As many of my regular readers are aware, my real estate investing mantra is that “fundamentals dictate strategy”. By far the most common question new investors have is “what investing strategy should I use?” And professional investors who focus on one main strategy will only continue to be successful as long as the fundamentals support their strategy. When the fundamentals change, the effectiveness of specific real estate investment strategies will also change in response. Simply put, a strategy that works well today can stop working if the fundamentals shift far enough in another direction.
Given the potential for changes in fundamentals, 2014 promises to be an interesting year in the real estate investing world. Here are some of the fundamentals that are presently in play for the coming year, with some thoughts on how they could impact various investing strategies:
1. The jobs / employment outlook is troubling. Job growth has been stymied by a combination of factors, beginning with the 2007 recession, the 2008 crash, the development of high technology that has eliminated most of the industrial era blue collar jobs, while labor costs continue to motivate employers to keep a lid on hiring. Add to that the fact that american worker “real” incomes peaked in 1988 and have been falling steadily since 1999, so consumer buying power is slowing being eroded.
These fundamentals often signal sluggish new home sales, and a general lack of growth for retail home sales. Job growth is a fundamental driver of a healthy home construction industry and the retail housing market in general. Notice that most of the cities that will see strong retail home sales are also those cities with geographic limitations that force land prices up, and those with high tech job growth, a big medical presence, or major government facilities. These sectors have been major full time job creators in recent times, leaving other markets well behind in price growth and buyer demand.
But, on the rental property side, those jobs numbers point to continuing growth in demand for rentals. And especially growth in “affordable” rental housing. Noting that “affordable” is a term that is relative to each individual market. Rural areas for example are seeing more growth in low end mobile home rentals while cities like New York will be seeing the development of smaller apartments, as little as 300 square feet, in order to reach an “affordable” level there. An interesting new trend that has taken on a life of it’s own in recent years is what I call “RV” neighborhoods. Essentially campgrounds where people live in RV’s and campers year round. And no, I’m not talking about Lake Havasu, Arizona, I’m talking about entire campground subdivisions in the woods, just off major expressways.
The interesting thing about real estate is that it is one of our most fundamental needs, so even when times are tough, there is still demand for shelter. The key is that the demand flows with the times, so the essence of being a real estate investor is to learn to discern where the demand is going, and get out in front of it if possible.
2. Looks like real estate money is going to make a big comeback this year. This could bolster the flipping / retailing / fix and flip models. Buy-low, sell-high models work best when prices are lower and mortgage money is plentiful. I just saw a commercial for “100% cash-out / debt-consolidation mortgage re-finance loans”. It’s the first one of those I’ve seen since ’07 or ’08. If re-fi money makes a big comeback, that will definitely help the quick cash models. Maybe Fed money is finally trickling down to the street level. If it does, we could see some unexpectedly good news and sales numbers for housing this spring and summer. But without lots of money, retail sales would continue to struggle for most markets.
3. Wall Street funded investment groups are continuing to put upward pressure on home prices in most major cities. Their plan is to securitize rental property cash flows at some point. I’m concerned that, while this plan would probably work out nicely for Wall Street, it also implies that these properties do not have to have positive cash flow for Wall Street to make money. And my sense is that they are already paying too much for the properties they are buying in many cities. This is certainly true of the Atlanta, GA market where I live and work. Their projected rental rates are too high and it’s leading them to pay too much for foreclosures. Smaller investors who live here have gone to the sidelines to wait this one out. This whole model could either lead to a recovery for housing, if their numbers are right, or it could lead to another crash at some point because of the high numbers of properties they are buying. This one is still to early to call, but bears watching closely.
EDITORS NOTE: Watch For Part Two Of This Article which will discuss interest rates and their impact on investing strategies.
Donna S. Robinson is a real estate industry expert, residential investment consultant and investing coach, with 18 years in the real estate industry. She has authored several books and study courses on real estate investing. View more of her teaching videos on real estate investing fundamentals and strategies on her website at www.RealtyBizConsulting.com