Million Acres recently ran an article discussing the pros and cons of P2P lending in real estate investing. The advantages listed include easy borrowing, low-interest rates, and low origination and closing fees. These are certainly advantages to investing in real estate through P2P lending platforms, but the article fell short of listing some of the best benefits. One reason may be that it targeted borrowers and left the benefits to lenders untouched.
Let’s discuss a few more benefits to real estate investing through P2P lending, those for borrowers and lenders:
Pros to P2P Lending for Borrowers, Developers, and Real Estate Deal Sponsors
While deal sponsors, borrowers, and real estate developers can often get better deals through real estate P2P lending platforms, not to mention the convenience of applying for loans more easily, there are other benefits to using a P2P lending platform to obtain a loan or to finance a deal. Here are three more benefits:
- Financing a real estate project can be structured as either debt or equity, so flexibility is key. Instead of taking out a loan, which you have to pay back, you can offer equity to your funders in exchange for their capital. In this case, it isn’t P2P lending so much as equity crowdfunding;
- Whether your financing is structured as a loan or debt, you are not tied to a single entity as your funding source. These platforms exist to allow multiple parties, individuals and institutions, finance real estate projects they believe in;
- Another benefit of using a P2P lending platform, or marketplace lending platform, is the speed of delivery for the capital you seek. If you apply for a loan through a bank or traditional lender, the application process could take a couple of weeks, and it could be several more before you see your money. With platforms like Sharestates, you can get access to financing in days.
The Benefits to P2P Lending for Real Estate Investors
Developers and deal sponsors are not the only ones who benefit from P2P lending. Project funders also benefit. Here are three ways investors benefit from using real estate lending platforms:
- Portfolio diversification. If you’re a serious investor, you’re likely invested in several different asset classes. P2P lending can be another asset class to help you diversify your portfolio.
- Multiple deals to choose from. With P2P lending platforms, you can spread your investment across multiple properties on the same platform. You are also not limited to debt or equity capital structures. You can invest in both, further diversifying your portfolio.
- It saves you time. With P2P lending and real estate investing platforms, there’s no need to drive neighborhoods to find properties to invest in. You can find suitable properties at your fingertips already vetted by real estate investing experts. Sharestates’ 34-point underwriting process ensures that deals you are presented with meet the strictest standards including LTV, potential ROI, and deal sponsor experience and track record. That means you can fund more deals in a shorter period of time while increasing your return on investment.
P2P lending, marketplace lending, and real estate equity crowdfunding have been around long enough to have a track record. Investors are earning respectable returns on good properties across a spectrum of choices including deal structure, type of property, and geographical location. We have officially entered a new age of real estate investing.
Last month, a historic home in Ponte Vedra Beach, California went up for sale. The Milam Residence, designed by architect Paul Rudolph and built-in 1961, is a beautiful real estate work of art. The asking price is $4.445 million.
The list price is the least of the problems for the seller. There are people who can afford it. The issue is the home design.
Featuring four bedrooms and four baths, it also has a guest house and a very spacious courtyard, a useful feature for entertaining. The building encompasses more than 10,000 square feet on a 2.11-acre lot and includes an in-ground swimming pool as well as a three-car garage.
While these are all great features, the problem with unique real estate designs like this is that such properties are difficult to sell. Just ask any real estate agent.
The reason this home may not sell quickly is that most home buyers want to be able to design their homes to suit themselves. If a house design is already so unique that adding a homeowner’s personality doesn’t make it any more unique or personable, then it’s likely to attract a lot of eyeballs but not as many wallets. Even architectural beauty is in the eye of the beholder.
Mesa Vista Ranch: $250 Million Worth of Beauty
If you’ve been keeping up with the news, you may have heard that legendary Texas oil tycoon T. Boones Pickens passed away last week, at 91. Pickens was known for his flare. He left behind a beautiful ranch in Pampa, Texas, on the block for $250 million. It’s been listed for almost two years.
