One of the most unique aspects of investing in real estate is the fact that individual local markets can be quickly and significantly impacted for better or worse, by changes in local market conditions. The fiscal cliff represents just such a possibility.
Assuming there is no agreement forthcoming for avoiding the “fiscal cliff”, real estate investors should be giving some serious thought to how your real estate investments, rental houses and commercial buildings might be impacted. For some there will be little change, but for others who have properties located in or near markets that will be directly impacted, the changes could be swift and severe.
According to reports concerning analysis of the impact, one of the most significant aspects of the sequestration bill would be large cuts in various types of defense related spending. If you own rental real estate in an area near a major military base, chances are you could see a local impact that would potentially reduce demand for rental housing, and could lead to an increase in tenants who would lose their jobs.
One such area that would be dramatically impacted is Fayetteville, North Carolina, home of Fort Bragg. The required automatic cuts in new defense contracts, reductions in personnel, and budget cuts dictated by the sequestration process are designed to reduce government outlays. And as painful as this will be, something has to be done to avoid an even worse situation somewhere down the road. But some communities will experience dramatic changes in their local real estate market, at least for a few years. Unemployment among veterans will rise. Communities where military and defense related jobs are concentrated will see a relatively fast impact that will quickly bleed over into the local housing market.
The government posturing over sequestration is getting somewhat tiresome, as everyone is merely jockeying for position, and no detailed terms for an agreement have yet been identified. Here is a list of the general cuts that would be implemented. Your challenge is to determine how this list might impact your real estate investments, or any investments for that matter.
My guess is that falling off of this particular fiscal cliff might be less painful that waiting for a higher fiscal cliff to arise, so in some ways perhaps we’ve got a better chance of long term survival if we go ahead and accept these cuts now. I get that. But as real estate investors, this is a classic example of a looming change in the fundamentals that will come quickly in some markets. Therefore, it’s important to know whether your properties are located in a market that will be sensitive to these changes.
Other states most vulnerable to military and defense cuts are Virginia, Texas, California and Florida. Virginia has a major concentration of military and defense related jobs and industries. And there will be specific local areas within each state that will be most affected.
Investors located near military and defense related installations or businesses should take careful note as to how the approaching changes might impact your local market. It would appear that a reduction in demand is a very likely outcome if the planned cut backs begin to take hold. The military-defense sector would be one of the first, and would be big enough to have a significant impact on local markets in a variety of areas.
In today’s challenging market, it pays to remain alert and vigilant to follow your local market fundamentals, and be aware of how any negative changes in those fundamentals could impact your properties and your cash flow.
Donna S. Robinson is a real estate investor, author and residential market analyst located in Atlanta, GA. Follow her on twitter at donnaconsults. Her latest book, Basics Of Real Estate Investing is now available on Amazon.