By R.W. Bowlin
With any investment the long-term question is not whether to sell or to hold, but when to sell. In order to make the best sell or hold decision, there are many factors investment property owners must consider from both a market and personal perspective. In last month’s “Owner’s Advocate” article, we presented conditions that support a decision to sell properties in today’s market. This month, we will present the other side of the coin - providing reasons why an owner might opt to hold on to their properties.
Limited Inventory & Land Constraints – Seattle City Council’s legislation has impacted not only existing rental housing owners, but also developers who are in the business of building new rental and multi-family properties. The Council’s Housing Affordability and Livability Agenda (“HALA”) has limited development of new inventory due to the additional costs associated with building multi-family units. Coupled with the geographic constraints inherent to Seattle (read: Puget Sound as well as our beloved lakes and mountains) new inventory is both difficult and expensive to build. Vacancy below 5% is considered a tight market. With Seattle reporting 4.3%, more construction is required to keep pace with the migration of people into Seattle.
Investment in Infrastructure – The Puget Sound’s push for expanded public transit could serve to benefit property owners in two ways. First, an overall reduction of congestion will make Seattle more livable, benefiting all properties but especially those located beyond walking distance of major employers. Second, the emphasis on transit-oriented development (“TOD”) will establish hubs of restaurants, retail and services outside the city’s traditional restaurant and retail centers. These satellite hubs will provide key services and amenities to neighborhoods previously viewed purely as commuter neighborhoods.
Historic Home Values – Home values throughout the Puget Sound continue to rise, with the greatest increases in areas such as Beacon Hill, West Seattle, Georgetown and Shoreline - areas that were previously considered to be “affordable”. The barriers to entry for first time home-buyers have never been higher. As a result, individuals who would consider buying are forced to continue renting, driving further demand for rental units.
Real Estate as a Hedge Against Inflation – We have experienced unprecedented low inflation over the past 10 years, however that trend appears to be changing. The inflation rate in May 2018 was the highest it has been since February 2012 at 2.8% - well below the 50-year average of 4.1% as well as the Federal Reserve’s target rate of 3%. If inflation continues its correction and rises from its historically low levels, investment real estate with annual lease terms becomes a particularly attractive asset class. Leases can be adjusted yearly to keep up with inflation, thus helping to preserve the property’s value.
Financing Flexibility – Similar to inflation, interest rates are also at historic lows. For owners who are not averse to leverage, now presents a particularly unique time to access equity in your property and lock in debt at low rates. This financing flexibility is one of the best features of direct ownership of real estate and can fund an opportunistic purchase to expand your real estate portfolio.
Owners have watched the opening quarters of 2018 closely, uncertain of the effects of tax reform, increasing interest rates (albeit from rock-bottom rates), and political turbulence’s impact on the local economy. Halfway through the year, home prices continue to stay high, as do investment property valuations. While we may not see the same growth experienced over the past 5 years in the coming years and the market outlook is not nearly as optimistic as it was even 6 months ago, there are many reasons to stay bullish on Seattle’s prospects in the years ahead.
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.