The ranch sits on 100 miles of land and features an airport with a 25,000-square-foot hangar, a wedding chapel, 20 lakes, four houses, a 400-square-foot building just for guns, a tennis court, a golf course, and an 11,000-square-foot dog kennel. It’s an amazing piece of property, but will it ever sell?
The jury is still out on the Texas panhandle property, but I suspect it will remain listed for a few more years. There are only a handful of people who can afford a $250 million piece of real estate, to begin with. And, as stated before, the uniqueness of the property itself leaves little room for the next landowner to make it their own.
The Property Listing Reality: What’s Good for Traditional Real Estate is Good for RECF
Selling real estate follows the same general principles whether we’re talking about listing on the MLS or listing through a real estate crowdfunding portal. If a property is going to sell, it’s got to sell on the merits of what is in demand. For that reason, real estate developers should pay attention to the trends in real estate, what home buyers are interested in, and what the market will bear.
By the same token, investors looking for a good deal would do their portfolios a favor by studying the market. What are homebuyers buying? What are developers building? Where is the market headed? These are the questions you should be asking.
A real estate crowdfunding platform that isn’t asking the same questions of the market is probably one that you should steer yourself away from. It’s important that the platform offer deals that are in concert with the supply and demand wave of the market. A home may be beautiful by aesthetic standards, but if it’s too impractical for the average homeowner, it likely isn’t a good investment.
Sam Dogen is a millionaire. What makes him different than other millionaires is the age at which he retired–34. Even more startling than that, he now regrets retiring at such an early age.
One of the reasons he regrets retiring so early is that he could have researched career opportunities in other sectors. As a finance professional, he could have written his ticket anywhere. He could have taken a risk on a new startup or continued climbing the career ladder at Fortune 500 companies. Instead, he retired.
To put things into perspective, Benjamin Franklin retired at age 42. Franklin’s second career was largely public. He parlayed his experience as a publisher into stints as a political mover, diplomat, inventor, scientist, postmaster, and writer. Had real estate crowdfunding existed in colonial America at the time, he might have tried his hand at that too. His interests were quite varied.
As speculative as that is, that’s precisely what Dogen said he should have done instead of retiring. Specifically, he stated, “I could have leveraged my interests in real estate and technology to start a real estate crowdfunding company–or, at the very least, join one.”
Joining one would have been less expensive in the long run and more lucrative in the short term.
Why Real Estate Crowdfunding Makes For Great Passive Income
Real estate crowdfunding has been around for about a decade now. Returns on investments average between 8.5 percent and 19.1 percent. Equity investments tend to offer higher returns, but they’re also riskier. These results are dependent, however, on the types of real estate investments, one puts one’s money into and the platforms where investments are held. While no platform can guarantee results, real estate crowdfunding has proven itself to be a solid asset class.
One of the key benefits to real estate crowdfunding is diversification. If you’re a serious investor, you likely already have capital tied up in certain assets. You might have investments in stocks and bonds, commodities such as gold and silver, and maybe even physical real estate. Among some investors, cryptocurrencies are popular. Real estate crowdfunding offers another asset class to help investors diversify their portfolios, and it can act as a hedge against downturns in the stock and commodities markets. These are some of the reasons investors seek passive income through real estate crowdfunding.
Of course, passive income works for anyone who is currently retired, planning retirement, or simply trying to supplement their income. As passive income, it offers serious private investors solid returns and awesome deal opportunities.
Don’t Retire Yet: There’s Money To Be Made
Just as Benjamin Franklin didn’t put all of his eggs in one basket, I wouldn’t recommend you do that either (and there were fewer baskets for eggs in the 1750s).
When it comes to retirement, it doesn’t happen on its own. Planning is required. Putting one’s money to work in any investment means spending time to perform some due diligence on that investment. In the case of real estate crowdfunding, it also means performing due diligence on the platform. Investors should be prepared to judge each platform by its management team, its underwriting practices, and the quality of its deals. When you decide to invest in real estate through any crowdfunding portal, that money becomes a part of your retirement portfolio, and when it comes time to retire–at whatever age you happen to be at the time–you’ll have one more passive income account to draw upon to live your life of Riley.
