How will the U.S. Elections affect the Housing Market?

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The U.S. is slowly edging towards the Presidential elections and with less than 3 months out, it seems the management of the economy will be a major issue for voters. This appears to be one of the more ‘volatile’ election campaigns we have seen in a long time in the U.S.

Both sides seem to be pushing heavy into the economic agendas, but the outcome, or headwinds investors may see are very different with each party.

Technically I don’t have a horse in this race, so we can look on the elections from a relatively ‘unbiased’ view.  Generally, for us as foreign investors, it is more around the impact on the housing market that the policies of the elected party have that is of more interest, but we also need to keep an eye on the reactions to the election as consumer sentiment can also affect markets.

In this election though, housing seems to have become a more ‘prominent’ issue due to higher mortgage rates, low inventory levels, and housing shortages in several states, all making for (in U.S. terms) a very expensive market (median house prices in the U.S. are still at record highs – US$495,100 for end of 2023 according to the Census Bureau and Dept of Housing & Urban Development).

Firstly, both parties have claimed to want to impact the housing shortage/cost of housing.  Kamala Harris and the democrats have said they will provide a US$25,000 down payment (deposit) assistance for first time buyers.  Now I can assume this will work similar to government first home buyer schemes we have had in Australia over the years.  Strangely enough though, just like here in Oz, when the prices are high due to under supply of properties, making it easier to buy properties, does not in fact fix the problem, but makes it worse…

Further her plan includes: creation of 3 million new housing units within the next 4 years, tax credits for developers who build starter homes/units (assuming this is more aimed at lower cost homes) and a US$40 mil fund to tackle the ‘housing crisis’.  To me this is all just words, and we have heard this and similar promises here from our government and it almost always leads to naught…

Trump and the republicans, on the other hand, have not directly tackled housing, but policies are more aimed at tax cuts, particularly for businesses, increased tariffs for imported goods, and looking to reverse a few of the green energy subsidies and mandates that the Biden administration championed.  Further comments/promises include reducing inflation and lowering interest rates.

This is interesting from two points.

Firstly, Trump’s policies, from a high-level overview could be regarding as inflationary. His claims of reducing taxes and increasing tariffs could certainly lift prices, causing inflation, so it would be interesting to see if his administration would monitor this closely.

Secondly, technically the president does NOT have any sway with the Federal Reserve Bank who sets the interest rates, and he is certainly not a fan of current chair Jerome Powell, the presidents do put forth candidates for the chair of the Fed and there was even talk that Trump could look to replace Powell as early as 2026, but this has dialled back some now, and with Powell’s stint up in 2028, Trump has said he would let Powell serve our his term, but then could nominate someone more willing to listen. This is also a little ironic as Powell was Trumps nominated candidate previously.  All in all, he would have little ability to control interest rates, other than ensuring the economy was healthy.

Then there is the claim from Trump that if elected he will attempt to ease economic pressure by devaluing the U.S. dollar…

Now, whether that is even possible is up for debate but there is no doubt that some of his policies could put pressure on the USD.

We spoke above about the powers the oval office has on the Federal reserve and lowering interest rates can generally lead to a weaker USD, but this would be difficult, particularly if Trump was looking to go against monetary policy to do this.  In his favour, it appears that rate cuts are on the horizon anyway, so he may just applaud this and roll with it, so to speak.

Alternatively, increases in oil mining and removal of bans on gas exports, as he has suggested he will do, could also put some pressure on the currency. As a climate change sceptic, Trump has promised to open more oil fields in the Gulf of Mexico and lift the moratorium on drilling in the Alaskan Artic.

Generally, energy prices can have a significant impact on consumer sentiment and can be considered inflationary.  Lower energy and fuel prices can help reduce costs of living and therefore inflation, which may then lead to the Fed looking to cut rates, and therefore, possibly drive the USD a little lower.  It’s a long shot, but if used in conjunction with other levers, could have some minor effect.

Threats of tariffs and/or trade negotiations could also be used, and Trump believes he can use the threat of tariffs to force other nations to make concessions with their currencies.

Trump was quoted by Businessweek in saying “Man, is it good for negotiation. I’ve had countries that were potentially extremely hostile coming to me and say, ‘Sir, please stop with the tariffs. Stop.’ They would do anything,”.

He said the threat of tariffs was effective against Japan and China and can point to some success with this tactic. During Trump’s time in office, the dollar declined 5.5% against the yuan.

Now, whether he can influence the USD is yet to be seen.  He can certainly point to the decline of the USD against the Yuan from his first term as evidence he can “get the job done” but most of his other polices are seen to be more inflationary.  Tax cuts, more government spending, and tariffs on imports are all likely to add to inflation, and subsequently interest rates and therefore more likely to inflate the value of the dollar rather than reducing it.

