How Tariffs Impact Real Estate Investing

Most of us think of tariffs as a political tool. They’re an abstract concept that most people don’t consider as impacting their day-to-day life, but it can cause a major hit to your profit margin as a real estate investor. Economic tariffs are usually covered by the media as a mechanism for trade wars, but they have a knock-in impact for the U.S. real estate industry.

Tariffs impact every aspect of the economy, from the cost of building materials to labor demand, which can pinch at your profit margins. Whether you’re focusing on fix-and-flips or long-term rentals, it’s crucial to understand and mitigate the impact of tariffs on your investing strategy. In this article, we’re exploring how tariffs impact real estate investing and what you can do to protect your profit margins.

Why Do Tariffs Matter for Real Estate?

Tariffs impose import taxes on foreign goods with key markets like copper, aluminum, and automobiles often the core focus. For real estate investors, tariffs can drastically increase the cost of construction materials, appliances, and building systems.

These unexpected price rises can result in supply chain delays as manufacturers and suppliers find themselves facing higher-than-expected import fees when their products or materials arrive in the United States. Real estate investors can expect the current market uncertainty, with tariff deadlines being continuously pushed back, to increase the cost of building and rehabbing properties.

Some domestic real estate markets have found themselves more exposed to the impact of tariffs than others. J.P. Morgan recently spotlighted the impact of a surprise tariff increase of 25% to 50% on steel and aluminum imports into the U.S., describing it as causing “significant uncertainty for the U.S. Midwest premium (MWP) market”.

The Materials Impact: Direct Cost Increases

Real estate investors are seeing the highest price increase in the cost of materials and appliances. It’s not just fixer-uppers who should be concerned. Every type of real estate investor who improves their property before putting it on the rental or buyer’s market will likely need to increase their property improvement budget.

Steel and aluminum tariffs are increasing costs on all sides, from structural components for building to appliances like HVAC systems. It’s not the first time in recent years that investors have had to be vigilant about the ever-changing prices of materials. Lumber prices spiked in 2021 and 2022, leading to a supply chain crunch and repeated price volatility.

While this situation was exacerbated by labor shortages, transport disruptions, and the pandemic, it showcases the long-term impact of price volatility as it took until early 2023 for lumber prices to dip below their 2021 prices.

Real Estate Construction & Development Delays

Tariffs have a knock-on effect throughout the entire construction industry, one of the most exposed sectors to supply chain delays and price volatility. It’s common for bottlenecks to occur when material costs rise rapidly, resulting in construction and development delays for real estate.

Suppliers often pivot when materials are tariffed, focusing on their more affordable products instead. Increased customs checks and import bills lead to delayed processing as materials arrive in the country. These delays and increased costs are passed directly to the consumer, including real estate investors building new properties or renovating.

Construction delays can cause additional challenges for investors, including those seeking to sell their properties to finance their next investment. Depending on your financing source, a bank loan or your initial funding may fall short as tariffs on materials cause additional delays.

Labor and Inflation Feedback Loops Caused by Tariffs

The impact of tariffs shouldn’t be considered in isolation. Economic tariffs often result in labor and inflation feedback loops, resulting in thinner margins for investors working on ground-up projects or who are rehabbing a property.

Tariffs typically contribute to general inflation pressures with construction companies often raising the cost of their contracts in unison with material costs to cover their own margins.

Impact of Tariffs on Different Real Estate Investor Profiles

Real estate investors will feel the impact of tariffs to varying degrees, depending on their primary investment strategy. Fix-and-flip investors are hit hardest by tariffs as many of the appliances and materials impacted are the focus of their renovation work. Kitchen cabinets, flooring, and appliances will all increase in cost.

Investors using a ‘Buy, Rehab, Rent, Refinance, Repeat’ (BRRRR) strategy will see their rehab costs grow with the refinancing value of their property potentially lagging their initial expectations due to construction inflation.

Another investor profile exposed to the far-reaching impact of tariffs is build-to-rent developers, including those seeking properties to potentially demolish or repurpose. These investors are squeezed on both ends, facing higher purchasing costs, which may not be easily recouped if the local market’s rental price remains stable.

Long-Term Strategic Shifts for Real Estate Investors

What can real estate investors do to minimize their exposure to economic tariffs? There are both short and long-term strategies they can adopt to protect profit margins and their portfolio value.

Here are some things to consider if you’re concerned about the impact of tariffs:

• Switching to domestic or alternative suppliers for appliances and materials may minimize potential price increases.
• Depending on your construction needs, substituting high-tariffed materials for a more affordable alternative may be possible. For example, opting for wood instead of steel.
• Scrutinize the potential ROI for rehab projects to determine if a higher cost will deliver a worthwhile return.
• Monitor the cost of key materials and commodities for more accurate budgeting, adding a financial buffer to your cost modeling for any potential disruptions.