Before 1990, if you wanted to invest in real estate someplace other than where you live, it was a huge risk. You either had to spend hundreds or thousands of dollars to travel to the location where you were considering investing just so you could get eyes on the property or you had to trust someone close enough to the property, to be honest with you and email you photographs of the property that you hoped weren’t Photoshopped. Today, long-distance real estate investing isn’t nearly as risky. Here’s why.
7 Practical Reasons Long-Distance Real Estate Investing is a Charm
BiggerPockets podcast co-host David Greene wrote an article detailing seven reasons why long-distance real estate investing isn’t risky. Here’s a summary of his talking points:
1. The Internet makes real estate research easy and accessible. You can do practically all of your due diligence online without proprietary information from professionals involved in the transactions.
2. Finding rent estimates is easy. Greene recommends emailing a landlord of a property listed on Craigslist and asking about the rent. In fact, you can email several landlords in a city you’re interested in investing in to get a good idea of rents in the area or search for aggregate reports published by brokerages that operate in the area.
3. Confirming property condition is a cinch. It’s common practice today to perform video walk-throughs on properties and post them online. Everyone in the industry is doing it.
4. Online reviews allow you to check reputations. Yelp, Google, Yahoo!, and other online review sites keep people honest.
5. You can research real estate agents on Zillow. If you’re trying to sell a property from a distance, you’ll need someone local to show the property to potential buyers. Zillow can make your search for an agent easy.
6. Pictures are posted online to make it easy to see what you’re getting into.
7. You can find your own comps at places like Zillow, Trulia, and Realtor.com. No longer do you have to rely on an agent to run MLS comps. You can perform your own comp research by checking on list prices of similar properties nearby.
Due Diligence: Perform Your Own, Or Trust a Marketplace
None of this is to say that you’re off the hook in performing due diligence. Just because information can be found easily online, doesn’t mean you shouldn’t think like an investor. Your job is to find reasons not to invest in a property, so don’t just accept the rosy picture that listings and online photos show you. Dig a little deeper and get the real scoop.
If you do a lot of investing in one area, even if it’s long-distance, try to find someone you trust in that area who understands your investing criteria and get them to screen the properties for you. That person, called a bird dog, can meet with agents on your behalf, take photos with their smartphone, and perform preliminary research that is biased toward information relevant and important to you as an investor.
Checking comps at popular real estate portals may help you better understand a particular market, but it shouldn’t be used to determine ARV and LTV. You still want to do the math and base it on real, verifiable data.
Finally, the eighth reason long-distance real estate investing isn’t as risky as it used to be is because of online marketplaces like Sharestates vet properties, sellers, borrowers, and property sponsors for you. A platform with solid underwriting and risk assessment procedures help investors find good deals and, in many cases, put their own skin in the game. If you perform your due diligence on the platform, online real estate investing can be fun, lucrative, and help you diversify your portfolio for short-term and long-term gains.
Economic transitions can be smooth, rocky, or somewhere in between. This year, I’m going with in between. Recent trends in real estate investing should have investors looking at more data, not less, getting creative with their investments, and sticking with the absolute best opportunities. But how do you know what those opportunities are and how to find them? I’ll admit, it isn’t easy. Let’s start by evaluating three current trends developing in the markets.
House-Flipping Market Softens
ATTOM Data Solutions published a report that shows the flipping rate has increased and is now at a 9-year high while return on investment for flippers is at an 8-year low. That’s not really anything to be alarmed about. In Q1, 7.2 percent of all home sales were flips compared to 5.9 percent in Q4 2018. That’s a big leap.
By the same token, average ROI was down almost 10 percentage points year over year in Q1 and registered at 38.7 percent. That’s the cost of acquisition versus the cost of sale. I don’t know about you, but that sounds like a decent ROI. A lower gain is still a gain.
The report also showcases 11 markets where real estate investors doubled their flipping ROI. Those include Pittsburgh, Flint, Shreveport, Scranton, and Knoxville.