Overall, there is little in policy for either party that is going to have a massive impact on the housing market over the next 4 years.  If the first home buyers grant, by any other name, is implemented, this could put additional pressure on an already lower inventory market, and give some fuel to a hotter residential market, combined with the likelihood of lower interest rates over the next 18 months.  These are the main two points I will be watching closely.

In terms of currencies, a country’s currency will rise and fall with the strength of its economy in general, relative to its peers so if either party’s goal is to strengthen the economy it will be difficult to devalue the dollar relative to other currencies.

While political unrest can certainly quieten markets down, this generally does not last long.  For us here as foreign investors, it is ‘steady as she goes’ with looming rate cuts expected to buoy a relatively stagnant market, but strong market growth is NOT a strategy we deploy for the U.S. market whose strengths in cashflow and the ability to generate manufactured growth far outweigh any market growth strategies that we cannot control.  We have one of the best growth markets right here in Australia, but for cashflow and manufactured growth strategies, the U.S. is extremely strong and looks to remain that way for time to come.

If your keen to look at implementing cashflow strategies in the U.S. give us a call, we would love to assist.

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Investing Exit Strategy – When top Flip and When to Hold?

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I get asked all the time by investors when looking at property deal feasibility reports as to what is the best exit strategy for US property – flip it (resell) or hold it (rent)? Often though, the answer is not as black and white. One of the most important things I look for in any and every deal we do, or recommend to an investor, is to have TWO exit strategies. Have a plan B. This can be one of the most important parts of analysing any deal. We always want to have the preferred option, but have a backup in case circumstances change.

Now, there are a number of factors you need to take into account when looking at which exit strategy is best for any particular property deal. No one particular point is the most important, I generally look at all aspects and rate them, seeing which way a particular deal leans towards (flip or rental). Particular areas to look at are:

1. ROI – Rental return vs Flip profit

I think always the first thing we should always look at is what is the estimated return we will get from renting the property or selling the property. We also need to take into account when selling costs such as realtor commissions, taxes applicable, title company charges and settlement/closing costs. If a particular property is going to give a high rate of rental return (i.e. over 10% net after costs) then it could be a great addition to your portfolio to keep. If on the other hand, the rental return is down around the 6-7% but the profit from sale (again look at net after costs noted above) is over the 20-25% range, then it’s possible the best strategy may be to flip and invest the money into another deal.

2. Region Demographics & Market Forces

Demographics and market forces of a particular region or neighbourhood can play a role in what is the best exit or outcome for a particular deal as well. Certain areas may be heavily owner occupier properties, often giving higher property prices as it may be a popular area people want to live. This may lean a particular deal towards looking to do a better level or renovation/rehab and plan to flip the property. Other areas might be very strong rental areas; very low vacancy and high rental returns compared to the price of the properties might tend a particular deal to be a good rental. If you have properties in rougher or less affluent areas of a city, it may be best to renovate and sell, with the demographics of the area not conducive to getting good solid tenants. Don’t forget also to check sale prices in the region over the past 3-6 months, to see if the area is getting any capital growth. Maybe a boom in infrastructure or businesses is seeing prices rising, so again, it can lean a deal towards rental, to hold onto while the prices in the area appreciate.

3. Affordability or Price/Cost of the Deal

How much capital you have in the deal (or would have if you were to purchase) and the cost of funding (if applicable) is also a critical factor to look at. If the property cost is relatively affordable then it may be good to hold the property and look to purchase another for flip or hold. If on the other hand, a particular deal will tie up all your available capital, and if returns are such that you are unable to continue investing (stuck so to speak), then getting a chuck profit from sale, to enable you to continue to invest in your strategy might be the best option

4. Type of Property

The type of property you have or are looking at can also play a big part in the favourable exit strategy for the deal. Large 4-5 bedroom properties with 2-3 bathrooms possibly on large blocks, are not as generally favoured by renters, and/or don’t really get the rental return they deserve with rental demand more for the 2-3BR /1BA homes or apartments. Larger two storey properties though, could look to be turned into multi-family residences (MFR) with possibly a 2 BR unit upstairs and 2 BR unit downstairs depending on the layout. This can significantly increase the rental return a property can give. Occasionally, property layouts could even support 3 separate units, vastly increasing return – these would lean strongly to rentals.

Often it is not just one of the these points above that will decide for you the best option for your deal/property. It may be a combination of 2-3 points that gives you that Plan A, but you should always have ready that Plan B in case circumstances change. On the other hand, one particular point might be so strong in one direction, that it is easy to see the best outcome for the deal.

If your looking at starting or adding to your investment portfolio and would like to discuss options and strategies, book a call with us today!

Investing in US Apartments – A Good Strategy?

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In my opinion, investing in Apartments in the US has always been a good strategy for cashflow and even growth. Apartments are almost a hybrid of residential and commercial real estate. In the US, anything over 4 apartments in a building is classified as a commercial investment, but still driven by residential trends and demographics. On the other hand growth or appreciation of apartment buildings can be more linked to the Net Operating Income (NOI) of the building, more like the CAP rate of a commercial property. As much as capital growth in residential, particularly in a large number of US markets is not something you bank on, in apartment buildings, it can be something you have more control over.

