Real Estate Investing In 2024: What You Should Know
Persistent inflation. High mortgage interest rates. Tight inventory in certain markets. There are many pressures and reasons why investing in multifamily and commercial real estate in 2024 keeps many investors on the sidelines.
However, there are many reasons to invest at any time, whether in commercial properties such as office buildings, industrial properties, self-storage and multifamily, or smaller residential assets such as vacation homes and single-family rentals. These are all popular real estate investments among owners of self-directed retirement plans, which can include a broad array of real estate investments within those plans.
Interest rates are expected to decline in 2024, which portends sunnier real estate investing conditions. As of March 20, Bankrate reported that 30-year fixed rates had declined slightly from the previous month, and I expect the trend to continue—perhaps slowly—over this year. But despite the relatively high cost of borrowing, investors may still see returns over the long term through asset appreciation and the potential income from investment properties.
Rentals Are Going Strong
Consider that homeownership remains out of reach for many young people—or those who live in expensive metro markets with a high cost of living. This trend created more competitive rental markets across the country in the past couple of years (although there are signs the rental market may be cooling a bit). However, the high price of buying and owning a home may fuel continued or increased demand for rentals for the foreseeable future. Rental properties are among the many popular real estate assets allowed in self-directed IRAs and offer the potential for ongoing passive income for investors.
Commercial And Multifamily Distress
Post-pandemic, many commercial buildings are now distressed properties, with landlords seeking tenants for empty offices, and hotels trying to bounce back and fill rooms. Completion of large multifamily projects has increased supply, which has begun affecting vacancy rates, although some developers are choosing high-job-growth markets for their projects (and tenants). High supply and flatter rental rates are forecast to contribute to elevated vacancy rates and instability in the multifamily sector this year, and office buildings had an 18% vacancy rate in January nationwide, a year-over-year increase of 130 basis points.
All these factors result in poor cash flow—and many loans are maturing now or within the next few years. As I read recently in the Wall Street Journal, over $2.2 trillion in commercial mortgages are scheduled to mature between now and the end of 2027. Those properties are ripe for investors with cash on hand to inject much-needed capital—to take on high-interest debt service, tackle capital improvements or purchase properties outright.
An article last fall in Fortune caught my attention regarding this topic. It cited some sobering statistics for the commercial real estate market, including the multifamily sector:
Commercial property values in the U.S. fell 9% in 2023 through September.
The value of distressed U.S. commercial real estate was the highest it has been in a decade, near $80 billion in the third quarter of 2023.
Office properties represented 41% of the value of buildings in bankruptcy, being repossessed by lenders or being liquidated.
These properties mean there are deals to be found for real estate investors. The same goes for the single-family and condominium residential sectors. In those residential sectors, “fix and flip” opportunities and rental properties can yield strong returns for investors. As interest rates decline, investors can refinance to take advantage of better rates and reduce what is typically one of the highest expenses of property ownership (the mortgage).
How To Include Real Estate In A Self-Directed Retirement Plan Portfolio
Investors looking to add real estate to their self-directed retirement accounts can do so in the following ways:
The IRA can make the investment with a non-recourse loan or pay cash.
A self-directed IRA can partner with another account or individual to invest in many types of properties, including farmland, raw land, rehabs, warehouses and more.
The IRA can also invest in a fund that specializes in real estate or participate in private equity funding for commercial real estate assets. We are also seeing increased interest in debt funds tied to real estate assets.
Individuals can include mortgages as an alternative asset within their retirement plan, with the self-directed IRA making the loan and collecting the principal and interest based on terms agreed upon by both parties (lender and borrower).
Potential Risks Of Investing In Commercial Real Estate
Bear in mind that real estate is considered a relatively illiquid, long-term investment. As with any asset, investing in commercial or residential real estate carries risks. Any individual who is considering adding real estate investments to their retirement portfolio should thoroughly research the asset and understand the potential downsides in today’s market.
In my view, the risks associated with real estate investments are due typically to economic instability stemming from multiple factors and sources.
For example, are we heading for a recession as some say? Will the retail sector survive in a brick-and-mortar environment? If not, what will take its place in downtown office buildings or mixed-use properties—and when?
There is also the issue of commercial real estate valuation, especially during a period of interest rate uncertainty. Since interest rates affect capitalization rate—the rate of return on a real estate investment—these could also affect property valuations, which in turn could lead to losses for an owner if their property is not priced fairly in its market.
Inflation (especially as we see in supermarkets and gas stations) may lead to challenges for apartment tenants to pay rent on time—another potential hit on owners’ cash flow. And with increased prices for just about everything, property management fees related to repairs and maintenance may be higher than in the past.
With all this in mind, as with any self-directed investment, it is incumbent upon the account owner to conduct full due diligence about the asset before sending instructions to their account administrator and custodian.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.