In the swirling sea of capital that makes up the global economic ocean we all invest in …
… big fund managers are pay close attention to a variety of factors for clues about the ebb, flow, and over-flow of people, business, and money.
Right now … it seems like a BIG wave of money could be headed into real estate.
Of course, compared to stocks, these things aren’t simple to see and track. And they’re even harder to act on.
Stocks are easy … if interest rates fall and money floods into stocks, you just buy an index fund and enjoy the ride.
Just remember … the dark side of easy and liquid is crowded and volatile.
So unless you’re a seasoned trader, trying to front run the crowd to both an entrance and exit in stocks can be a dangerous game.
But real estate is slow. It’s inefficient. It moves slowly. There’s drama.
And yet, the BEAUTY of real estate is its messiness. Embrace it.
So here’s why we think more money could be flowing into real estate soon …
We’ll be talking about this more in the future, but the short of it is the new tax code creates HUGE incentives for current profits from ANYTHING (including stocks) to make its way into pre-identified geographic zones.
According to The Wall Street Journal,
“U.S. is aiming to attract $100 billion in development with ‘opportunity zones’…”
“could be ‘the biggest thing to hit the real estate world in perhaps the past 30 or even more years’ …”
Private Equity Funds
Another Wall Street Journal article says …
“Real estate debt funds amass record war chest”
“Property funds have $57 billion to invest …”
This Wall Street Journal article indicates BIG pension funds are getting into the game too …
“Big investors like the California teachers pension are backing real-estate debt funds …”
One reason savvy investors watch economic waves is to see a swell building … so they can paddle into position to catch a ride. It’s like financial surfing.
Time will tell where all these funds will land, but it’s a safe bet it won’t be in smaller properties. MAYBE some will end up in residential mortgages, but don’t count on it.
So what’s the play for a Mom and Pop Main Street investor?
Start by watching the flow …
We’ll be watching the markets and product types the money goes into.
Then we’ll be watching for the ripple effect … because that’s probably where the Main Street opportunity will be.
For example, if money pours into a particular geography, it’s going to create a surge of economic activity … especially if the funds are primarily used for construction.
But we’d be cautious about making long-term investments in any place temporarily benefiting from a short-term surge … so it’s best to look past the immediate impact.
Think about the long-term impact … which is a factor of WHAT is being built.
Fortunately, major projects take many months to complete … so they’re easy to see coming IF you’re paying attention.
We like to plug into the local chamber of commerce to track who’s coming and going in a market place … and why. The local Business Journal is also a useful news source to monitor.
The kinds of development that excite us include factories, office buildings, industrial parks, and distribution centers. Those mean local jobs.
We’re less excited about shopping centers, entertainment centers, and even residential and medical projects.
Because even though they mean jobs too … they don’t DRIVE the economy. They feed off it.
Of course, we’re not saying those things are bad … but they should reflect current and projected growth … not be expected to drive it.
Hopefully, developers are doing solid market research and are building because the local population and prosperity can absorb the new product.
Then again, when money is aggressively pumped in, sometimes developers get greedy … and areas get OVER-built.
So don’t just follow the big money. Be sure you understand the market.
Watch for the over-flow too …
Sometimes money moving into a market creates prosperity only for some … and hardship for others.
Silicon Valley is a CLASSIC example.
As billions flood into the market through inflated stock prices, many people get pushed off the back of the affordability bus.
But even though it’s hard for those folks, they end up driven into adjacent markets which are indirectly pushed up. It’s overflow.
That’s when you see headlines like these …
Boise and Reno Capitalize on the California Real Estate Exodus –Bloomberg, 10/23/18
“Sky-high housing prices in the Golden State bring an echo boom—and new neighbors—to other Western states.”
Sure, in Silicon Valley’s case, the flow of money is cheap capital pouring into the stock market and enriching tech companies … and their employees.
But it doesn’t matter which door the money comes in when it flows into a market. That’s why it’s best to look at ALL the flows into a market.
And when the flow of capital drives up investment property prices in a market (depressing cap rates), even investors will overflow into secondary markets in search of better yields.
The lesson here is to watch the ebb, flow, and overflows as capital pours into both the debt and equity side of real estate through Opportunity Zones, private equity funds, and increasing pension fund allocations.
You never quite know how the market will react, but you can be sure it will.
The key is to see the swell rising early so you can start paddling into position to catch the wave.
We do it by looking for clues in the news, producing and attending conferences, and getting into great conversations with the RIGHT people.
We encourage YOU to do the same.
Until next time … good investing!
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