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How the Trump Administration Could Impact the Apartment Market

Nov 14 2016

Real Estate ProfessionalsNow that Donald Trump baffled most of the pundits to secure the U.S. presidency, a host of people from different industries are beginning to study how the Trump administration’s policies will affect them and the overall U.S. economy over the next four years and beyond. 

Those in the apartment industry are trying to get a beat on how the economy might look, with its effects on the U.S. job market and the atmosphere for investments. Jobs are sure to be a focal point, as one major factor in Trump’s victory was that his message about job creation resonated with blue-collar workers in the Rust Belt who have voted Democratic in the past. 

Trump’s election will likely mean a return to the emphasis on supply-side economics popularized during the Reagan administration. The Gross Domestic Product is the sum of consumption, investment, government expenditures and net exports, and the new administration’s focus will likely be on investments and net exports (meaning trade deals).

 

 

On the investment front: 

  • Comprehensive tax reform benefiting investors is likely. If those beneficiaries invest that money to the economy, GDP and job growth may pick up. And jobs are the major driver of apartment demand.
  • The financial industry has been overloaded with regulatory oversight since the Dodd-Frank Act was enacted. Expect this to loosen and affect Commercial Mortgage-Backed Securities (CMBS) and the single-family home-buying market in general. Home buying should pick up, albeit slowly, with very little impact to multifamily market.
  • Because Trump and the Republican Congress will likely make major changes to the Affordable Care Act (ACA), the health-care burden borne by business could be reduced. If the 25 million people with ACA can be smoothly transitioned to market-based insurance, both business and consumers could save money.
  • Investment in infrastructure could increase productivity levels, which could boost national wealth and add jobs.
  • The re-patriotization of off-shore money by U.S. companies would bring more dollars home and increase GDP and job growth.
  • Monetary policy will be more data driven, and we expect the pace of Federal Funds Rate increases to ramp up starting mid-next year.
  • Despite the increase, the 10-year T-Bill rate should rise gradually to about the 3% range by the end of 2018. Even with this increase, apartment cap rates are still expected to remain low because of the high investor demand for apartment properties.  

On other issues, Trump spoke strongly against current U.S. trade policies while he was on the campaign trail. But most of the time, reality sets in once the president-elect actually sits in the Oval Office. 

So, don’t necessarily expect the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP) to be abandoned. Do expect heavily negotiated terms with our partners, since positive net exports can help GDP calculation. Trade policies should be based on comparative advantage rather than managed and regulated free or fair trade.      

Trump’s idea to create child-care accounts free from taxes and to allow families to deduct more child-care expenses from their taxes makes fiscal sense. That will free up money for consumption, which boosts GDP and job growth. 

And, stricter immigration laws are imminent. In the short-run, displacement of population could reduce national consumption side of the GDP equation. For the apartment market, more immigrant renters may double up, reducing occupancy. 

With all this in place, we expect average GDP growth of 2.5% from 2017-2020, barring an unexpected shock to the economy. About 10.3 million jobs could be created before the next presidential election, with annual average growth of 1.7% — exactly the rate of October 2016.

That’s our view. If Trump’s projections that his policies could increase GDP to 3.5%-4%, more jobs would be created, benefiting the apartment market.

One thing to consider, though, is that the economic cycle kicks in no matter who is president. The current economic expansion has lasted more than seven years, and the longest expansion period on record was 10 years. That means the business cycle is pointing toward a downturn in the not-too-distant future. 

Also, a recession has always occurred within 12 to 36 months (an average of 24 months) after the unemployment rate falls below the natural rate of 5% -- it was 4.9% in October. So, it is likely a recession – albeit mild – will occur by the end of 2018. But we expect GDP and job growth to continue rising for the next four years because of the slow to moderate growth during the current recovery.

But if economy-stimulating Trump policies as mentioned above are enacted, a recession could be averted. 

And therefore, we anticipate the U.S. apartment market to perform well during Trump’s first term, with annual average occupancy of close to 95% and rent growth exceeding 3.0% from 2017-2020. New supply is expected to average about 330,000 units per year during the same time period.

But higher GDP and job growth, as Trump predicts will happen, could mean rent growth and occupancy increase by an extra 50-100 basis points.

