Hedge Your Real Estate Investments
Real estate has been experiencing some phenomenal returns over the past several years. Even the stock market has been a long running bull market. Several factors play into this. Low interest rates as well as low inventory have benefited the real estate market.
Anyone who has studied markets understand that is it certainly cyclical and understanding where we are in the cycle is an educated guess by some at best.
It seems that investors are getting comfortable with higher risk and this long running prosperity. However, I would caution investors and “would be” investors to be aware of the eventual real estate market downturn. Look for investments that are not too sensitive to downturns. If you have been looking for investment opportunities, you no doubt have found it a bit harder to find the deals with high cap rates like there were a short few years ago.
When 7 or 8 cap rates were more common in the past, investors are getting more comfortable with cap rates of 3, 4 or 5. The high returns are certainly changing and becoming more moderate. As a result, some investors are willing to take more and more risks to keep their returns high but this could be dangerous.
The Good News
The economy is generally strong and growing at a nice rate. It’s a long recovery that has been one of the best in recent history. The current US administration is pro business which spreads confidence among companies, thus resulting in increase job creation and capital investments. The real estate fundamentals seem to be solid and growing stronger.
The Bad News
Interest rates continue to rise slowly and will probably continue to do so. Cap rates are low and most all real estate classes have seen price levels exceeded. When looking at past cycles, often times these are the same indicators that were in place before a downturn in the real estate market.
Invest For The Long Haul
Investors should use caution and not just invest for quick capital gains but rather long and steady growth. Don’t be a speculator who always seem to be trying to time the market cycle. At some point, the music will stop. Stay with the fundamentals that reduce your risk and will provide a nice steady long term growth.
There are many real estate classes that will provide a nice hedge until the cycle corrects itself (which it will). Don’t always follow the investor crowd. Do your own research and make the right decision that’s right for you.