Industry Sector Analysis: Real Estate

Estimated read time: 5 minutes

If you're looking for a new way to invest your money, real estate is an exciting way to branch out from traditional stocks and bonds.

Real estate purchases may require more capital upfront, but there's also an extra level of stability since people will always need a place to live. Still, rental prices rise and fall, and smart investors know that paying attention to trends can seriously beef up your ROI.

Here are some key trends that realty investors expect to see in 2019.

An Overall Industry Outlook

Overall, the real estate market looks good. Investors still plan to invest, which means there's a consensus that home prices will continue to rise. That's despite a relative cooling down of the market, compared to earlier years.

The cooling effect is especially strong in markets that have been red-hot recently. Prices spent years skyrocketing in cities like Seattle, Los Angeles, and Honolulu, but the housing market softened in the final months of 2018. It's expected to pick back up throughout the year in most places, but some analysts believe the country's major housing markets are close to their peak rates of growth.

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One major boon to the real estate market is the millennial generation. The bulk of millennials are in their late 20s or early 30s. That's the age when most Americans begin shopping for houses. The influx of first-time homebuyers across the country should help spur home price growth amid other cooling factors.

Many analysts do expect mortgage rates to continue rising, as they did in 2018. The Federal reserve has suggested that it'll hold off on benchmark interest rate hikes for a while, but unless there's a significant economic downturn, the Fed's long-term plan still calls for rate hikes. Rising mortgage rates will be a drag on the industry, but qualifying for a mortgage is still fairly easy, so rising rates may not dampen home sales too significantly.

External Influencers

Primary external influencers on the real estate industry are trending positive. Economic indicators and employment rates continue to grow at healthy paces in key real estate markets around the world. With economies holding strong and good employment rates keeping cash in people's pockets, 2019 should be a fine year for buying and selling a house.

There are signs that U.S. economic growth is slowing, but that isn't necessarily bad news for real estate investors. When the economy slows, it drives demand for rental units, especially on the more affordable end of the price spectrum. Modestly priced rental units may be in high demand throughout 2019, and investors may want to try to capitalize on that.

One ongoing concern for investors (in all areas) stems from trade tensions between China and the U.S. Tariffs between the two countries stifles growth around the world, and the real estate world isn't immune to macroeconomic factors like that. If those trade tensions escalate, home sales may take a hit, but if the trade dispute is put to rest, the real estate sector could see a boost in activity.

Investors don't like uncertainty, and one of the largest sources of uncertainty in today's global financial climate is the looming prospect of Brexit. Britain has yet to strike a deal for how it plans to exit the European Union. That uncertainty and fear has permeated into every corner of financial markets. Like with trade tensions, a resolution could bring newfound stability and growth, while more drama is likely to create more problems.

Technology: Opportunities & Risk

Most commercial real estate investors believe technology will become increasingly important in the industry. We're already seeing evidence of technology, sometimes called "proptech" or property technology, upending real estate processes. Cloud technology can help streamline paperwork processing and make it easy to find important documents when you need them. Virtual and augmented reality software give buyers the opportunity to tour homes from thousands of miles away.

The new technology presents new opportunities to explore, share, and sell property, but it also introduces a new level of risk. Proptech is still somewhat of an emerging market. There's plenty of technology to choose from, but there's no guarantee you're investing in the technology that's going to take off.

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Top Real Estate Markets in the U.S.

As mentioned, red hot markets of recent years are expected to cool down somewhat in 2019. If you have investment property somewhere like San Francisco or Seattle, now might be the time to cash in and reinvest that money in an up-and-coming market.

That said, some popular housing markets still show promising economic indicators. Cities like San Diego, Portland, and Orlando still enjoy steady job growth, and home prices haven't inflated too far beyond the average income in the area. That data indicates the market likely still has room to grow.

Another strategy is to invest in markets that are slumping right now but show the promising signs of growth. Job growth is strong in cities like Cleveland, Indianapolis, and Memphis, and the prices are cheap compared to average income.

Pick Your Investment Strategy

If you're new to real estate investing, there are four basic methods of investment you'll choose from.

First, there's "flipping." That's when an investor doesn't rent out the property. Instead, they fix it up and sell it as soon as the market inflates to a desired level of profit. This type of investment can quickly generate returns, but investors are more exposed to the ups and downs of the real estate market. For investors tight on capital, a benefit of flipping is that you can live in the property while you fix it up. Not only do you save on rent, but buyers who plan to live in the home usually qualify for better mortgage terms.

Other investors prefer to become landlords. If you have the ability to manage all the moving parts that come with renting out property, this can become a lucrative investment. The difficulty scales up the more units there are, so beginners may prefer to start with renting out a house before trying to manage a multi-unit building or apartment complex.

If you have the capital to invest in rental property but have concerns about managing it yourself, you may want to consider real estate investment groups. The group either builds or acquires rental units, and you purchase the units through the group. The group does all the managing, and you get to share the profit. Not all groups are equal, though, and one risk you take with these types of investment is with the management quality. A badly managed property could be a sour investment. Vacancy poses another risk. If the units aren't getting rented out, you won't make any money.

A real estate investment trust, or REIT, is the most hands-off way to invest in real estate. REITs are bought and sold like stock. You buy a stake in a company that invests in real estate, and your investment's value fluctuates with the company's value. Many investors already know the ins and outs of stock trading, so this is an easy way to add real estate exposure to your portfolio without significantly changing your investment strategy. The biggest downside is that you don't technically own any property with an REIT, so you can't borrow against home equity or otherwise benefit as a property owner.