What goes up, must come down.
It’s true in gravity … elevators … and the real estate market.
The constant ups and downs can give investors anxiety. It’s hard to enjoy a boom when you’re always wondering … is it all about to come crashing back down?
The good news is that markets rise and fall in cyclical motion.
History repeats itself … and there are signs and patterns to look for that signal when you need to move and when it is best to sit back and wait it out.
Listen in as we discuss where we are in this infamous cycle … and what you can do about it.
In this episode of The Real Estate Guys™ show, hear from:
- Your upstanding host, Robert Helms
- His downright delightful co-host, Russell Gray
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Riding and driving the cycle
Real estate markets work in cycles … we’re either at the bottom, in the middle, or at the top.
So, where are we at? And what can investors do about it?
First off, it’s important to remember that real estate isn’t an asset class itself … there are so many different categories.
Each of those categories operates in its own market … and the cycles don’t always align.
Office buildings could be up while residential is down … and agricultural could be sitting right in the middle … ALL AT THE SAME TIME.
So, when you think about where you are in a cycle, you need to think of both macro and micro levels.
Part of what’s going on will be influenced by the macro … like interest rates, what’s going on with the Fed, tax breaks, and Opportunity Zones.
The other part deals with the micro … what’s going on in a particular industry and the demographics it serves.
The challenge for a real estate investor is that there is no one key indicator for where the market is heading. In fact, it’s so confusing that nobody gets it completely right.
But there are things you can look for … and things you can do … to set yourself up for the best chance of success.
Understanding the big picture
One of the big picture items to look for, understand, and act on is interest rates.
When we talk about real estate investing, it’s really all a derivative of income … of cash flow.
Someone can only afford to pay a price for a house based on their income and how much income that will mortgage into the purchase price of a house.
If you take a look at the major inputs going into a mortgage, you’ll find interest rates and tax consequences.
So, if you can lower interest rates and lower taxes … the same amount of income will buy more houses.
With the new tax code and incentives like Opportunity Zones, there is a good chance that the upside of the cycle will be extended for a few more years … but is it sustainable?
Understand that every day we’re closer to the next market top.
So, what can you do as we get near the top?
Don’t sit on the sidelines
What you don’t want to do is sit on the sidelines. You do need to act.
If you take prudent moves to protect yourself in the case of a downturn … and there isn’t one … you aren’t any worse off.
The good news is that real estate investors and markets move slowly … we’re not flash traders.
Your tenants don’t look at the newspaper, see a headline, and move the next day.
As investors, it’s a balance of being aware of those macro events and keeping specific trends in mind.
Right now, mortgage rates are low, and the dollar is relatively strong. Interest rates are dropping in treasuries … and people are buying there looking for a safe place to ride out market dips.
This gives real estate investors the opportunity to go into the market and lock that low pricing and low interest rate long term. It’s like having a sale on money.
And if you buy a property that has good cash flow with that low interest locked in, you’re putting yourself in a great spot to hold through any downturn in the cycle.
People who sit on the sidelines are guaranteed to make zero return. Instead, look at the idea of recession resistant price points.
Recession resistant means you are renting to a clientele that is likely to always be there … and the price point is typically something just below the median home price.
Many of these recession resistant price points work great in a good economy AND they’ll also be a little more protective in a down cycle.
This is a time to be super prudent when it comes to underwriting … both the analysis of the market and the performance of the property.
When it comes to the performance of the property, there are a couple of big picture things to keep in mind.
You want to live in a landlord friendly state. If there’s a problem, you want laws that favor a landlord and can help you get a tenant out quickly.
You’ll also want to talk to your property manager about rental trends.
What have people been paying in rent recently? How many people are applying for leases now compared to other years? Have they had to change the kind of tenant they accept?
Another way you can make the most of the market cycle is to focus on top markets.
There are lots of investment funds and real estate investment trusts that focus only on the top 50 metropolitan statistical areas (MSAs).
These are the top cities in the U.S. where there is always real estate movement and a depth of demand.
When you go into a market that has already proven itself with solid infrastructure, there’s a greater probability that in tough times people will gravitate there.
Changing your strategy for success
We’re certainly proponents of continuing to invest through cycles … just change your strategy a bit.
It makes a lot of sense to have some cash when you are nearing the top of a market cycle for a lot of reasons.
If you end up having problems with properties that perform differently than you expect during a downturn, you want to be prepared for that.
But downturns are also often where opportunities are … opportunities to buy.
As real estate investors, we make our money when we buy … so it is good to keep some cash in reserves if the right opportunity presents itself to invest in a property with promise.
One last idea to consider when it comes to being at the top of the market is that there are certain demographics that don’t suffer as much in a downturn.
Generally, this is affluent groups of people. When times get bad … they get bad for the middle and bottom part of the socioeconomic ladder.
So, it’s always an interesting strategy to market to the affluent. One of the ways we love to market to this demographic is through residential assisted living.
Remember, your customer is not the person staying in the facility. It’s the family members who look out for them and place them there.
Another strategic investment is hospitality. In downturns … the rich still go on vacation.
Many times in an economic slump, entertainment does well because people are trying to get away from the doom and gloom.
If you believe we’re at the top of the market, there are proven things to think through.
Analyze your portfolio and ask yourself, “What happens if pricing and demand were to go down?” Take a look at your financing. Are you getting the best, lowest rates?
If you take proven steps now, when the market cycle starts heading downward … you’ll be glad you did.
Tune in over the next several weeks as we dive into more strategies you can take to thrive even when the market isn’t doing the same.
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