So far in 2019, the headlines continue to be dominated by 2018 stats: December was Wall Street’s worst since the Great Depression, U.S. existing home sales dropped sharply in December down 10.3 percent from the year prior, and many hot coastal markets like Seattle and New York are softening dramatically. To top it all off, there are growing fears about the global economy. Even the Fed has announced it is going to be “patient” before raising rates again. It is easy to get overwhelmed; as a real estate investor – what should one expect for the coming year and beyond?
I am cautiously optimistic that 2019 will likely be a good year for real estate rental property investors overall. Home price growth will continue to slow thanks to rising interest rates and increasing inventory. The market is changing noticeably in formerly hot cities like San Francisco where I live. That being said, there are a number of factors that can play out positively for the savvy investor:
- Renters Abound: Whether it is a favored lifestyle or inability to buy homes, the number of people renting continues to hover around all-time highs.
- Apartment Vacancy Lows: US apartment vacancy continues to stay low even with the wave of new construction hitting the market. In particular, Class C vacancy is the lowest on record, and there are almost no new Class C buildings coming on the market.
- Employment Growth: There are currently more job openings than unemployed, and young adult unemployment is at a record low. While the labor shortage could slow the growth cycle, it will definitely lead to wage increases.
I am particularly bullish about workforce housing located close to transit hubs within 30 minutes of large downtown areas or more specifically, older multifamily buildings that you can pick up for below replacement cost. Some people think of workforce housing as “affordable housing,” but I prefer to think of it as simply housing that is affordable, and I believe there continues to be a tremendous opportunity for investors there.
NO SLOWDOWN IN SINGLE-FAMILY RENTALS
Homeownership for young adults under 35 is well below what we have seen over the years, ending 2018 around 27 percent. As more millennials enter their 30s, start families, and want their own homes, single-family residential homes will be a compelling space for investors in coming years. That being said, due to rising rates and affordability issues, many first-time buyers are going to struggle to make that first purchase.
The Tax Cuts and Jobs Act passed by Congress in 2017 will also be a major factor this year. Many homeowners are going to be in for a surprise in April with the capped state and local tax deduction and reduced mortgage interest deduction for new loans. It’s been reported that there is a benefit to itemizing the taxes on 44 percent of US homes, but under the new tax reform plan that number could drop to as low as 14.4 percent.
Between the generational trends and the significant reduction of tax benefits of homeownership in higher priced areas, there should be a lot of interesting opportunities in the single-family residential space in the coming years.
INVESTMENTS IN QUALIFIED OPPORTUNITY ZONES
The Tax Cuts and Jobs Act also created the Qualified Opportunity Zone program. The program encourages investment to spur economic growth in low-income areas in the U.S. and its territories by offering significant tax benefits, like the ability to defer and eliminate future capital gains, to real estate investors. In 2018, about 8,700 Qualified Opportunity Zone designations were finalized.
While there are a number of complexities that make it challenging for individual rental property investors to start a qualified opportunity fund, it is quite easy to invest in existing funds. The designated opportunity zones list is also a good resource to keep in mind when seeking your next deal due to the potential for significant development. Most investors with whom I have spoken have a qualified opportunity zone surprisingly close to their existing investments and I expect to see increasing investments in these zones in 2019.
THE RAPID GROWTH OF PROPTECH
The PropTech industry had a huge year in 2018 - from both an investment and user adoption perspective. Unlike in the past, more investors today are willing to pilot new real estate technology products, and many are integrating them into their day-to-day workflow and are seeing positive returns.