Increased Competition Among Hard Money Lenders
According to the American Association of Private Lenders, the number of hard money lenders operating today is around 8,300. That’s an increase of 40 percent since 2016. What that says to me is a respectable demand curve. Lenders don’t jump into a dry pool.
On the other hand, more private lenders mean less business for each. Loan volume for home flippers was $20 billion last year. That’s 37 percent more than in 2016.
What this spells for house flippers looking to get a loan to finance their deals is a comfortable shopping environment. Look around for the best deal because it looks like the lending market, saturated with lenders, is a borrower’s market.
High Net Worth Investors to Increase Real Estate Portfolios
The third trend developing is that high net worth individuals (HNWI) are expecting to increase their real estate investments this year. Based on a survey, 53 percent of HNWI plan to make two to four direct real estate investments this year. Last year, only 33 percent made that many real estate investments.
Along with that trend, 47 percent of HNWI would like to allocate more than 20 percent of their investment portfolio in commercial real estate. This includes multifamily, industrial, office, hospitality, retail, and real estate funds.
Seventy-nine percent of the HNWI surveyed said they invest in real estate online. Certainly, the rise of online real estate investing can account for some of these trends. If you ask me, real estate investing is looking pretty good right now despite the increase in competition.
Lenders and Borrowers, Do Your Due Diligence
Whether you’re looking to borrow money for an investment or lend money to an investment, be sure to perform your own due diligence. The market has many moving parts. Both borrowers and lenders should not overlook real estate crowdfunding platforms, however, if you do invest through an online portal, be sure to choose one wisely. Technology may streamline expenses for the platform, but it doesn’t guarantee experience, know-how, ethical behavior, or sound underwriting practices. Your best bet is to choose a platform with a track record.
If you’re looking to invest in real estate online, choose a platform with a minimum of the following:
- At least four years in business
- An executive team with real estate experience
- Solid underwriting practices with transparency about the process
- A solid track record with few losses for investors
If you take a hard look at Sharestates, you’ll see it meets all of these criteria and more.
The May 2019 Fannie Mae Housing Forecast indicates a growing trend in new housing starts and existing home sales. The forecast doesn’t show where these homes are located, but it does show there is room for optimism in each real estate market. The question for investors is, what kind of neighborhood makes the best investment? Should you put your money to work in urban, suburban, or rural markets?
Where Are People Choosing to Live?
It can be difficult to discern trends in a mixed environment. On the one hand, President Trump’s Opportunity Zones could create opportunities in urban markets where many of these zones are located. On the other hand, millennials are beginning to buy their first single-family homes and are looking at suburban areas. Not only that, but movers are migrating from metro areas to the suburbs. These trends are happening as the market transitions from declining home sales into an upmarket trend and mortgage rates are creeping upward.
Another thing affecting real estate markets is the aging baby boomer generation. The second largest living generation is retiring, downsizing, and moving into 55+ communities.
Fannie Mae points out another trend in non-traditional home ownership–manufacturing housing communities. These can be non-profit communities, government-owned communities, or resident-owned communities, and they can exist in urban, suburban, or rural housing markets. What makes this attractive for some home buyers is the cost of ownership is often lower.
As you can see, all of the environments offer some benefit to the home-buying demographics. Seniors moving to retirement communities can choose one in an urban area, a suburban market, or a rural setting. The same goes for single-family buyers of any generation and those on the lower end of the economic scale have good choices in all markets too.
So Which Real Estate Market Should You Invest in?
Knowing where people want to live is only a part of the equation in determining what makes a good investment. It says something about demand, but it says very little about the actual math of the investment. As an investor, you should analyze home-buying trends, but also neighborhoods and communities and the property values. Choosing a good investment is as much about your own values as it is your investment strategy. If you know rural markets well, or a specific rural market, you might find better opportunities there than in an urban setting.
This goes just as well for real estate crowdfunding opportunities. Look for investments that provide a return based on sound risk assessment principles, but invest in what you know. If you understand multifamily markets and feel comfortable with those types of investments, there are plenty to go around. If you feel more comfortable with single-family homes or fix and flips, then put your money in those investments instead.
