As I was reviewing the performance of my once healthy investment portfolio, I found a couple standouts: Omega Healthcare Investors (OHI) and Realty Income Corporation (O).

I knew they were performing well, but I didn’t realize how dramatically these two publicly traded REITs have been performing compared to the S&P 500 index until now. OHI is up ~25% YTD and O is up ~11% YTD.

A common assumption investors have is that when interest rates rise, real estate tends to fall because borrowing costs, and therefore, purchasing power goes down.

Given the Fed has hiked the Fed Funds rate multiple times since the end of 2015, and given mortgage rates have also increased meaningfully as the 10-year treasury bond has sold off, it is impressive how well these two REITs have done in 2018.

Let’s look into more detail why higher interest rates don’t necessarily hurt REIT and real estate performance overall and may actually be a positive signal for the industry as a whole.

When the stock market takes a dump, I like to focus on happier things, like nice houses with beautifully remodeled bathrooms where you can actually go to the bathroom.

As a dad, I want my parents and in-laws to come visit more, which is why it’d be nice to have a ground floor level dedicated just for them. It would be more comfortable for all of us.

Given I write from home, it would be nice to have a house large enough so that I can’t hear my boy squealing with joy or crying in frustration. Trying to create while hearing him is one of the toughest things to do. He makes me want to drop everything.

Finally, I have some FOMO that if I don’t buy a house in one of the best neighborhoods in San Francisco, I might never be able to get in. This is more ego talking than anything else. 

I’ve written several posts helping buyers try to get the best deal possible. As an equal opportunist, here’s a post to help sellers get the best deal possible.

After 30 days of showing my house in 2017, I only had one offer, which was unusual for the San Francisco housing market back then. But I had expected this type of outcome because five years earlier in 2012, I tried to sell my house for 40% less and got zero offers.

My house was on a busy street. Few families felt comfortable living close to so much traffic and road noise. As a result, the only tenants I was able to secure during its rental period were 4-5 dudes.

The person who ended up buying my house was a 47-year-old venture capitalist. He had a daughter and a girlfriend. They were the perfect buyer I had in mind. Although being a venture capitalist sounds impressive, there are many different tiers of VCs. He worked at the VC arm of a food conglomerate.

I’m not exactly sure what his income was, but there was a long delay with his financing because he revealed he was leaving his job to start his own company. The bank didn’t like the uncertainty of his future income, and I had my doubts his bank would come through.

But after going two weeks past his financing contingency, his bank did come through and lent him a whopping $2 million as his primary loan plus another $400,000 secondary loan. In other words, he was only putting down about 10%.

If I was his financial advisor, I would not recommend he leverage up so much to buy my house, especially during a job transition. Better to wait a couple years and see how the new gig goes. Besides, he already owned a nice three bedroom condo not much smaller than my house. I’d tell him to be happy with what he had.

But what’s done is done. I suspect he’ll be fine, especially if he was able to sell his condo, deleverage, and own his new house for at least a decade. Sometimes you got to take bigger risks to live your desired life.

With rising interest rates, rising inventory, and a sluggish stock market, let me share some strategies that may help you sell your house in a softening real estate market. 

When I traveled to China in the early 2000s for business, I frequently explored Special Economic Zones (SEZs) that received preferential tax and incentives for businesses. With most of the economic growth centering around Beijing and Shanghai, the central government wanted to spread the wealth. As a result of tax incentives, business streamlining, foreign investment, and technology, SEZ cities such as Shenzhen and Zhuhai are now a couple of the richest and fastest growing cities in the country.

I’ve always wondered why the United States didn’t do the same. Sure, on a state level, governors can provide economic and tax incentives for businesses to set up shop in their respective states. But there was no such program on the federal level, where taxation and regulation are often the highest.

Until December 2017 that is when a new tax law was passed called the Investing In Opportunity Act. The law is designed to lure capital that faces heavy capital gains tax into Opportunity Funds, or O-Funds, which invest in roughly 8,700 Opportunity Zones, or O-Zones. These O-Zones are generally considered struggling cities or towns that are in need of redevelopment.