How to Profit from Real Estate in a Changing Market
May 30, 2020
Traditionally, real estate markets are said to be following a cycle from a growing bubble to a steady-state and then a fall or a crash. But it is not always easy to predict what comes next. Policy changes, interest rates, unemployment rates, economic growth, and many more aspects play a role in defining the market fundamentals of the real estate sector.
For the past few years, real estate has been growing steadily but slowly even amidst fear of possible recessions. A Sept 2019 survey by YouGov states that about 46% of US citizens expect a recession happening in two years and many people consider real estate to be the safest investment.
Interest rates are fluctuating and falling at record low rates. The mortgage industry itself is going through some swift changes. All of these point to one fact that is already known. The real estate market is always changing and to be able to make profits, you need to have a strategy to deal with changes and make profits.
Here are some ways you can assure yourself of a profit no matter how the market changes.
Diversify or Specialize?
Choose your niche and be an expert in it. Specialization helps you find ways to cut your losses in case of changes whereas diversification makes it difficult for you to develop an understanding of the market.
Real estate investment is not equivalent to stock market investment. And diversification works only for stock investments. For real estate, the advantages of specialization far outweigh any risk involved.
With specialization comes a good amount of knowledge. If you plan to invest in different neighborhoods and different kinds of properties, you may feel like minimizing risk but what happens is you will lack enough knowledge on how to make more value and money out of your diverse investments.
But when you specialize in a certain type of property or a neighborhood, you will be able to set the right rent amounts, offer the best possible value for a deal and develop expertise in handling these properties well.
Managing your properties will also become easy as you will have a clearer idea of the lease types, tenant management and the specific strategies needed for that particular property.
What Can I Afford?
Buy only what you can afford. No matter how enticing a deal sounds, never go for a property that is beyond your buying power. Instead, look for the best properties you can get within your price range.
Identify the properties in your locale that have the highest potential for appreciation.
Also, look at the long term expenses when you lock in on a property. Monthly rents may seem like a good source of cash flow but if the building demands more time for tenant management and maintenance, what you would make out of it would be quite less than you expect. Your profits on resale will also be low as few buyers would be willing to manage tenants. So, the key is to find better-located properties that are in high demand and also within your budget.
You can increase your leverage with the help of credit or private money to boost your buying power. But borrowed money is something you have to be very careful about. There are several factors to consider and you need to be ready with backup plans to repay the loans if your property does not make enough money.
So, gauge your current resources and incomes to get a clear picture of how much you will be able to invest and work within those figures.
Buy to Resell or Flip for Cash
Realtors can do flip sales or quick sales where they buy a property and resell it to make quick profits. Now, while this may sound interesting, it takes a lot more skill to flip than buying it for long term purposes.
Buying to resell gives smaller profits as investors buying from you will also be looking for low price deals and you will be time-crunched to sell the property.
Some pointers to note when you buy to resell are:
- Check the price ranges in the neighborhood before buying to resell a property
- Know the average time to market and time to sell for the properties. The slower it takes to sell the property, the lower your profits will be.
Buying to resell only works if you can make a sale within the few weeks of buying the property and can close the deal as quickly as possible.
Buy for LT Cash Flow (BRRRR Method)
For a safer side of things, it is recommended to always invest in just one property at a time. Don’t look for thrills when you are investing in real estate. Those who make huge profits in real estate usually take a conservative approach to invest. Some of the advantages of buying properties with long term cash flow opportunities are given below.
- Little deals can mature up to bigger deals as you hold on to then properties. Land prices will mostly appreciate and your chances of meeting a loss will be considerably lower compared to short term sales.
- Invest in moderately priced houses. This way you can make zero to very little down payment for the purchase price. If in case, the property loses value, the lender will also face the problem and let you lower the price, so you can keep making the monthly payments. This also gives you the chance to renegotiate the price or terms if the lender is the seller as well.
- Securing leverage for real estate investment is much easier as the housing market is more stable. This lets you invest with a small amount of money and still make good profits in a few years.
- Buy one house at a time. This is by far the safest way to invest in real estate. In case of a market slowdown, you can hold the property until a market rebound by comparing how much it will cost you if you sold it for a loss now and how much it will cost for the maintenance until you can sell it for a better price. Generally, it is advised to hold a property for at the least 3 years when you make such projections.
- Try to get the best out of rental income. Rents usually increase on an average of 5% a year in most markets. While you cannot control the rental income, renting out will help you learn to be a better manager and deal with tenants efficiently.
Takeaway:
Long term investments can be more efficient and fetch better profits than short term reselling. For each house you hold for 10 years, the sale price will be with at least twice the price you paid while buying. So, consider holding an income-producing appreciating investment for longer periods to make huge profits.
Decide Your Minimum Profit Before BUYING!
Photo by Andrea Piacquadio from Pexels
Set your minimum profit goal based on your risk tolerance. Make an offer only after you have decided on the price range that gives you the minimum profit you expect.
It gives you a hard number to base your negotiations.
Low prices houses may give your low profits but would be adequate in covering your expenses and risk. Higher risk properties may be able to fetch huge profits but you cannot always expect to make it big.
For instance, you can buy and sell many $200K houses at the same time that it takes for you to sell one expensive $500K house. Inexpensive houses sell faster and are safer options to buy. Either way, what decides your profitability is reaching the target profit price you have set.
Additionally, you also have to consider the repairs and maintenance costs when you calculate your minimum profits.
Use proper values that reflect real-world data and not wishful thinking when you set your profit target
Conclusion
Making profits in a market riddled with constant fluctuations is a challenge. But in no way does it make real estate any less attractive as an investment option. With careful planning and management of your resources and cash flows, you can very easily learn to ride the tide and make profits regardless of the market conditions.
Stay vigilant, learn the market conditions, understand your affordability, leverages and make smart decisions on investments.
What are your views on this? Let us know in the comments below.