Growing up, I watched my parents pull themselves off the treadmill of living from job to job, with my dad doing construction for others, by transitioning over to building spec homes and splitting the proceeds with a business partner who helped fund their projects.
They were able to use the proceeds of these sales during strong economic cycles to purchase apartments in lower income neighborhoods, where prices could be sustained by rents with less money down than was needed in the more upscale areas. And as rents increased over time, it helped their property values increase to the point where they could be refinanced to purchase additional properties.
Generally, real estate follows the economic cycles of expansion, peak, recession and recovery which help dictate prices and rents while the local forces of supply and demand further contribute to the rise and fall of these values in response to an area’s economy. It is crucial to consider these cycles on both the national and local level in order to develop a successful strategy for investment in any given market.
With increasing signs of a peak economy starting to show, the focus of informed investors generally shifts from short-term construction and flip projects back to cash flow investments that can sustain returns during a downward cycle. This means transitioning from the principle of Internal Rate of Return that drives speculative projects to the principles of cash flow and comparative pricing that are used to evaluate income producing properties.
The challenge in the current sociopolitical climate is going to be whether those principles can continue to be applied in the face of increasing regulatory factors such as rent control on both the local and state level.
For example, there have been multiple restrictions placed on short-term rentals in both the City of Santa Cruz and in the unincorporated areas of the County, making them less viable than they once were.
On the other hand, long-term rentals in the unincorporated areas have so far remained unaffected by legislation, and a rent freeze imposed by the City Council has lacked the force to impact property values as it was unable to implement just cause eviction measures due to the legal constraints of not being able to override voter consent. Meanwhile at the State level, the Assembly just passed a 3-year bill limiting increases to 10% in any calendar year state-wide, with levels of relocation assistance not yet established.
It remains to be seen, in the face of all this increasing legislation, if real estate investment will continue to be a viable means for families in the future to be able to pull themselves off the treadmill by investing locally, or if they will need to shift their focus to investing elsewhere.
