In today’s real estate market, fear and uncertainty have crept in. Interest rates have jumped more than two and a half times since early 2022; capitalization rates (a calculation used by investors to help evaluate how risky a real estate investment opportunity is) are on the rise; inflation remains a persistent issue; insurance premiums are going up.
That’s led to concerns of falling property prices, causing many to wonder about the state of the real estate market. Add to that a high percentage of both buyers and sellers expressing regret about their transactions in 2023.
The mood around the real estate market is not very good, making many real estate investors nervous.
So, what’s an investor to do?
Do we sell everything? Buy an RV and try to live a nomadic lifestyle until things go back to normal? No, but I wouldn’t recommend approaching every opportunity as we did during the pandemic, when it felt like every deal was a “can’t miss.”
Staying on the sidelines may not be the best strategy, but neither is jumping in quickly — it’s crucial to strike a balance. In today’s environment, it’s essential to be selective and particular about the types of opportunities you entertain. Balancing action with prudent choices will be key to navigating the real estate market successfully.
As investment fund founder Shelby Cullom Davis famously said: “You make most of your money in a bear market, you just don’t realize it at the time.”
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It’s not sexy, but during difficult times we have to remind ourselves of the fundamentals. Here are four important factors you should strongly consider before making an investment in real estate:
Population and job growth
When evaluating a potential investment market, consider factors like population growth and job growth rates. These metrics indicate future demand for housing. Additionally, assess the rate at which new housing units are being constructed to determine supply and the current occupancy rate. Only invest in markets where data supports a housing shortage that’s unlikely to disappear soon.
Long-term strategy
Given the current market conditions, selling properties may not be easy or profitable for the near future. Prepare to hold properties long term, ideally for at least five years. Ensure that the properties you acquire can generate strong cash flow, as this will be your primary income source in the short term.
Rising expenses
Several expenses have surged recently, potentially impacting your cash flow. Insurance premiums, property taxes, labour costs and inflation have all been on the rise. This unpredictability makes forecasting cash flow a challenging task. It’s vital to recheck the market’s fundamentals and ensure your investment can withstand these challenges.
Leverage with caution
Leverage can be a powerful tool in real estate, but it’s a double-edged sword, particularly in uncertain times. Traditional mortgages and portfolio loans may not be the best options right now. Instead, consider creative financing solutions like assumable loans, seller financing, wraparound mortgages, private loans from friends and family, or even purchasing in cash. Those who can secure low-interest loans or buy in cash may find more opportunities to thrive in a challenging market.
In these turbulent times, it’s crucial to be well-informed and adaptable as a real estate market investor. While there are concerns and challenges in the market, there are also opportunities for those who approach it with a strategic mindset.