A good real estate crowdfunding platform will have a diversity of opportunities. As an investor, your task is to find the right opportunities for you. You can start by determining your values: What is your risk tolerance, do you prefer urban markets over suburban and rural, and do you like specific demographics of housing consumers? Are you more familiar with single-family, multifamily, or commercial real estate?
Once you narrow down your real estate investing interests, your investment style, and your values, begin looking for opportunities. When you make these judgments, don’t just focus on the potential returns. Also look at the cost of acquisition, holding costs, and property taxes. How much can you endure?
In January, National Real Estate Investor published an article that began with a look at the S&P 500 through the third quarter of 2018 and ended on a high note with a positive outlook for alternative investments in general and real estate investing in particular. Has anything changed since then?
Actually, the S&P 500 has rarely been better. In fact, 79.3% of 29 reported companies have exceeded analyst expectations. Not only that, but the Dow and Nasdaq are just both just 1.6% below their recorded highs. Stocks are aiming for the skies.
But hold onto your hat because analysts are now predicting a slight turnaround.
Bull or Bear Market in 2019?
Markets are hard to predict. In times of volatility and rapid change, they can turn on a dime. Today, analysts are concerned about the global economic outlook and what might happen with China. An American Express study found that chief finance officers have a positive outlook overall, but not as positive as a year ago. That’s good news, but it’s not great news.
The International Monetary Fund recently reported it expects a pullback on global economic growth. Instead of growing 3.5 percent as forecasted in January, the IMF expects the economy to grow just 3.3 percent. That’s a far cry from a recession, so there’s no need for alarm. However, it does indicate that confidence is waning.
Stocks had a good first quarter, but with these outlooks, the rest of the year might not be as good. They could still be good, just not as good. In other words, I don’t see a bull or a bear.
Why Alternative Investments Aren’t Cooling
Regardless of what happens in the stock market, alternative investments like real estate should remain a part of your portfolio. If the market turns sharply down, you’ll be glad you invested in real estate. You might even complement it with commodities and other alternatives.
If the stock market takes an upward turn, you’ll still want diversification, and real estate is usually a good bet. Commercial real estate will likely be the best bet for a market upturn because when company stocks do well and businesses are in expansion mode, they tend to invest in real estate. The big question is whether you should invest in development or rentals.
Marketplace Lending is a Safe Bet for Transitional Markets
I’d say we’re still looking at a transitional market, not just in real estate, but also in stocks. In fact, the entire economy seems to be in a transitional mode. How long it will take to make the full transition is anyone’s guess.
With marketplace lending, you can bypass the ownership dilemma. You cut out holding costs, and it’s easier to move your money around if it isn’t tied up in a physical investment. There’s nothing wrong with owning properties, especially if they’re appreciating in value, of course. On the other hand, if you need a quick exit strategy due to the unpredictable nature of the markets and their potential for quick turnaround, then fractional ownership on a short-term loan or real estate development can help you gauge where the market is headed long term and allow you to shift your asset mix if the need arises.
At the end of the day, private investors would do well to maintain a good mix of alternative investments, including real estate, and rely on crowdfunding platforms for short-term investments and to keep some of those assets liquid. Whichever way the market ends up turning, you’re more likely to come out smelling like a rose.
What makes a solid real estate crowdfunding (RECF) investment? Is it anything like traditional real estate investing? You’d be surprised at how similar it is to analyze a real estate crowdfunding investment and a traditional real estate investment, but there are differences. Let’s discuss those, point by point.
1. It’s all About the Underwriting
With traditional real estate, you may not be the underwriter, but underwriting is important and should be considered. Your RECF underwriter will be interested in many of the same metrics that you, as an investor, should be interested in, namely, loan-to-value (LTV) ratio, after-repair-value (ARV), and estimated repair costs, just to name a few. When evaluating a real estate crowdfunding investment, you should take a good look at the criteria the platform uses to evaluate risk and to underwrite a project. If those aren’t readily available, be prepared to ask questions.
