Rising interest rates can be a deterrent for investors looking to start or expand their real estate portfolio as the cost of financing rises, but there may be a silver lining. With high rates often translating to higher rents, investors may find 2024 to be an ideal time to invest in real estate.
If you believe rates have peaked and may fall in the year ahead, then real estate should appeal as one of the few markets where pricing is at or near cycle lows, says Zsolt Kohalmi, deputy CEO and global head of real estate at Pictet Asset Management.
Here’s what you need to know about the best real estate investment property opportunities in 2024:
There are two broad ways to access the real estate market. “The first is directly, through owning your own direct rental property or some kind of private equity deal, both of which are tremendously illiquid,” says Chris Berkel, investment advisor and president of Axis Financial.
The second, more liquid – and arguably simpler – method of real estate investing is through a real estate investment trust, or REIT. These are companies that own, manage or finance income-producing real estate and are required to pass 90% of their income onto investors as dividends.
REITs can be private or publicly traded. Investors can purchase shares in the public versions on the stock market exchanges.
It’s important to note that every REIT is different. “Some will use massive amounts of leverage to try and boost returns through yields to attract yield-seeking investors,” Berkel says. “This may work but could also dilute shareholder equity and create a situation where the total return ends up being negative.” So, pay attention to management’s strategy before investing.
REITs can also focus on different segments of the market. For example, some own only data centers or retail shopping malls, while others can take a broader approach by investing in a variety of real estate properties.
“For people who lack the ability to really dive into the nuances of those types of investments, it may be better to focus on macro themes that seem to be accelerating, like the move toward a more digital future – whether that be data centers and data transmission REITs or something else,” Berkel says.
If you want to invest in physical property, he says to consider REITs that focus on single-family homes. “We still have a housing shortage, so REITs backed by single-family homes may be a better bargain if you want to be invested in something with a physical footprint,” he says.
A decline in real estate market participation by major institutional investors is making way for local individual investors to step in, says Kurt Carlton, co-founder and president of New Western, a private marketplace for residential investment properties in the U.S.
“This makes them an attractive option for the lower- to middle-income buyer, which currently faces a shortage. Especially as we enter the new year with continued low inventory, local investors are providing solutions to the shortage by fixing up unlivable homes and putting them back on the market, giving consumers more options for their home-buying search,” he says.
Around 320,000 homes valued up to $256,000 are needed to meet the needs of homebuyers, according to a 2023 National Association of Realtors analysis.
Look for cities with a lot of older homes primed for substantial renovations plus a robust demand for cost-effective housing.
“Instead of just buying for long-term appreciation, look for homes that, with strategic renovations, can be immediately elevated in value,” Carlton says. “In essence, wins in real estate often come from hands-on value creation as well as long-term speculation.”
Based on New Western investor behavior data, Houston, Raleigh, Atlanta and Denver; Austin, Texas; and Raleigh, North Carolina, lead the increase in investor-purchased homes from the first to second half of 2023. The same time period also saw a 16% increase in investor purchases in the West and a 6.5% increase in the South.
The concept of supply and demand is a tale as old as time. As the population grows, the demand for housing follows. Cities like Austin, and Atlanta, could be worth consideration, says Rod Khleif, an entrepreneur and real estate investor with more than 2,000 properties.
These areas boast job growth, favorable business environments and a lower cost of living, making them attractive for real estate investors, he says.
More than 63,000 new residents flocked to the Austin metropolitan area between 2021 and 2022, with a growth rate of 2.7%. During this same time frame, a lesser-known suburb less than 30 miles from Austin experienced tremendous growth. Georgetown, Texas, was the fastest-growing city in America, basking in a growth rate of 14.4%
Similarly, Atlanta has experienced rapid growth in recent years. According to the Atlanta Regional Commission, this major Southern city gained more than 66,000 new residents between April 2022 and April 2023.
Before you jump into an unfamiliar pond because the population growth looks promising, consider that every real estate market is unique. Other factors can affect the viability of a market area, says Mark Charnet, founder and CEO of American Prosperity Group in Sparta, New Jersey.
“Never underestimate the cost of a vacancy factor and the cost of repairs,” Charnet says. Investors oftentimes prepare to cover the cost of the property, but neglect the costs that can affect cash flow. Just like rental income, the cost of a water heater, new roof or siding can vary depending on location.
Sometimes the best option hits close to home. That way, you can independently manage your rental property and reap maximum benefits.
Real estate investing can be a rewarding long-term investment. Despite challenging market conditions, there are real estate investment opportunities in data REITs, residential properties in lower- and middle-income areas and places with strong population growth in 2024. However, it’s important to familiarize yourself with an area and its unique characteristics before jumping in.