In other words, we expect the apartment market – and the economy – to be generally positive during the next four years, even though unexpected outside shocks could muddle things up.

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If you’ve ever considered investing in a few rental properties in Philadelphia or Bucks County, PA now might be a good time. Prices are still low in Philadelphia, but have been on the upswing. According to the National Association of Realtors, the median price of an existing home in a US metropolitan area grew 13.7% between July 2012 and July 2013, the latest in a 17-month streak of year-over-year price increases. 

New landlords can choose from properties that are likely to appreciate and a large pool of potential renters.Licensed realtor Pat Mueller cites a few reasons for this trend: “Many families have lost their homes to foreclosure and are entering the rentals market for the first time in years. Mortgages are also harder to get now, so fewer people are qualifying for a new one.”The more skills you bring to the table to get into Houses for Rent in Philadelphia Philadelphia or Bucks County, PA and the more time you have to devote to your properties, the faster you can make a return on your investment. 

But investing in rentals can also be disastrous (or too stressful to be worthwhile) without expertise. Here are three professionals you may consult about your new rental properties, and what you can do to mitigate how much they cost you:Handyman:  You may need to hire a specialist for some work on your rental. If you need new outlets or new pipes, for example, hire an electrician, plumber or licensed contractor. Handymen usually tackle smaller, more manageable tasks, like:

  • Painting and paint removal
  • Drywall repair
  • Minor appliance repairs (fixing a leaky toilet or faucet, among others)
  • Installing tiling or flooring, moldings, windows, doors
  • Refinishing decks, cabinets and other wood items

When You Could Skip It: You could do any (or all) of these projects yourself if you have the time and interest in learning. Of course, this only works if you live relatively close to your rentals and are flexible enough to service them on short notice. And if you’re willing to respond to the occasional 5 AM basement flooding.

Average Savings: Any base rates or costs-per-hour vary from location to location in Philadelphia or Bucks County, PA , but nationally, you can expect to spend an average of $60 to $85 per hour for repair costs. It general costs less to hire an individual handyman than a handyman employed by a company. Expect an additional charge if your job requires a trip to the store for materials.

Resident Property Manager As the owner of a handful of rental properties, you may be able to manage them yourself, but if you want help, a single resident manager would probably be more cost efficient than a property management company. Resident managers may:

  • Serve as a handyman
  • Advertise vacancies in your units
  • Show apartments to prospective tenants
  • Review rental applications
  • Collect rents

When You Could Skip It: Again, the closer you live to your properties and the more spare time you have, the less likely you are to need a manager. The obligations of being a boss will also cut into the time you save on maintenance.

Average Savings: The national median wage for residential managers is just over $25 per hour. Research the wages in your community and adjust according to how much responsibility your manager will take on. 

Real Estate Agent: Once you’ve gotten your financials in order and done your own research on the neighborhood(s) you’re considering, you might contact a realtor to show you potential properties. You can also arrange for a realtor in Philadelphia or Bucks County, PA to show rentals once they’re ready to rent.

When You Could Skip It: It depends. Even if you’re a local, or have thoroughly researched the neighborhood(s) you’re considering, a realtor is a great resource for a first-time rental buyer. Realtors have access to data and statistics not necessarily available to the general public and first-time buyers may not know all the right questions to ask. Using a realtor to fill your Houses for Rent vacancies is less of a no-brainer, depending on your other time commitments or whether you plan to hire a resident manager who could do the same thing.

Average Savings: As a buyer of rental properties, as when buying your own home, sellers typically pay most, if not all, of the buyer’s realtor fees. In this case, Mueller points out there’s little reason not to work with a realtor. For help in filling your units in Philadelphia or Bucks County, PA, the services of a realtor would set you back between 10-20% of the unit’s rent per month.  Mueller recommends interviewing with several brokers before making your final decision to invest into Houses for Rent .

The Bottom Line: As a new landlord, you can’t necessarily control the flexibility of your schedule or the amount (and cost) of unexpected repairs to your properties. Rentals are a long-term investment. However, to maximize profits from your Houses for Rent, new rentals, you can buy close to home and start small. It is best to begin with just one or two properties. This will allow you to maximize the time you spend on your properties’ needs, and minimize the amount you’ll have to pay anyone else.

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