The boom in housing prices has caused many economists, industry professionals, and investors to question whether the next market collapse is looming. Strong appreciation has exceeded pre-recession values, creating concerns that soaring prices and limited inventories could lead to a rapid market decline in the next few years. Are the same market factors present today, and how with they affect the future of real estate investment?
10 Years Later. Is the Bubble About to Burst Again?
The real estate economy has recovered significantly in the last 10 years since the market crash. While some in the industry are anticipating an impending decline due to the rapid expansion of the market and extremely high rates of appreciation in urban markets, it is unlikely that we will face another crash of anywhere near the same magnitude. Many factors contributed to the recession including poor regulatory measures in the mortgage and finance industries, inflated housing values, and overly optimistic speculation regarding continued housing price gains. Opportunistic and unethical conduct by many in the real estate finance industry also led to the excessive price increases and availability of credit.
Today, these factors are not present. Strong regulation as the result of the Dodd-Frank Consumer Protection Act and other related legislation has tempered the growth of the market and limited the availability of credit. Rules that limit the amount that borrowers can finance relative to their incomes restrict loan officers and underwriters from lending to unqualified borrowers. Strict underwriting requirements have stabilized the housing market and significantly decreased the size and viability of the subprime market. The stable growth of industry and labor markets across the country and low unemployment rates are contributing to the strength and resilience of the real estate investment industry.
What Does a Crash Mean for Real Estate Investment?
If another recession does occur in the next few years, you don’t need to be too alarmed as a real estate investor. The real estate investment business is very resilient and often the best opportunities emerge during down cycles in the economy. When the market drops, property owners of all types, including residential, commercial, and business prospects are consistently more willing to sell their properties at a discount. The decline in demand for properties by less savvy retail buyers and investors results in a buyer’s market. As inventories increase, aggressive investors that stick to their investment criteria can make acquisitions that will provide wide margins.
Projects purchased well below retail value provide sufficient margins to allow room to account for excess renovation costs, continuing market declines, and other budgetary issues. Buy and hold strategies are particularly effective during these downturns. If the investor is willing to invest in debt or equity over the long-term, they can reap tremendous profits when the economy recovers. Recessions make fortunes for prepared real estate investors. Many notable investors that started to build their portfolios in the late 2000s were able to expand their holdings from less than 20 doors, to well into the hundreds, despite suffering significant losses during the height of the recession.
The Shift Toward Shared Risk in Real Estate Investment
An incidental result of the recent recession is the robust growth of the online real estate investment model. Real estate investors are now much more conscious of the risk profile of their investments and give more support to crowdfunding platforms that reduce the potential for loss. Crowdfunding allows smaller investments in numerous projects across geographic markets to improve portfolio diversification. When investors pool their experience and resources to capture larger market opportunities, it reduces overall risk for investors that participate in the project and fund. Collaboration in investment is a tremendous benefit that creates teams equipped to better evaluate investment opportunities and generate sufficient funds to fully capitalize on projects.
Inadequate funding and inexperienced management contribute significantly to the failure of startup and established projects. Crowdfunding provides an alternative to the mainstay conventional lending institutions that traditionally dominated real estate investment finance. The aversion to risk has not been the only factor that contributed to the expansion of crowdfunding sources. As opposed to independent private lending and investment in projects, pooled funding allows access to projects of much greater scale than present significantly greater long-term returns to investors.
Renewed Tax Advantages of Real Estate Investment
The scale of projects available to investors through crowdsourced investments provide enhanced stability and potential for growth, in addition to tax benefits due to favorable structures. The Tax Cuts and Jobs Act of 2017 is another factor that promises support for real estate investment in the coming years. Real estate investors can expect reduced tax liability due to increased deduction amounts and favorable tax treatment of real estate gains and business interest. The Act has additionally renewed the 1031 tax-deferred exchange program, with the exception of personal property exchanges.
Real Estate Investment Growth in Any Market
Stable economic growth, excellent housing demand, healthy labor markets, and significant tax benefits contribute to the viability of investment in real estate through crowdfunding. The number of options available to you with the expansion of the crowdfunding business requires you to ask many questions to determine how each calculates the risk profile of investments, and structures real estate investment opportunities to provide the highest and most stable long-term returns. When you’re ready to move forward in partnering with a crowdfunding platform, choose a firm that has a proven track record of generating returns for investors through carefully selected and vetted projects.