The Genie prognosticates…
In the aftermath of the Presidential election, so much has been commented about on television and written about in articles throughout the world about the proverbial fiscal cliff we’re about to hit here in this country. And property investors need to develop alternate plans as a means of grappling with this uncertainty. You’ll want to be prepared with several real estate investment strategies in place as we approach the end of this year.
At the time of this writing, it appears to be a 50-50 coin toss as to which way Congress is going to go regarding avoiding the fiscal cliff. With all the rhetoric coming out of Washington post-election about how conciliatory each side is going to be, it’s hard to take both parties seriously, and hard to believe that some compromise will come to fruition.
So my gut feel is some form of agreement will not occur by January 1st. It is possible all involved will come to an agreement on a further extension of time beyond January 1st for a short period to allow for more discussion on the matter, but buying time only prolongs the pain. We live in a time of extremes in Congress, when both political parties here in this country seem unable or unwilling to reach agreements. The concept of compromise is all but gone. This has been demonstrated numerous times over the past several years. So with recent history at our backs, it’s hard not to be pessimistic about a solution be worked out by the end of the year.
The sequestration effect
Without a new deal struck, and sequestration taking effect, property investors need to create a proper plan for this horrible eventuality. In this scenario, let’s see what will happen to your property investments in the short-term and long-term, then determine some proper real estate investment strategies moving forward.
Sequestration calls for deep cuts in government spending to all sectors, most noticeably in defense spending. These cuts will take place over the next ten years. Job creation will be severely affected, and so the overall drag on the economy will be a major hit.
In addition, there will be repercussions seen across the world as Europe still struggles to climb out of its recession, and China is just starting one of their own. The psychological effect on the entire U.S. economy will be severe over the next year should sequestration occur. People, afraid for their jobs and having very little job safety, combined with little job creation in this country, will ratchet up saving for the proverbial rainy day. That means they will stop buying frivolous goods and services.
Effects on residential and commercial markets
With that, the small brief expansion of the economy that we saw this year will come to a grinding halt. The residential real estate market slowdown (and any appreciation that occurred over the past year) will come to a halt. Commercial property will also be adversely affected – probably more so than residential markets, as businesses struggle to either stay put, or end up contracting.
With very little expansion by the business sector, office vacancy rates will increase. So too vacancy rates in retail outlets, shopping centers and malls. Look for overall contraction in the commercial real estate investment market over the next year if sequestration occurs.
However, residential rental real estate, at least for property investors, should remain strong. House prices will at best struggle to stay level, and they will most probably contract somewhat as the sequestration puts an overall drag on the economy. However, as we’ve seen over the last several years, as the economy got worse, rental property cash flows went up.
The reason was simple: buyers sat on the sidelines, preferring to rent instead of purchase. The increased demand for rentals increased the average rents in almost all areas of the United States over the last two years. This trend would absolutely continue with sequestration, as the economy continued to contract. So if you’re already holding rental property, you would want to continue holding it for the short term. You could expect cash flows to increase in the likelihood of this scenario.
In addition, if sequestration does take effect, property investing for the mid-to long-term will require more patience and fortitude. For one, you’ll definitely want to plan for longer-term acquisitions and hold onto your existing properties longer. You will not be able to rely on property appreciation to provide much in the way of returns on investment. Instead you’ll look for cash flow (and strictly cash flow) on your properties. In addition, flipping properties will be much more difficult as more people stay on the sidelines because they lack jobs or are fearful of losing their jobs.
If a compromise is reached
But what if Congress is able to reach some sort of compromise by the end of the year? What will the overall economic landscape look like then, how will it affect the property investor, and what real estate investment strategies should youy implement in this case? Well, for one, financial markets love stability. So if a deal is struck, even one with higher tax rates, Wall Street will invariably fall in line, calm down and stabilize as markets become less volatile. This will then have a ripple effect going overseas as European markets are subdued by the lack of volatility in the US market.
In the short term, things may get jumpy in the first quarter of the new year if an agreement is reached, but for the remainder of 2013 however, things should settle down and remain pretty much as they were this past year. That means: slow growth overall. Especially in residential real estate, and certainly in commercial real estate niche markets.
Increasing market valuations
Overall market values should slowly creep up over the course of the next year given this compromise scenario, and you can look for greater returns on your investment when you look to sell. Keep in mind that the rental market will soon be peaking as the economy stabilizes. So the best thing to do in a compromise scenario is try to quickly acquire more rental property before prices spike next year. Also, assuming the fiscal cliff is averted by the end of the year, look to possibly sell off some of your poor performing investment properties by mid-next year.
Mid to long term planning
In addition, mid-to long-term planning for property investors should include thinking about how to weed out poor performing properties and at the same time acquire better properties (even though appreciation will make it more expensive for you to do so). With the fiscal cliff averted, it will signal not just more stability in the financial markets, as well as an improvement in the overall U.S. economy, but an overall optimism from U.S. residents over what Congress and the president can accomplish together. This feeling of stability should translate into a very positive psychological feeling for most home buyers in this country. More home buyers will come off the sidelines over the next several years as this feeling pervades the economy. Look for appreciation to continue in the mid-to long-term (5 to 10 years).
Plan for both scenarios
So whether sequestration or compromise occurs, property investors will need to plan now for one of the two scenarios occuring, by creating several real estate investment strategies. With sequestration, make preparations for quick acquisitions and then the holding of rental property for the long-term. In the case of a compromise being worked out and disaster being averted by the end of this year, look to sell off some of your weaker properties and then acquire better properties for long-term growth next year. Also in this positive scenario, if you’re a property flipper, expect a very hot economy over the next few years. Either way, you’ll want to properly prepare as any good property investor should.
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