2. Deal Sponsor Experience
If you’re going to invest in a real estate project, you want to know that the person managing that project has the requisite experience to pull it off. Whether we’re talking about a ground-up development, a fix-and-flip, or a value-added commercial rehabilitation project, you want the person managing that project to have some experience and a successful track record in that specific type of project. That’s true of both traditional real estate investing and RECF.
3. Deal Structure
Real estate crowdfunding investments can range in deal specifics from straight equity to debt, or some form of a mix between the two, and more complex arrangements. Pay close attention to whether or not you are investing in equity, in which case you get a percentage of ownership in the investment, or in a debt arrangement. With loan deals, you’ll get a periodic payout based on the terms of the loan whereas in an equity deal you may not see a payout until the property is sold. Understand how each deal is structured before you invest.
4. Risk Factors
Risk factors are very important. Is your investment going toward a first lien position or mezzanine? Is the investor putting some skin into the game? How about the platform? Or do investors on the platform fund the entire project? How much cash flow do you have? How liquid is your portfolio, and do you have a well-defined exit strategy for your investment? You should ask all the same questions you’d ask on a traditional real estate deal plus additional questions based on the platform and the structure of the investment.
5. Platform Considerations
Any RECF platform that wants your investment should have customer service representatives available to you at reasonable times. You’ll undoubtedly have questions about the platform itself, investments listed, and your payouts. When you do, you want the platform to be responsive to your requests. You should also evaluate the management team of the platform itself. Do they have experience in real estate investing? How old is the platform? Does their technology facilitate easy transaction management and analysis? You’re not just investing in real estate. You’re also investing in the platform.
6. Realistic Financial Projections
Finally, just like in traditional real estate investing, you want RECF projections to be realistic. If it seems too good to be true, it probably is. That said, RECF returns can be higher than expected on traditional real estate investing due to streamlining of processes offered by technology and the differences between your local economy and the economies of geographic locations where real estate projects on the platform are listed. Evaluate all claims to financial projections against realistic expectations and, if possible, get testimonials from past users.
Real estate crowdfunding is still relatively new, but it’s been around long enough that all of these criteria can be assessed relatively easily.
Real estate markets move in cycles. One year, or one decade, commercial real estate could be the hottest sector, and then the market shifts and residential becomes hot again. Single-family could shift to multi-family, commercial could shift to industrial, or markets that favor buyers could shift to markets that favor sellers. Market conditions are always changing.
The fix-and-flip market has been a hot residential market for the last couple of years. Is it still a hot market, or will it cool off in 2019?
Why 2019 is Still a Hot Market for Fix-and-Flips
Whether fix-and-flips are “hot” largely depends on where you’re located. Like real estate sectors, geography plays a big part in whether real estate is hot or cold, and geographical markets run in cycles too.
CNBC reports that states west of the Mississippi River are colder markets than those on the east coast. The reason is because of the number of days, on average, a property sits on the market before it sells. Known as holding cost, each day your property doesn’t sell is another day you don’t realize a profit on your investment. Ideally, you want to get into and out of your fix-and-flip property as soon as possible. That’s why geographic considerations are important, because if you live in an area with high unemployment or a lot of vacant properties, then your fix-and-flip could be on the market for a long duration.
Factors to Consider When Investing in Fix-and-Flip Properties
No matter what market you are in, however, there are some things to think about before you purchase a property you want to repair and put back on the market. First among these is the buy price. The old adage “You make your profit when you buy” rings true. If you overpay, you’ll squeeze out any potential profits on the back end. If you overpay too much, you might not profit at all.
Another factor you must pay attention to is the loan-to-value ratio (LTV). If you are borrowing money for your project, you need to make sure that the amount of money you borrow for property acquisition and repairs leaves you enough room to profit when you sell. Successful investors have a set LTV they use as a benchmark. Sixty-five or seventy percent LTV are common.
After-repair value (ARV) is also a consideration. How much will that property be worth after you make the necessary repairs? Can you sell it for that amount and make a profit? What if you discount 5% or 10%? Could you still profit?
