3 Questions To Answer Now
FINDING OPPORTUNITY IN CHANGING MARKETS
3 Questions To Answer Now
Have you noticed changes in the real estate market recently? It seems to be in the news every day. As real estate investors, many are anxious. So are many people wanting to be homeowners. Inflation is at a 40-year high and interest rates are rising. Home affordability is dropping.
If you have read the book, Who Moved My Cheese, then you probably already recognized it.
The cheese has moved. We have to find new cheese.
How do we, as investors, find opportunity in changing markets?
ONE. What are the changing markets?
We have seen home prices rising at a faster rate over the last couple of years. Multi-family housing prices have also increased. Capitalization, or CAP rates, were falling, compressing rates of return with the cost of borrowing.
Interest rates have also been rising rapidly. The Federal Reserve has stated that it will continue to increase rates until it is satisfied that inflation is in check.
There is a changing demand for housing, with more people choosing to remain renters. Some of these are renting because home ownership has become more expensive with the higher interest rates.
New home and multi-family construction have slowed down. Rent increases are smaller.
The CAP rates between C-Class and A-Class multi-family properties have been compressed to the point that new construction can be more appealing than value-add investments.
TWO. What is the opportunity?
To discover opportunity in the current market, let’s take a quick look at some of the opportunities that have done well since 2006.
Airbnb and short term rentals have become a common way for many homeowners to obtain additional income. Executive housing is a variation on this theme, catering to people who travel to a fixed location for an extended period of time. Many investors also chose to purchase properties for the sole purpose of placing them in service as short term rentals.
Buying single-family rentals using the BRRRR strategy. This is Buy, Rehab, Rent, Refinance, and Repeat. The same principle works for value-add multi-family investments. The properties may later be refinanced or sold.
Many houses were purchased as foreclosures or short sales during the Great Recession. During that time many people were underwater, with mortgage balances that exceeded the value of their property. Today, with the significant increase in home values over the last few years, the number of properties underwater and in the foreclosure process is significantly lower.
Where is the opportunity today?
Every city goes through economic cycles, but they are not all in the same place of the cycle at the same time. Migration and growth patterns, along with employment demands, can have a significant impact and create opportunities. Moving companies sometimes provide data showing where people are moving to and where they moved from.
We can look for the path of progress in these cities. What are the fastest growing zip codes? Where are the new developments that are still going up?
Are buying habits changing? It appears that more people are choosing to rent and stay mobile. For some it is because housing has become too expensive for them to purchase a home. For others it is a choice to stay mobile and move around the country when better job opportunities arise. Some large corporations are choosing to meet this increased demand by building entire neighborhoods of single-family homes as rentals.
Some of the opportunities can be found where property owners no longer desire to manage a property. It might be possible to use creative finance techniques to acquire these properties. Examples include assuming a mortgage, taking over a mortgage subject-to, and master leasing with an option to purchase a property.
Mobile homes, mobile home and RV parks can also provide some of the more affordable housing in this changing market.
THREE. How do you find these opportunities in a changing market?
I like a deep sea fishing analogy. If I want to fish I can take a fishing pole to a pier and drop a line in the water. But if I want to catch larger fish, like red snapper or something even bigger and more challenging, I need to go out into deeper waters. This requires a boat. But that is not enough. I need a captain who knows where the fish are. Many deep sea fishing boat captains have dropped artificial reefs offshore. Over time these artificial reefs attract fish and their population grows. So we prefer to charter a boat and captain to take us out and go after the larger fish.
Where do we find the boat captains? At the marina, of course. And online. At the marina you can see who is bringing in a large catch.
As investors, we can go where other successful investors are going. Like the local real estate investor clubs and meet-ups. We can talk with brokers. We might even consider getting a coach or working with another experienced investor.
Help Us Get To Know You Better
How are you looking for opportunities in the current real estate market?
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Mike is a retired aerospace engineer with a passion for real estate investing and teaching financial literacy. He lives with his wife in Daytona Beach, Florida.