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SHOW NOTES FOR EPISODE 236: 10 TIPS FOR BUYING RENTAL PROPERTIES IN TODAY’S SLOWING MARKET
With increasing competition, rising interest rates and topped-out home prices, a correction is approaching. But what are real estate investors to do? Just because real estate prices in some areas have hit a temporary ceiling, that doesn’t mean that profits from property investments are hard to come by. In today’s podcast, Bill shares how, even during a real estate market slowdown, stagnation or depression, profits can be made… if you know where to look.
The Outlook
According to Bloomberg Businessweek…
The U.S. housing market — particularly in cutthroat areas like Seattle, Silicon Valley and Austin, Texas — appears to be headed for the broadest slowdown in years. Buyers are getting squeezed by rising mortgage rates and by prices climbing about twice as fast as incomes, and there’s only so far they can stretch.
Robert Shiller, a Nobel Prize-winning economist who is famed for warning of the dot-com and housing bubbles, said in an interview, that “This could be the very beginning of a turning point,” He stressed (however) that he isn’t ready to make that (official) call yet.
Look at what just happened with Seattle. For the last two years, it was the hottest housing market in the country but it just lost it’s #1 place to Las Vegas, according to the recent Case-Shiller home price index report just released. What happened? Prices maxed out and inventory declined. However, people are still buying, they’re just not buying in Seattle Metro. Instead, people are buying in nearby Tacoma and Everett, where home prices are still reasonable, at least for the time being. The bubble may have capped out in Seattle, but new bubbles are developing in the surrounding secondary and tertiary markets.
This podcast will present ten tips real estate investors can apply when buying in today’s slowing market to hedge their success and grow their portfolios.
- Research and understand where you are on the curve – the concept of a property market cycle existing is not myth, it’s a fact and is generally accepted to be based on a price-income relationship. We talk all the time on this show about emerging markets. Check the recent historical price data for properties in the area of the country you’re considering purchasing in and try to determine the overall feel in the market for prices currently. Are prices rising, are prices falling or have they reached a peak. You need to know where your area is on the curve of the property market cycle in your preferred investment area.
- Get ahead of the curve – as a basic rule of thumb, professional real estate property investors seek to buy ahead of the curve or, as I like to call it, “at the base of the bell,” looking at the curve as a bell curve. If a market is rising try to target “up and coming” areas that are close to locations that have peaked, areas close to locations experiencing redevelopment or investment. These areas will most likely become ‘the next big thing’ and those who buy before the trend will stand to make the most gains. As a market is stagnating or falling many successful investors target areas that enjoyed the best levels of growth, yields and profits very early on in the previous cycle because these areas will most likely be the first areas to become profitable as the cycle begins turning towards positive once more.
- Know your market – who are you buying property for? Are you buying to rent to young executives, purchasing for renovation to resell to a family market or purchasing to rent real estate for short term rental like AirBNB, VRBO or vacation renters? Think about your market before you make a purchase. Know what your target renter look for in a property and ensure that is what you are going to be offering them
- Think further afield – there are emerging real estate property markets around the country where local economies are going from strength to strength, where a growing business sector is pushing up demand, where local business tax incentives have been created to attract more business or a major employer plans to relocate and will provide hundreds or thousands of jobs for example. Look further afield than your own back yard for your next property investment and diversify that real estate portfolio for maximum success.
- Purchase price – set yourself a budget that will realistically allow you to purchase what you’re looking for and profit from that purchase, either through equity growth and or rental cash flow. Pay less for properties in anticipation of a downturn.
- Entry costs – research fees, charges and all expenses you will incur when you buy your property – they differ from state to state and sometimes even from county to county. Know how much you will have to incur and factor this amount into your budget to avoid any nasty surprises and to ensure your investment will be profitable.
- Capital growth potential – what factors point to the potential profitability of your real estate property investment? If you’re looking at an emerging market, which economic or social indicators exist to suggest that property prices will increase? If you’re buying a rental property, are there any indications to suggest that rental demand will remain strong, increase or even decline? Think about what you want to achieve from your investment and then research and find out whether your expectations are realistic.
- Exit costs – if you will incur a substantial capital gains tax liability if you sell your investment property, then will that render the investment profitless?
- Profit margins – what levels of capital or equity growth can you realistically gain on your property investment and how much rental income can you generate? Allow margins for declining values and reduced rents. Work out these facts and then work backwards towards your initial budget to work out your potential profit margins. At all times, you have to keep the bigger picture in mind to ensure that your real estate investment has good potential for profit.
- Think long term – unless you’re buying property for short-term gain and intending to flip or wholesale it (which I would highly recommend against in this market), you should view real estate investment as a long term investment. Real estate is a slow to liquidate asset, cash tied up in property is not simple to free up. Take a long term approach to your property portfolio and give your assets time to increase in value before cashing them in for profit.
Another strategy is to not buy now and wait ‘til the bargains hit the market. For more conservative investors, you’ll want to wait and build up your cash reserves and prepare for the post-recession bargains. While you are waiting, here are a few more tips
- Put less emphasis on leverage – Leverage, without a doubt, is a great way to grow your portfolio quickly, but market variables have to be right for leverage to make sense. With increasing interest rates, less favorable loan products and property prices peaking or on the decline, it is not a good time to leverage.
- Optimize your current investments – Instead of buying new properties, concentrate on re-investing in your current properties through upgrades and improvements that will reduce expenses (like water-saving toilets, facets, etc.)
- Refinance while rates are low – If you can still get decent interest rates, re-fi to reduce your mortgage payments. You can also try to accelerate your pay down on your existing mortgage.
These tips will help you either in the “acquisition” or “wait and see” stages of your investing activities in today’s market.
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