the future.
Palomino says it’s largely the millennials who are the primary determining factor. “Millennials don’t have the same attachment to property as previous generations, are more transient and are overburdened with debt,” she says. “Yet, since millennial couples have children, they want to move out of the apartment and move into a house with a backyard and garage.”
However, it is not just the young who are looking for houses to rent.
“As the baby boomers move out of their old homes, many are looking to downsize, but have less money than expected,” says Giovacchini. As a result, they “might have to rent rather than buy a new home”.
Those determined to run the course of single family rental homes may benefit from doing their homework.
“The single-family home rental market needs to be analyzed at the local level,” says Janine Yorio, CEO of Compound in New York. “We have seen huge variations in rent growth and price appreciation in different places. “
The biggest risk, she says, is the cyclical nature of real estate. Yorio advocates for investing in multi-family properties through a real estate investment trust.
“Investing in a single family at the individual level is much riskier than diversified REITs,” she says. “A landlord must be prepared to deal with extended periods of vacancy, capital improvement needs and to deal directly with problematic tenants. “
Yorio also says that not all single-family residential investments are created equal: “It is important to pay attention to more than the initial rental yield or the capitalization rate and to pay attention to the short- and medium-term cash flows at the level. of the property, taking into account any repairs and maintenance required.
There are also subtle differences between investing in a townhouse and a single-family home. Townhouses may have less cost considerations regarding maintenance, repairs and landscaping if these expenses are managed by an association of homeowners or co-owners.
Sneddon says the target tenant profile is important, as is your exit strategy. Most important, he says, is the likelihood that the asset’s value will increase over time.
“Things like location, condition of property, style of property, local job growth, etc. are important factors to consider when choosing which single family rentals to purchase, ”he says.
“It’s a lot of work to be a homeowner,” says Yorio. But outsourcing the rental or property management to a trusted team can ease the burden.