Trade War May Be a Great Opportunity to Invest in US Rentals

[Jorge Vazquez]

Trade War May Be a Great Opportunity to Invest in US Rentals

September 21, 2018 By Jorge Vazquez & Rafael Castro 

Trade wars…both countries fight but almost always end up coming to an agreement. It’s like the best friends fighting in middle school for a girl, but then the next day makeup and have lunch together in the cafeteria. What is the impact for those of us focused on long-term real estate investment in the US? You will be surprised, but there are some great opportunities out there, especially for foreign investors. Let’s focus on the top 4 trends you can take advantage of during a Trade War:

1. Steel goes up, rent amounts go up too!
   1. Wait…steel impacts the rental market? Absolutely! Think about it…steel is used in new high rises, condos and apartment buildings. A rise in steel costs could cause a rent hike in apartment and condos to make up for the increase in construction costs. We have recent history to prove it: In 2017 the US levied a 20% tax on Canadian lumber. Lumber prices have gone up 15% since, which in turn led to a six to ten thousand dollars increase in median housing values. Steel prices, go up, rent goes up…Steel matters!
2. China buys a LOT of US Bonds, driving interest rates higher if they react
   1. Trade wars can raise interest rates because they drive inflation, and the Federal Reserve is as allergic to too much inflation as I am to shellfish, and interest rate increases are their tool of choice.
   2. China is the biggest holder of US notes. If they buy fewer notes, the Fed has to increase rates to make them more attractive. If China buys more notes, it floods the market with dollars, creating inflation and…you guessed it, Fed increases rates.
3. If you are a long-term real estate investor, rate increases are GOOD
   1. If rate increases, mortgage rates go up as well, making it harder for buyers to pay for homes
   2. If rate increases, homeowners that have a low mortgage rate will be reluctant to move from their current home
   3. Fewer sellers and more buyers not affording a home lead to an increase in rental demand, driving rent amounts up and decreasing the time to find tenants for your rental properties.
4. When fools money rushes out, smart money comes in!
   1. The trade war can be a red flag to international investors, as they see it harder to invest in US real estate. This could have a big impact on the market and Asian investors in particular. If relations between the countries get worse, more investors may choose to stay away from investing in the US.
   2. What happened during the last recession in 2008? When the real estate market was freefalling, from 2008-2010, as individuals were selling their properties at pennies to the dollars (“fools money rushing out”), big investors were buying in big volumes (smart money rushing in!). Its the big ol’ saying…buy low, sell high.
   3. The 2008-2010 selling/buying spree may repeat again if the trade war continues and international investors decrease dramatically their investments here. It’s a great opportunity to go “against the grain” and scoop up real estate investments with much less competition and at competitive prices. Are we going to see a drop in prices similar to 2008-2010? I hope not! But staying on the sidelines waiting for something to happen has never been a good strategy.

Who knows…maybe this whole article is a mute point if the two countries reach an agreement soon. The impact to both of their economies, and the global market overall is too high and the risks, both financial and political, are very high too. Right now both countries sit a standstill in a game of chicken to see who blinks first. It may be a great opportunity for the smart long-term real estate investor to use the trade war as another tool to analyze and take advantage of the situation. Why act now? Remember, like those middle school kids, after they fight for the girl, they end up next day together eating lunch at the cafeteria…that can be the US and China in a couple of months.