Should You Pool Your Money to Invest in Fix-and-Flips
If you are investing in fix-and-flip properties, it’s important to perform your due diligence, on both the property and the market. Due to technology, investing in fix-and-flips is a lot easier and less risky if you can pool your money to invest in a property along with other investors. By spreading the risk around, you do not put as much of your money at risk and you share the burden of risk with other investors. You can also maintain certain liquidity in your investment portfolio because you do not have to invest all of your capital in a single property. You can spread your investments around in multiple properties, which distributes your personal risk among several investments.
Marketplace lending makes this type of risk distribution possible. If you are a conservative investor or have a low risk tolerance, marketplace lending allows you to manage your risk by sharing it with other investors and spreading it out among multiple investments in smaller increments per investment.
There are indications that the hot fix-and-flip market of the past is still hot in 2019. That’s not to say it won’t cool, but the signs are showing a steady market at this time.
The partial government shutdown is now in its fourth week, the longest shutdown in history, and several voices are beginning to rise up in alarm that the shutdown could have drastic consequences for the economy. They could be right in the long term, but for now, indicators seem to be that the real estate sector is doing fine.
Kevin Hassett, chairman of the Council of Economic Advisors, estimates that quarterly economic growth is reduced by 0.13% for each week the shutdown lasts. Still, that’s less than 1% to date. In short, economic fundamentals are still strong, and I’m not the only one saying this. A former Wells Fargo CEO said it two weeks ago, and a UBS Investor Watch Pulse Poll shows that 78% of long-term investors believe it too.
Economic Fundamentals Indicate a Strong Economy
While unemployment numbers for January 2019 have not been released yet (they’re due out in February), in December 2018, the unemployment rate was 3.9%. It has been in steady decline since September 2016 when it was at 5.0%.
Another indicator of a strong economy is the inflation rate. In December, it fell to below 2% for the first time since August 2017. Real Gross Domestic Product (GDP) is still on the rise. In the third quarter of last year, it rose 3.4%. That’s not as good as the 4.2% we saw in the second quarter, but it’s still not bad. There aren’t any signs that GDP will decline in the near future. GDP for real estate and rental and leasing increased by 5.3% in the second quarter of 2018. It went up by 2.7% in the quarter before that. Again, no signs of a turnaround any time soon.
Why We Should Be Optimistic About the Real Estate Sector in 2019
There are lots of reasons to be optimistic. Should the government shutdown last through April, we will likely have cause for concern, but as long as we’re seeing positive growth numbers in the fundamental economic indicators, we can maintain optimism in the housing market, new development sector, rental and leasing, and marketplace lending.
CoreLogic reported the overall mortgage delinquency rate hit an 11-year low in the second quarter last year. It ticked up slightly in the third quarter and again in the fourth. Still, at 5.17%, that’s hardly anything to be alarmed about. It was close to 30% at the height of the Great Recession in mid-2008, according to the Federal Reserve.
Existing home sales numbers for December 2018 have not been released yet, but in November, they increased from the previous month. First-time homebuyers are buying up real estate in droves. Since 2008, the single-family rental market has boomed. The current market is looking good for sales and rentals, commercial and residential, and the signs seem to indicate a steady pace for the foreseeable future.
That doesn’t mean there aren’t legitimate concerns regarding the real estate markets. Rising interest rates could put a hamper on mortgages. If so, that will only mean a stronger rental market. Millennials and young adults could continue to buy more homes, especially starter homes. If so, new developments and existing home sales will remain strong. As long as GDP and manufacturing continue to rise, commercial real estate should be a strong sector, as well.
What Does This Mean For Marketplace Lending?
Like most real estate sectors, marketplace lending should remain strong, but investors should look at where the market has been and where it is headed. If rentals remain strong, you’ll see more opportunities in equity markets. If new development and housing starts continue to do well, you’ll see more debt opportunities. In a transitional market, conditions can favor buyers or sellers, lenders or borrowers. The key is to know the market and to have a clear vision about your own goals. Opportunities are there, but investors and developers must perform their due diligence and think harder about how market forces are affecting their individual businesses.
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