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Annapolis Real Estate Law Blog

Real estate investment strategies for entrepreneurs

Successful entrepreneurs in Maryland and around the country are generally people of action who make decisions quickly when an opportunity presents itself. While behaving in this way can be fine when the consequences of a poor decision are relatively benign, people may wish to take a more prudent and pragmatic approach when entering the challenging and unpredictable world of real estate investment.

Running a business requires constant attention, and successful entrepreneurs are constantly on the lookout for untapped market segments and new income streams. However, real estate transactions are usually conducted at a more relaxed pace, and most of the work done by property investors involves research and due diligence. Business owners often see real estate as a sound and secure investment strategy, but success in property investment is based on sound and calculated decision making rather than seizing opportunities.

Ways real estate can increase wealth

Many people in Maryland would like to invest, but they may not know which vehicle may work best for them. If they are interested in potentially investing in real estate, there are several ways that doing so may increase their personal wealth.

Landlords may have profits from their rental units, which are equal to the collected rents minus the properties' expenses. Landlords who have several properties may have profits coming to them from multiple sources. Another way real estate can help to build wealth is through appreciation in its value over time.

Different commercial real estate investment strategies

Maryland residents who are interested in investing in commercial real estate may avail themselves of several different approaches and strategies. The best method often depends on the amount of available capital they have and their ability to obtain loans.

Some investors choose to purchase so-called "trophy properties", which are located in desirable locations, are new or are otherwise high-profile. While this may seem like a lower risk strategy to take, the cost of such properties is normally very high. Most people would need to be able to obtain commercial real estate loans in order to acquire these types of properties. If they qualified, they would need to make certain they receive decent interest rates and check when the loans would mature.

Government changes rules on luxury real estate purchases

Real estate investors in Maryland may be interested in a new federal rule that will require the identification of real estate buyers who purchase luxury properties for cash in both Miami and Manhattan. The rule will require that those purchasing homes in Miami of $1 million or more and those purchasing Manhattan properties of $3 million or more be identified to the Treasury Department.

Many people purchasing such high-end residential properties do so while keeping their identities anonymous, using shell companies to complete the transactions. The government indicated that it is cracking down on this practice because it wants to prevent potential money laundering.

The impact of interest rate increases on the real estate market

Commercial real estate developers and investors in Maryland have been paying close attention to statements coming from the Federal Reserve in recent months as economic experts became more convinced that historically low interest rates would be increased for the first time since 2006. Janet Yellen, the Fed's chairwoman, cited inflationary concerns when she announced the long-awaited hike on Dec. 16, and economists have disagreed about the impact that the 25 basis point increase will have on real estate markets.

The interest rate increase comes at an inopportune time for many commercial real estate investors as it coincides with the maturity of mortgage-backed securities worth billions of dollars that will now be more costly to refinance. Some fear that this factor combined with fears of future interest rate hikes could lead to a flurry of new borrowing that would make it more difficult for developers and investors to access capital as banks become more selective and begin to apply stricter lending criteria.

Market forces make home buying more attractive than renting

People in Maryland who have been dreaming of home ownership should be motivated to start house hunting. Historically low mortgage interest rates and rising rents are increasing the appeal of buying a home.

Although interest rates on mortgages could rise, they still offer an opportunity to produce significant savings on a home purchase. Currently, 30-year fixed rate mortgages only demand about 4 percent in interest. Even with housing prices inching upward in some markets, a low interest rate could result in a payment within reach of many people. According to one real estate broker, low interest rates could create hundreds of thousands of dollars in savings over the decades of a mortgage.

Home prices rising at fast pace

There are some positive signs for Maryland real estate investors, as home prices are continuing to rise. On Dec. 29, an announcement was made that the S&P/Case-Shiller index of property values rose by 5.5 percent for 20 U.S. cities from October 2014 to October 2015. Previously, data for the same cities showed that home prices had risen by 5.4 percent for the year ended September 2015. Home prices rose by 5.2 percent nationally.

Analysts say that rising property values are partially due to the limited supply of properties. Cities such as Denver, San Francisco and Portland, Oregon, are contributing to the rise in overall home prices as those cities saw 10.9 percent annual gains. The smallest increase in home prices was in Chicago, where home prices went up by just 1.3 percent.

Banking regulators tell banks to tighten loan standards

Federal regulators have warned banks in Maryland and across the country about the consequences of loose lending practices. In a joint statement issued on Dec. 18, the Federal Reserve's Board of Governors, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation said that they were particularly concerned with commercial real estate loans.

According to federal banking regulators, underwriting standards for commercial real estate loans have gone down, and many banks are allowing a significant number of exceptions to their underwriting policies. The effect of these loose lending standards could have a negative impact on the financial health of the banks themselves and the country as a whole, regulators warn.

The impact of an interest rate increase on real estate

Stories about falling unemployment rates and a rebounding economy have led many in Maryland to believe that the worst of the 2008 financial crisis is now behind them, but fears that interest rates may soon be on the rise once again have led to nervousness among some real estate investors. One of the most relied upon ways to determine real estate market value is looking at the spread between Treasury yields and capitalization rates. According to experts, this spread is usually about 270 basis points, but low rates and a strong real estate market have seen this spread grow to about 300 basis points.

Experts say that this allows the real estate marker to absorb some of the impact of an interest rate increase. They also point out that the economic data that may prompt a rate hike is also good news for commercial real estate developers and investors. Demand for space will likely continue to push vacancy rates down and rents up, and even fears about a surging dollar are being downplayed by analysts. They say that projects in major markets like New York, San Francisco and Boston are still able to attract significant amounts of foreign investment.

Using a checklist for selecting a business location

Opening a business in Maryland can be an exciting prospect, but it is important to make certain that the chosen location will work for the new venture's purpose. There are many different things business owners should consider when trying to decide if a particular property will be a good fit.

In order to make it easier, business owners may want to use a checklist to help them analyze a property in which they are interested. They should then conduct the research necessary in order to answer all of the questions on their list.