I know, I know – many of you have been hearing for years that many people lost money on their houses when the bubble burst a few years ago. It made investing in real estate, a scary proposition. Now that the situation has changed, investors search for alternatives to diversify their stock and bond-laden portfolios and many are turning towards the real estate market. Yes, there are loads of opportunities for those who want to buy real estate.
Why Invest in Housing Market?
Real estate can enhance the return profile of an investor’s portfolio, by offering them competitive risk-adjusted returns.
Another benefit of investing in the housing market is its diversification potential. In some cases, real estate has a low or negative correlation with other asset classes means when stocks go down, real estate often goes up.
An Ease of Down Payment
Investing in real estate gives an investor a benefit of ‘down payment’- a tool that is not available to stock market investors. For instance, if you buy a stock, you have to pay the full value at the time you place the order – unless you are buying on margin. On the contrast, paying a down payment on your real estate property, means that you can control the property, the minute the papers are signed, by only paying a fraction of its total value.
Kevin Finkel, VP of Resource Real Estate in Philadelphia says “Some are looking towards mid-ranged multifamily housing. This, together with the likelihood of rising interest rates, means that home ownership will remain depressed and affordable apartments will be in demand by the country’s workforce. With unemployment back to pre-recession levels, more and more young people will be leaving home and forming households, and they prefer to rent.”
Finkel added: With rental demand growing stronger, some investors are looking towards (mid-ranged) multifamily housing.
Charles Gross, equity and data analyst at Morning star in Chicago, says, in future multifamily housing will make up a big portion of a new housing construction – about 25% of all total home building during the next decade.
According to the FreddieMac 2017 Outlook, multifamily housing market will grow again this year but at a moderate pace, with California; Sacramento, Washington; Tacoma, Colorado; Colorado Springs, Portland, and Seattle leading urban markets-based on gross income growth.
Finkel added with rising construction costs, many real estate developers in the U.S are concentrating on building luxury multifamily units in urban downtowns that will deliver high rents. For renters who need more affordable choices, there aren’t a lot of options in the middle-income market. It would take years to create affordable single-family homes and apartments to meet demand.
Finkel says, “The supply hasn’t been built for the past 15 years. Everything that is being built is high end, so there’s a real housing crisis in the middle.”
Consider Investing in Existing Units
Finkel says, “Many developers are focusing on building new luxury rentals. Investors should play the opposite spectrum and be wary of new development. When you build from the ground up, there’s so much money flying around. You could build something no one wants, have costs overrun or people stealing from you. Development is a very messy business. It takes a lot of risks.”
He added, “Most people don’t rent out their homes, so, it’s a consumer purchase of a commodity product, like buying a car, except with a house we are able to keep up the appreciation price because we are constantly putting money back into a home.”
Decide Your Comfortable Investment
Yuen Yung, Chief Executive Officer of Casoro Capital, says, “Consider on investing what your net worth allows you easily. Even large institutional investors such as pension and endowment funds generally limit their exposure in real estate to somewhere between 8 percent and 15 percent of their investment portfolio. Keep in mind that real estate is considered an illiquid asset, so carefully consider if you may need immediate access to your invested capital.”
Gross also points to non-direct assets whereas many investors only look at investing in property. Roughly half of all lumber goes for new construction, remodeling, repair, and restoration.
Gross says “We think lumber is undervalued and the market is underestimating how much building is going to take place which needs lumber.”
Capitalizing on multifamily housing units may be a good alternative to stocks and bonds. If you do decide to invest, contact with a trusted local realtor who can help you navigate the real estate market situation. They often know what is the right time to invest or when properties are about to go on the market. Will you be investing in multifamily housing units in the near future? Why or why not?
Quotes are taken from USNEWS