Written by Allen Shayanfekr (Forbes Real Estate Council)
In a year of unprecedented market volatility, real estate remains widely regarded as one of the safest investments you can make. Real estate has long been the bedrock of wealth creation in the United States, but there are various ways to invest in the market with different risk and opportunity profiles associated with each deal. The “state of the union” of real estate is strong, but what investors want to know is how the market will play out in 2018 and beyond.
With property prices on the rise and interest rates relatively low by historical standards, home fixing and flipping is on the rise again. However, unlike the period that led up to the Great Recession, the number of inexperienced flippers active today is a small portion of the overall marketplace. The lending environment has changed with more scrutiny over loan-to-value and loan-to-cost ratios required to finance new projects. With the likelihood of another crash reminiscent of 2008 being slim, real estate investments are a safe investment option to avoid the bear market in 2018.
New Players Getting In On The Action
A rise in seller demand has enabled Zillow to buy houses directly from sellers and test real estate flipping as a new source of revenue for the company. The listings operator's new feature allows sellers to upload information about their homes and receive offers from local investors to complete a sale on their timeline. Sellers have the option to choose between a fast sale and a traditional sale if they have time on their side. Zillow is also going to be "playing the role of investor, bidding on homes in Las Vegas and Phoenix." The company is aiming for 300 to 1,000 homes by the end of the year, which highlights how lucrative the property market is right now.
Traditionally, home flippers made their profits from the appreciation of property values. However, the most intriguing aspect of Zillow's approach is that it make its money through seller fees and agent commissions. In today’s real estate tech age, it’s disrupt or be disrupted.
Fintech Is Changing The Game
Advances in technology and the rise of fintech startups in the real estate market are shaking up the industry. Removing the middlemen who offer little value is lowering costs and making it easier to do business. Elsewhere, established institutions are struggling to keep up with the pace and expectations from digital natives.
The digital transformation and digitization of everything have helped the real estate landscape evolve and is ultimately creating unprecedented investment opportunities for those who traditionally looked in on the market from the outside.
There are increases in demand that the fintech revolution is supporting that previously did not exist. Before 2012, there wasn’t an easy way to invest in real estate as an asset class outside of owning a home or investing in a real estate investment trust (REIT), which offered less liquidity and transparency than direct investment. Few of today's options would have been possible without the Jumpstart Our Business Startups Act, or JOBS Act, passed in 2012 by President Obama, which lifted certain securities regulations that previously banned individuals from raising capital from a crowd of people. It paved the way for our company and others to offer borrowers a secure, non-bank means of finding the funding they need to complete their projects while also allowing investors to zero in on an asset class of properties that fit their portfolio and risk tolerance. The brave new digital world of online marketplace lending and crowdsourcing investors has increasingly been used in real estate projects to meet investor demand and has completely changed the real estate landscape.
Low Risk, High Reward In 2018
What does this mean for the industry and the outlook on investing for the remainder of 2018? A diversified market is opening the floodgates to individual investors who were previously relegated to the sidelines. Values are continuing to rise as the economy continues to expand.
The importance of being risk-aware and understanding that emerging markets are inherently more volatile than other investments will serve investors well. But at a time when investors in top-performing markets are enjoying significant windfalls from equity investments, you will need to find the right balance between risk and reward. While equity investment may earn the highest returns, marketplace lenders are also able to offer double-digit returns to investors in the form of different debt investment options that carry a significantly lower risk profile.
Earlier this year, journalist Leigh Gallagher shared some lessons from her book about disruption at an industry event, advising business leaders to embrace change and lean into unconventional thinking — or risk widespread disruption. Sure, there are significant challenges on the horizon for the real estate industry, but there are equally as many opportunities across debt and equity investment options.
Despite all the talk of disruption, tech trends, demographic changes and risk, the reality is that real estate is still one of the safest investments you can make here in 2018 and beyond.