Many real estate investors are going to want to stay away from cities with rising prices this coming year, where they are more likely to end up with the bag than strike it rich.
You can never say when a real estate bubble will pop – I hope it will not happen now – but caution is the order of the day in places like San Francisco, Seattle, Miami and Denver. When you own land and want to sell in these places, don’t wait until the demand peaks. And if you’re looking for a good place to put your money in, consider the 20 markets I’m mentioning here instead.
While boasting about how good the economy is doing, in eight years it has been creating employment at the lowest rate. And given the tech boom, most new jobs are at the lower end of the pay scale, where inflation-adjusted wages have not risen for the average worker over the last ten years.
This means that we will continue to have strong demand for rentals – single-family homes and condos – but not at the high end of rents. And it means you shouldn’t invest in markets that are already overpriced – as time passes, there simply won’t be enough tenants for expensive assets.
In the 20 U.S.A. markets I’m mentioning here, you should focus on properties where rent is not more than 25 percent above average rent; that’s the Target Rent Range as described at Local Market Monitor, where you’ll find the highest concentration of tenants, a very important factor if and when a recession strikes.
There are some positive things going for these 20 markets. First of all, local economy does well. In the past year, jobs have risen at or above the national average of 1.5 percent. In areas such as Cleveland (who would have thought?), Silver Spring, and Fort Lauderdale, growth rates are now much higher than they were just six months ago.
Second, housing demand has been strong. In the past year, home prices rose between 5 and 10 percent, not too low, not too high. Home prices are a market proxy for houses and rental properties alike.
And third, there’s no overpricing in those markets. Look at how home prices relate to the “money” level, a metric built almost 30 years ago to recognize bubbles reliably ahead of time. Orlando, Fort Lauderdale, Portland and San Diego are edging into overpriced territory, but not yet significantly, with rates 20 percent above the “income” price. And other markets have plenty of space to raise prices until competition and supply are out of control.
Look for properties in both of these markets that will place you in the Target Rent Range, where the tenants are. (In Orlando that’s between $1,208 and $1,510 a month.) You’re spending partly on a defensive basis. Then look for properties near hospitals, government offices, shopping centers, colleges (staff, not students).
Your best approach, aside from such generalizations, will be different from market to market. In Cleveland, Indianapolis, Memphis, Kansas City and Cincinnati, the low home prices allow you to purchase big single-family homes and divide them into multiple rental units. On the other hand, the high prices in Silver Spring, Boston, San Diego and Washington make investment in apartments a safer option.
With prices climbing rapidly, in Orlando, Jacksonville, Fort Worth, Atlanta and Nashville, you’ll want to act quickly.
Overall, high-growth markets are better bets than those with lower growth, but a steady growth rate is equally critical in the long run. And there are specific vulnerabilities that should be considered. Orlando depends on tourism, Charlotte on banking, Miami on Fort Lauderdale, Dallas on Fort Worth, FedEx’s is the main draw in Memphis, Silver Spring and Washington on government employment and government contractors. Cleveland and Cincinnati continue to have a strong manufacturing industry.
I wouldn’t have any problem investing in any of those markets (although I’m not an investor), but overlooked places like Cleveland, Philadelphia and Kansas City appeal to me the most because you’re more likely to find properties in very desirable areas, which essentially is what counts for a good investment.
Investing in real estate – and especially in rentals – would be a smart move in 2019, even with interest rates inching. But it’s a safe time to stay away from the glamorous markets and invest in stability for the long term. This year, closely watch the markets.