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’d like my parents and in-laws to come visit more, which is why it’d be nice to have a ground floor level portion of the house dedicated just to them. This would make it more comfortable for all of us.

Given I write from home, it’d 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 my toughest challenges because once I hear him, I just want to drop everything and go to him.

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

Despite publishing cautionary posts about investing in stocks, bonds, and alternatives at current levels, the biggest caution I should be writing about is taking out massive debt to buy property at record highs.

If you lose 50% on your stock and bond portfolio, you’ll be upset, but fine. If your property loses 20% of its value, however, this means you’ve lost 100% of your 20% downpayment. In this scenario, you’ll also probably still be fine – if you don’t have to sell. But when property prices correct by 20% or more, many people become forced sellers because they’ve also lost their jobs.

I understand that millennials are coming of buying age and inventory is on the decline, making competition for buying a home fierce. However, only if you are fully cognizant of the following points I’ve highlighted below should you proceed with a property purchase today. 

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.

With home prices at record highs, it’s only natural that more homeowners are spending money on remodeling. I’ve personally remodeled three homes and I never want to remodel again!

But for those of you who want to suffer through the pain of remodeling, whether to get a better deal or earn some sweat equity, here are some top down views I have about the process:

1. Pay more for quality material since labor cost is relatively fixed
2. Get the proper permits to protect yourself from bad workmanship, while also boosting the value of your home through a more  comprehensive 3R report
3. Expect the overall job to cost 30% more and take 30% longer, but don’t let the contractor know
4. Adding livable space is the most valuable type of remodel
5. Always speak to the last contractor’s client at the very least
6. Great homes have wonderful outdoor space, don’t neglect landscaping
7. The value of a remodel fades over a 20-30 year period, at which point a new remodel may be due
8. Decide whether you’re remodeling for profit or for personal use

The big question every homeowner has when it comes to remodeling is how much they should actually spend to increase their chances of not only getting their money back, but also making a positive return if you decide to sell.

I believe the #1 remodeling error is spending outside the scope of the home. Let’s discuss a framework.