For instance, if the rental returns in an area are rising or if you are able to rehab/renovate some units to increase the rental return, then the overall value of the apartment building will also increase, regardless of whether residential property is softening in the market or not. Its kind of having the best of both worlds in one investment. If the market in a region is booming and more and more people are buying homes, then house prices appreciate, and often apartments can “rise with the flow”. On the other hand, if markets are softening, becoming more of a buyers market than a sellers market, people get nervous, start selling and renting for a while. Rents can often increase as the demand for rentals rise, which can then increase the NOI of the building and hence, its value. Win – Win!

Now, there is a number of factors though, you need to take into account when looking at apartment buildings as an investment:

1. Management

Firstly, there is much more management involved. Apartment buildings are not necessarily for the “passive” investors, or those that want to sit, and forget their portfolios and just let them be. With the higher number of tenants involved in one building there is always a lot more management needed, even if you have a property manager in place.

2. Vacancy

You always need to factor in a vacancy rate for your portfolio, apartments particularly. Now one of the major advantages of apartments over houses, is that if you own 1 house and the tenant leaves, you now have a 100% vacancy rate on your portfolio until you are able to tenant the property again. If you have a one 7-apartment building for instance and one tenant leaves, that’s only a 14% vacancy rate. But understand, there is a good chance, particularly if you have a couple of apartment blocks that there will always be a couple of units vacant at any one time.

3. Affordability

Apartments can be much more expensive to purchase upfront, and costs such as property management, maintenance, insurance etc can also be higher as these are often treated as commercial investments if 4+ units. Need to ensure you factor in these costs when determining your returns and cash flow. Which brings me to the last point…

4. Returns

Returns on apartments can often be higher than single family or multi-family homes. Given the higher management and increased costs, the returns though can be better. If a particular area is giving 7-8% ROI in Single Family Residences (SFR’s) you may find apartment buildings can be 12%+, sometimes even higher!

If you are looking at a passive rental portfolio, and not afraid of the increase management and costs/affordability of apartment buildings, they can make an excellent addition to a portfolio. We have clients realising returns of over 17% on some apartment buildings and have seen EBIT’s (earnings before Interest and Tax) of over 25% possible – making sure to factor in increases in costs, maintenance and a vacancy rate.

If this is something you are interested in adding to your portfolio, book a call with us today!

Whats in Store for the US Market in 2019?

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Looking back at 2018, we experienced a year of high expectations that largely did not disappoint. Markets continued to stabilise, economic promise grew along with property values, and the revitalisation of cities nationwide provided opportunities and population growth.

It was a good year for investors. But now, we have to ask ourselves: what does 2019 have in store for U.S. real estate? What national trends will shape the markets on the whole, and what do we have to look forward to…or keep an eye on?

This is what you need to know as we look ahead for 2019.

Top Predictions for the U.S. Real Estate Market in 2019

Balance is the word.

As we consider factors like growing inventory and the slowing of appreciation and asking prices, the word that comes to mind is balance. In 2019, we expect to see the return of more traditional housing markets that offer less frenzied, more evenly paced opportunities over the extreme environments we have seen booming in the last decade. These will be the exception. Savvy negotiators may be able to snag a great deal, and some markets are still on that rise – Detroit for example.

If buyers start to slow down, they will rent while waiting for the market conditions to change, thereby strengthening the rental market.

What’s the deal with interest rates?

Interest rates were at their lowest recent point post-recession in 2008. The federal government controls short-term interest rates, while the market dictates long-term rates. When the government changes the rates at which banks are allowed to borrow money, it can take several years to shift the economy on the whole, while the trickle-down affects the average consumer, where it has an almost immediate impact on things like credit cards, student loans, and yes…mortgages.

Interest rates are moving from a decade of being historically low to 5 and 6 percent as we enter 2019. Economists and real estate experts alike are concerned that this could hinder consumer spending power and make the burden of mortgages greater. In regards to housing, it may deter buyers even as housing prices are expected to fall. But most of this is what we would call “Sticker Shock” Its simply that interest rates have been at record lows for so long people lose sight of the fact that 5-6% is still quite cheap (remember the 15-20% of the 80’s and 90’s!)

Good news too though is that if buyers start to slow, the will rent for the mean time while biding time for the market to change, strengthening the rental market for us Aussie investors!

What about the trade war issue?

The global economy has always been a factor in the health of our markets, real estate included. The issue here is that tariffs and trade wars on a broad, global scale, may cause issues in the US domestic economic markets. Economists worry that cold economic relations with allies and a possible trade war with China could cause economic instability by 2020.

However, none of these things are guaranteed or set in stone.

Despite these predictions, good and bad, they are just that: predictions. The best we can do is to plan for the long-term and choose sustainable, smart investments that help you secure your best financial future.