Why Now Is a Good Time to Invest in Real Estate
Knowing what to do with your money in a constantly changing economy can be tough. While financial indicators in the U.S. are on the upswing, recent drops in the Dow Jones Industrial Average are prompting investors to speculate on the possibility that it may be the right time to invest in asset classes other than equities. One sector that is proving to be increasingly attractive is the real estate sector, both residential and commercial.
Positive Leverage from Real Estate
In a Q&A published by Investors Archive, real estate investor and CEO of the Starwood Capital Group, Barry Sternlicht noted while in the past, real estate investment could offer a 6% or 7% yield and a 5% finance rate, today, investors can enjoy a 6% yield and obtain finance at 2.5%. This gap, notes Sternlicht, is unique to real estate. It exists because although experts have expected rates to go up, they haven’t, leading to fears that current rates are “unsustainably low.” Currently, both absolute and embedded rates are failing to rise as predicted, a phenomenon that is occurring in other developed economies across the globe.
Debt or Equity?
Forbes Councils’ Evan Gentry notes that the commercial real estate industry is currently offering investors “an attractive middle option that efficiently balances risk and return while providing cash-flow to a portfolio.” He advises that when debating between debt or equity, private debt offers investors a safer entry into this market. As it is backed by collateral, it minimizes the risk of default. Although earlier in the investment cycle, equity ownership offers a higher potential for return, later, debt is more interesting because risk is significantly lowered. This makes investment an interesting option for those wishing to raise finances in the future for other projects. Even seniors who are seeking greater liquidity are considering options such as reverse mortgages in order to hang on to their homes and perhaps make a sale 10 years down the line.
Real Estate as a Current Investment Opportunity
Both CRE and RRE offer a high yield. Residential real estate, however, has been particularly affected by the new tax law, which is predicted to lead 38 million Americans to opt for standard tax deductions as opposed to itemized deductions for real estate investments. There is a high probability that demands for rentals will increase, a source of income that individual investors may consider. According to CNBC, rents are rising at the fastest pace in almost two years: “The median rent in the United State rose 2.8 percent over the past year to $1,445, the fastest pace of appreciation since May 2016.”
Currently, investment officers are able to count on an excellent degree of liquidity, and real estate is a logical avenue in which to invest. Not only is appreciation predicted for both residential and commercial real estate, but this type of investment continues to be considered safe. As noted by Barry Sternlicht, on the one hand, if the economy booms and interest rates rise, rents will also increase. On the other hand if they stay low, the investment continues to be interesting so it ultimately is a win-win situation.