Is Real Estate Still An IDEAL Investment?

IS REAL ESTATE STILL AN IDEAL INVESTMENT?

Rising interest rates and declining home sales have some people questioning whether or not real estate is still a good investment.

One source estimates the number of home sales closed by investors in Q4 2022 dropped 46% from the prior year.

Commercial real estate prices are pressured downward due to rising interest rates.

But that does not mean that we should panic and sell, or even avoid real estate investments.

REAL ESTATE AS AN IDEAL INVESTMENT

We still believe that real estate is an IDEAL investment.  Harland Merriam wrote a blog some time ago explaining this in detail.  Before going into why we believe this holds true today, here is a quick summary of what makes real estate an IDEAL investment.  You can read Harland’s blog here for a more in-depth discussion.

INCOME – Investment properties can provide a stream of income.  This holds true for many forms of real estate, including houses, apartments, office buildings, mobile home and RV parks, and more.

DEPRECIATION – This is a tax deduction that can be used to offset income.  It can create a loss on paper, resulting in a significant tax reduction.

EQUITY – Equity is attained through appreciation such as rising prices due to inflation.  It can also be created by adding value to a property, such as from a renovation, reducing expenses, or increasing income.

AMORTIZATION – As tenants pay rent, a portion is used to pay down principal on the mortgage.  This creates additional equity as the loan is amortized.

LEVERAGE – The most common form of leverage is a loan on a property, allowing you to buy more property than you could with your own cash.  You may have seen this in your own home or rental properties if you only had to pay a small percentage down.  Leverage has a multiplier effect on creating equity, but must be used with caution so as not to create a cash flow shortage.

Any of these benefits can be maximized on a particular deal, but the challenge remains how to get the best total return while maintaining a desired level of cash flow.

Is RE still an IDEAL investment?

Rising interest rates make finding a property that produces positive cash flow more difficult.  And the rising interest rates put downward pressure on commercial real estate prices.

The market has been changing and there is much uncertainty.

It is also a challenging time for flippers.  There is a reduced number of buyers, but this is somewhat offset by the low inventory, keeping prices fairly stable.  Will springtime bring out more buyers?  Or will they sit on the sidelines as the Federal Reserve continues its plan of hiking interest rates?

Here is why we believe real estate is still an IDEAL investment.

History Repeats Itself

Real estate values continue to rise over the long term.  During times of normal inflation, around 3-4 percent, real estate provides an increase in equity.

Rents continue to rise with inflation, but a fixed-rate mortgage keeps the payments for principal and interest constant.  This provides a cash flow stream that increases more quickly than inflation.

About one third of the population consists of renters.  This may vary by a few percentage points, but we have a significant renter population.  For some it is a choice, while many have not learned how to save money to buy a house.  Some will always be dependent upon government-subsidized housing.  Many people will always be renters.  And almost everyone wants a nice place to live.

Stick to Fundamentals

Preservation of capital is more important than earning high returns.  While we seek to obtain a higher total return, remember that it is cash flow that enables us to hold a property.

Properties with positive cash flow are better able to weather a storm.  

Don’t over-leverage.  It might take a larger down payment or lower loan to value to ensure a property will have sufficient cash flows to sustain itself and provide the desired cash flow.  Be sure the debt service coverage ratio, or DSCR, remains comfortably high enough.

Maintain plenty of reserves.  This should be able to provide for larger capital improvement expenditures which are certain to be needed in addition to being able to cover expenses during vacancies.

Get Creative and Expand Your Toolbox

This might be a time to consider adding tools to your investment toolbox.  There are many ways to invest in real estate, many of which do not require you to be a hands-on landlord.

If you want to do it yourself, there are creative deal structuring techniques.  Like purchasing with lease-options, or buying subject-to an existing mortgage.

You can also expand your network of real estate professionals.  Get to know people in your area who are currently buying properties.

Some people are choosing to be private lenders, obtaining a higher interest rate than what the banks are paying right now.  Can you see yourself being the bank and cutting out the middle-man?  

It could be partnering or doing a joint venture with someone else who does the heavy lifting.  Real estate syndications are another form of partnership that enable people to diversify their investments while remaining passive.  That is, they don’t have to be involved in day-to-day operations or handle calls from tenants.

The bottom line is that real estate continues to be an IDEAL investment.  Remember to stick to the fundamentals and explore new opportunities as the markets change.

Help Us Get To Know You Better

How are you adjusting your investment decisions in the current environment?  

Attune Investments provides a better return for our investors.  And we make a positive impact in people’s lives and in our world.

If you want to learn more about how others are investing with us then we invite you to join our club and request a conversation with us.  See below.

Through the power of a syndication partnership with other investors like you, working with managing partners who are experienced in managing apartment complexes, you can own multifamily assets.  

Or you can choose to loan money, get in with a clear return, and get out earlier.  

If you haven’t already subscribed to our BLOG, you can increase your knowledge and comfort with this asset class by subscribing now.  It’s free.  We publish an article every week.  SUBSCRIBE HERE And take one more step. Become a member of our ATTUNE INVESTORS CLUB in which you have more personal access to us.  JOIN HERE.