With a cooling housing market, it’s a good time to look at factors that may influence housing in the future and how these trends could impact residential real estate investors.
Here are four things that real estate investors will want to keep tabs on, with a nod here to John Burns and Chris Porter, authors of “Big Shifts Ahead, Demographic Clarity for Businesses,” who address these four influencers in their book:
- Changing governmental policy
- Economic growth
- New technologies
- Shifts in societal acceptability
Governmental policy: There could be a wide variety of policy changes at any time that could affect real estate investors, but tax policy is a key issue. No one has filed a tax return yet since the Tax Cuts & Jobs Act (TCJA) that went into effect January 1 but that will begin shortly. Like any tax law, the interpretation should be left up to the tax experts. Hopefully, most real estate investors will have already connected with their accountant, attorney, or other tax professional to understand how to benefit from new pass-through deductions and accelerated depreciation rules.
However, real estate investors should be paying extra attention to state and local tax rules. The inability for high-income earners to deduct local and state income taxes may come as an unpleasant surprise to both the taxpayer and even state, should these high-income earners decide to move to a state without local income taxes.
In addition, the conversation around real estate tax benefits at all levels persists. From mortgage interest tax deductions and 1031 rules at the federal level to state-level property tax rules to local sales taxes, government entities at all levels are on the prowl to plug budget deficits. Real estate continues to be a prime target to fill those gaps.
Economy policy: The economy affects each person differently depending on what stage of life they are in. It’s also something that individuals don’t have much individual control over. Some are just recovering from Great Recession losses and now ominous headlines are predicting another market correction. In 2019, political uncertainty will exacerbate economic concerns so expect a wild ride.
Professional real estate investors know to avoid buying into negative headlines and remain focused on the data. Watching seasonal trends, inventory by price segment, inventory mix, construction costs and making sensible offers is the name of the game. While investors have little control over politicians and economic policies, they certainly have control over making great offers, preferably on deals with more than one exit strategy.
New technologies: It’s an exciting time for new technologies. Everyone is talking about the self-driving car and how that could impact both commercial and residential real estate. For the real estate investor, smart home technology is further along on the development spectrum than autonomous vehicles. Luckily, many of these products are both relatively inexpensive and easy to install. While investors may stay clear of making technology choices for buyers and tenants, there is a case for making properties tech-ready so the buyer or tenant can install their favorite devices on their own. Simple improvements like thoughtful plug placement or a centrally located router may be all that’s needed.
However, expect “accessible homes” to take on new meaning in the coming years as real estate developers and investors alike are forced to consider the growing smart home robotics category which includes vacuums and mobile assistant robots. Unlike IoT smart devices like speakers, thermostats, light bulbs and connected appliances, the robotics category may require design changes. Softbank’s Pepper robot, for instance, warns owners that Pepper needs flat and bare (no rug or thick carpet) floors to avoid falling. Steps and stairs are also a no-go for robots. When building or renovating spaces, investors might want to plan ahead of this growing trend now by opening floor plans, eliminating steps and using floor finishes conducive to wheels. Expect to see “robot friendly” in your MLS listings soon.
Societal shifts: These shifts can be hard to pinpoint in terms of the full impacts on housing demand and can emerge over long periods of time. An example would be people getting married after they have kids instead of before. Or, multi-generational housing in which older parents are moving in with their children to lower living expenses for the entire family. Homeownership trends point to younger generations still valuing homeownership, they just may be taking longer to get there.
Real estate investors should pay attention to trends in micro-living, co-living and short-term rentals in 2019. Don’t think of these as this cycle’s condo-hotel investment and don’t assume these trends apply to only Millenials. These are market-driven categories that can make investors extra income, especially in urban markets where cash flow is hard to come by and affordability is a real issue. Investors can model larger players in the field like Dwell, Ollie and coliving. Landlords will need to get comfortable creating a lifestyle experience instead of shelter to play the co-living game.
Co-living is an important trend because investors should expect issues with short-term rentals in 2019. Many hot US markets are regulating vacation rentals because of affordable housing shortages and homelessness concerns. Additional permitting costs, limits on rental contracts and owner-occupied rules are just a few of the snags investors will increasingly experience. If you get stuck, co-living may be a solution.
Also, watch states like California as they consider yet another round of legislation aimed at easing ordinances around accessible dwelling units (ADUs). This state-driven push for affordable housing by way of ADUs (a.k.a granny flats, pool homes, backyard cottages, or in-law suites) and converted garages (Junior ADUs) has local governments none too pleased. Since the regulation is specifically aimed at solving affordable housing, expect more cities to lock down owner-occupied requirements and make vacation rentals more difficult. For now, ADUs are a better play for landlords looking to maximize cash flow on long-term rentals. Flippers will likely face issues with appraisals and financing while the market takes hold.
Adding to the excitement of ADUs and co-living is 3D printed homes which are rumored to hit select US markets in 2019. States like California may help push 3D printed homes into the mainstream to deal with affordable housing and to help fire-stricken areas. If a 600 square foot unit can be printed in the backyard for $10,000 and fully finished in under one month, there will be plenty of real estate investors and consumers alike that will be interested. Details on where these units fall within existing building code and the political fallout from disrupting the construction industry will be interesting to follow in 2019.
Real estate investors can get caught in a trap of not thinking much beyond their next flip or their next rental acquisition. However, as we close out 2018 and look forward to a new year, it’s a good time to think bigger — even beyond just a one-year or five-year period to gain a better understanding of long-term demographic shifts and investment opportunities that could shape your portfolio well into the future.