Category: real estate
China responded firmly to the US tariffs, releasing its own list of retaliation tariffs, also worth approximately USD 50 billion. President Trump responded to China’s retaliation by threatening to impose tariffs on a further USD 200 billion of Chinese imports. China in turn threatened to retaliate “forcefully” with “strong countermeasures”. Real estate Investors’ hopes that the US administration’s threats were part of a negotiating strategy that would eventually lead to a deal are now fading, and the risks are rising that the current tit-for-tat game between the US and China might spiral into a full-blown trade war.
This development has its risk. Higher and rising tariffs often mean higher import prices, leading to higher consumer prices. This reduces domestic demand by slowing consumption growth and demand for foreign goods, in turn, depressing the real estate markets. Lower demand implies a deceleration in corporate earnings growth, resulting in a reevaluating of the real estate prices. Furthermore, firms start to adjust and may stop future investment projects. The probability that this may materialize has increased significantly over recent weeks.
With rising uncertainty about the future economic outlook, and hence future corporate earnings, we are reducing our allocation to real estate investments, as the world economy remains able to cope with the current impact of these tariffs on global trade and global economic growth.
As a ballpark estimate, every USD 100 billion of imports affected equates to approximately 0.5% of global trade and accounts for 0.1% of global GDP. With USD 230 billion of US and Chinese imports currently affected, global trade may fall about 1 percentage point short and reduce global GDP growth by around 0.25 percentage points. In addition, a negotiated settlement between the US and China is still on the table and cannot be ruled out. However, trade tensions may have to get worse before they get better: ending the “war” might require evidence that trade actions and rhetoric have costs, i.e. evidence of pain in the markets and the economy, before the two sides are incentivized to change tactics. It therefore appears wise and prudent to reduce risks.
Some of the drags are likely to be temporary, such as the payback from unusually fast growth in the second half of 2017, when the economy in the US economy rose by more than 3%. The adverse weather impacts across the US have taken their temporary toll on economic momentum, but should spur economic growth in the second quarter due to strong pent-up demand.
While the positive effects of the US tax reform should ramp up over the course of this year, clouded business sentiment should prevail due to trade tensions which may prove hard to resolve as well as some tightening in financial conditions.
We have started to see the effects of this trade “War”. The U.S. apartment market’s performance stumbled during the first quarter of 2018. Occupancy backtracked to 94.5 percent in March, down from 95 percent a year earlier, according to real estate technology and analytics firm RealPage, Inc. Annual rent growth cooled to 2.3 percent, the slowest pace of increase since the third quarter of 2010.
“While some loss of apartment market performance momentum is normal when cold weather in much of the country discourages household mobility, the occupancy downturn in early 2018 is pronounced,” said RealPage chief economist Greg Willett. “With so much new supply coming on stream, even a short period of sluggish demand can do some real damage. It’s difficult to maintain pricing power in such a competitive leasing environment.”
Many of us, consider, whether purchasing a multi – family, rental property, is a good fit, in terms of being, a component of one’s investment strategy, and process. Like anything else, a wise consumer researches, and becomes familiar with the possible, pluses, and minuses, and whether it, is for them. It is important to understand, and evaluate, the best, buying – opportunities, whether it should be sold, or if renting, is the best strategy. Should one purchase a new property, or an existing one? With that in mind, this article will attempt to briefly consider, examine, and review, when, and, if, someone should buy, and whether it is the best time to sell, and/ or, if renting, might be the best strategy and approach.
1. Before you buy: There are many considerations, before you should purchase, a multi – family, rental property. Are you going to live in one of the units, or rent the entire property? If you live there, your mortgage interest rate, will be lower, because it will be considered, an owner – occupied property, but, you also, will receive less revenue from rentals. Those doing so, often, look at this, as a way, to use rental revenues, to significantly, reduce one’s own, housing costs. If you are looking at this, as an investment, then, your mortgage interest rate, will be slightly higher, your down – payment, a little more, and you might have to justify the viability of the purchase, based on rentals. A formula, I suggest, is receiving a 6% return, and a positive cash flow. This means, if the property costs $500,000, you must have a rent – roll of a net of $30,000 per year, after deducting real estate taxes, and owner/ landlord paid utilities, and basic maintenance. Therefore, if taxes were $10,000 and anticipated utilities and basic maintenance were an additional $5,000, then you must collect, at least $45,000 per year, in rents. Do this calculation, based on 10 months rents, in order to prepare for potential vacancies, etc. In addition, calculate the rents, and compare them, to your expenses, and proceed, only if this is a positive cash flow, and the 6% return, is achieved.
2. Selling: Is owning the best idea, for you? Are you prepared for the unanticipated expenses, and will you commit to putting aside, a reserve fund, for maintenance, repairs, and renovations? Is the real estate market, the right one, now, to get the best results, from a sale? Consider competition, the local market, mortgage interest rates, and how much, you feel, you need, from any transaction.
3. Renting: Ensure you do, a quality, legal, enforceable, screening process, and seek the finest tenants. There is no guarantee, but pricing correctly, to ensure, you are not the most expensive, often, creates the best opportunities. You must also, either, have the abilities, to do, lots of the repairs, etc, or have qualified service technicians, to prepare for the possibilities, and obstacles.