With the recent rise in the number of catastrophic natural disasters, such as with Hurricane Florence, many investors, and particularly those with real estate holdings in these areas, are experiencing a great deal of anxiety. While this is a very valid response, it’s wise to remember that there are some key concepts to remember and actions that can be taken in order to minimize the financial losses that can stem from natural disasters.
Bracing for the Storm
While there may be a tendency to think that real estate investing in a hurricane-prone area should just simply be avoided, it’s crucial to realize that this trait alone doesn’t ultimately discount it from being a good investment. Provided that investors work with sponsors who have done their due diligence and have secured all of the necessary insurance, the financial losses stemming from even a devastating hurricane can be mitigated almost completely, or at least to a large extent.
Securing an insurance policy that covers not only the loss due to damage from the physical property, but also loss of income that may be generated during the repair or rebuild should be considered a top priority when any purchase is made in a location that may experience catastrophic storms. As a real estate investment, this cost should be factored into the cost of investing and the policy must be put into place before the disaster hits. In addition to the insurance, it’s vital for property management staff to devise an alternative living situation for residents that may be displaced temporarily. This plan must take into consideration the fact that there is often a real estate shortage right after a major storm. While these factors can be challenging, the prep work done up-front will put any investor in a much better situation to handle a major storm or hurricane.
Seeking a Safe Haven
In addition to the threat of physical hurricanes, investors should also be wary of how and where they are selecting their investment properties. Diversity is another key aspect in weathering any losses that can be incurred during a major storm. Real estate has historically been considered a safer investment than other options, and many leading economists warn that investors should approach the stock market very cautiously. There are also signs that the housing market is slowing down and may even be in a bubble. Recent social and geo-political concerns have muddied the outlook even further.
In light of turbulent and uncertain market conditions, it becomes even more important than ever to look at other data sources that may shed some insight into the upcoming state of the industry. What we know from demographic data is that from projected population growth, over 4.6 million new rental units will be needed to meet this demand by 2030. This equates to approximately 350,000 new units a year, a figure that far exceeds the 244,000 average annual units that have been added every year for the last four years.
With this imbalance between projected supply and demand, investment in income properties remains a safer bet than most other investments in today’s market. Many financial analysts recommend having between 10%-30% of a portfolio committed to real estate holdings in order to be properly diversified.
Data-Based Decision Making
But even in light of this data, real estate investments are not all created equally, and diversification in the types of properties owned can provide greater insulation from market fluctuations, particularly when the properties are selected using key data points and market indicators. There are specific trends that should be watched as they can inform investors of opportunities in all sectors. The following trends may prove to have a huge impact in the rental industry in the coming years.
Home ownership rates have dropped to 62.9%, a low not seen in more than 20 years. If this trend continues, ad is contrasted with the anticipated demographic shifts, there will inevitably be an effect on the value of and demand for multifamily real estate.
Millennials are entering adulthood over the next several years and during this time, there is an expectation of an 86% increase in new household formations, of which 58% are expected to be renters. While this demographic group may desire home purchases, many among them simply carry too much credit card and student loan debt to achieve this goal.
Generation Z is hot on the millennials tail and are just beginning to enter the rental and student housing market. Comprising 26% of the population, their influx will prove to further increase rental demand.
While there is no crystal ball that can predict the market with great accuracy, these trends indicate huge opportunities in the rental real estate market for investors.
Accessing the Right Investment Options
With all signs pointing to income-generating real estate being one of the best options for investors in the current market, it’s also worth noting that innovative technology is making it easier than ever for investors to gain access to a wide variety of types of real estate holdings that can work together to create a balanced portfolio. This includes high-quality deals that were historically only available to accredited investors. Advances in fintech have allowed established firms like Black Rock, Carlyle Group and Casoro Capital to launch platforms, such as Upside Avenue, that allow investors access to these deals with as little as a $2,000 investment. Often, this enables them to get into alternative assets such as multifamily, senior living, and student housing real estate options. This would not have been possible for the average investor even a few short years ago.
Storms, whether they are financial, economic, or even the physical natural disasters, are simply a part of life. For investors though, this often poses challenges for preparing for the oncoming onslaught of, often unexpected, yet turbulent conditions. This does not mean that financial success cannot be achieved and maintained though. The most successful investors always remember that the storm is coming – so be prepared. The key to weathering it successfully lies in your ability build a solid foundation that can withstand even the harshest conditions.