By R.W. Bowlin
Successful real estate investors pay close attention to risk. Risk can be defined as the measure of uncertainty that an investor must take in order to realize a gain from an investment. Without risk, there is no opportunity for gain; however excessive risk, without a greater opportunity for gain, can tip the scales on an investment. Most investors are good at assessing risk when evaluating a transaction. The tricky part about risk is that it is fluid. All real estate ownership presents risk and an existing investment’s risk profile can change quickly. Staying on top of risk assessment is crucial to preserving your appreciation and protecting your returns. The following is a sample of the particularly relevant risks many of our multi-family clients are monitoring in the current market environment:
All owners of rental property, whether single or multi-family, should be aware of and monitoring the regulatory risk present in the Puget Sound. Seattle tends to lead the charge in terms of “progressive legislation,” but make no mistake, other municipalities are following their lead (e.g. the $15 minimum wage roll-out). As RHA reported in their May 2017 article entitled “New Burdens Placed on Landlords” the city of Seattle is pursuing increasingly aggressive policy as it relates to tenant screening – new policy in addition to the “First in Time” ordinance passed by the Seattle City Council effective January 1, 2017. Include the proposed city income tax and capital gains tax in the conversation and suddenly Seattle becomes a difficult city to be a landlord.
Interest Rate Risk
With interest rates currently sitting slightly above all-time lows, there is little direction for rates to move but up. Chairwoman of the Federal Reserve, Janet Yellen, has already signaled that there may very well be two additional interest rate increases before the end of 2017. Economics suggest that increased financing costs relate directly to declines in real estate values, as investors require higher returns within real estate or will migrate their dollars to different asset classes if they are unable to find them within real estate. Some suggest that the economic growth in the Puget Sound will drive rents up even further, thus overshadowing increases in financing costs. Projected economic growth leads us to our next risk.
Historically, real estate market cycles last an average of 18 years peak to peak. Depending on your source, property values in the Puget Sound bottomed out between 2010-2012 and the region has enjoyed sustained economic growth for the past 5 years. Due largely to the technology talent, relative affordability and livability of Seattle compared to that of San Francisco – dozens of technology firms have opened engineering offices in Seattle and, in the process, lifted the economy as a whole. Consecutive years in the Top 5 of U.S. Cities Population Growth has put pressure on our housing market and driven both rents and prices to unprecedented levels. Furthermore, unemployment is at all-time lows for the State of Washington. Real estate owners have benefited tremendously from the market conditions throughout the last 5-8 years. However, both the U.S. and local economies run in cycles and, while we do not know when, an eventual pull-back is inevitable.
Simply put, life happens. Sometimes life happens in a methodical and intentional way, sometimes it is unexpected and jarring. At a certain point, owners ought to ask themselves whether active management of their property is necessary or should be continued. How much is enough and could your time be spent in a more enjoyable manner - say with your children, grandchildren, or doing the activities you love? Furthermore, consideration of plausible life events is a must, especially as owners grow older. If you were to pass or become disabled, who would manage your real estate holdings? Are the properties in a condition in which your significant other or children could manage them? Do they have the time, expertise or desire to manage the properties? Consideration of these factors is critical for both quality of life and responsible estate planning.
In summary, regular monitoring of risk is imperative when protecting returns. At Real Estate Transition Solutions, we are strong proponents of investing in real estate as an asset class due to the lack of correlation with the capital markets and unmatched tax benefits. However, direct property ownership in a concentrated market creates heightened risk which may over time not be the right fit for you as an investor. Do not hesitate to reach out to us to discuss other real estate options that may be available to you as you look to reduce your risk and protect your returns.
Roger W. Bowlin, President of Real Estate Transition Solutions, LLC, provides exit strategy analysis, execution, income and equity replacement options for investment property owners. If you have questions relating to your investment property ownership, please email him at: RWBowlin@RE-Transition.com or call (206) 755-7068.