How to Always be Prepared for Real Estate Market Changes
May 23, 2020
Real estate is a sensitive market. There will be a boom one year, then recessions, changes in government policies and subsidies, floating interest rates, demographic shifts, and many ups and downs.
This is simply because a lot of factors play a role in how real estate markets evolve and change all the time. According to a report, real estate sector witnessed more downturns than upswings in the last 10 years.
So, does this mean that you should stop investing in real estate? No. You only need to be ready to make changes in your strategies and be flexible enough to embrace the change.
This does not mean you shouldn’t have a plan. Investment should not be made on speculation and become a wild guessing game. You should instead have a solid strategy that can predict changes, minimize losses and get the best out of any situation.
Here is a guide on how you can accommodate changes and be able to take on everything the market throws your way and still come up on top of the game.
Know Your Market
Planning for a change starts with predicting the change. While it is not possible to fully predict what comes next in real estate, you can always depend on your extensive knowledge about the market to make some estimations. So, get real busy educating yourself about your market.
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When you start learning about your market, you will observe that the local market and national level stats and averages are quite different. Real estate markets are different throughout the country and each market can have its speed of growth and varying degrees of cash flow.
A good starting point would be to first learn everything that you can about your local market where you live. If it has a low potential for growth, move to a better location and understand that market before you start to invest.
Some ways through which you can predict changes are:
- Gauge whether the market is a seller’s or buyer’s market and find out how long it has been having an upward or downward trajectory in terms of rates of appreciation. This should give you an idea of when the next boost in prices or slowdown might occur.
- Find out the minimum profit ranges that sellers are actually making.
- Learn about the housing properties that have stable price ranges regardless of the market conditions. Sometimes buyers might be willing to buy a house regardless of the total amount if they can afford the down payment and the monthly installments.
- Understand that it is the land value that actually appreciates and not the house.
- Get to know the rents and house prices in your locality and the percentage of average rent appreciation. In general, rent values creep up by 5% every year in a high-value market.
- Get to know the state of the current credit market. If buyers can easily pay for the down payment, they would choose to buy rather than rent.
- Track the foreclosures in your locality to make some good deals.
- You can also track the price ranges at which houses get auctioned off at foreclosures to get an idea of the market state.
- The average time to sell a listing is also a good indicator of the market values.
- Make sure to get a clear picture and not completely rely on public records as these can be misleading. The same goes for average stats as you may mistakenly compare irrelevant factors and reach wrong conclusions. These stats usually compare national averages to a local market which is a little helpful in predicting changes.
Invest Within Your Means
Investing in real estate is more of a time-consuming effort compared to stock exchanges and other investments. You cannot expect to have a diverse investment portfolio in real estate unless you are generously well-funded. So, always choose to invest within your means.
Here are some tips to keep you on track:
- Specialize in how you invest in real estate. This way you will know all that you need to know about a certain type of property or neighborhood. Specialization also helps you manage your tenants better.
- Look for the best properties which you can afford.
- When you buy for a reselling purpose, always try to buy at discounted prices. Aim to get the price down to as low as you can get it. Remember reselling may not give big profits as if another investor buys from you, they too will look for cheaper prices. Know the average time to sell and plan accordingly. The lower the time to sell, the better it is.
- Consider how much you will have to pay in taxes for every profit you make.
- Prefer to invest in just one house at a time. Look for houses that can provide a better long term profit.
- Always negotiate with the minimum profit set in your mind. Try not to sell below that value.
Be Careful if You Borrow to Invest
It is quite risky to invest with borrowed money. So, be extra cautious about what property you buy with your borrowed money.
Structure your debt to decrease your risk and increase profits. You should choose your loan terms carefully and make sure it helps you achieve your minimum profit in the worst case. Here are a few factors to consider before buying a property on loan:
- Term of the loan – short term loans are riskier than long term loans.
- Payment schedule – lower payments in the first few years of the repayment schedule would do you good.
- Loan collateral – your property should be able to fetch a good selling price at an auction. A well-maintained property at an attractive location is, thus, more advantageous.
- Interest rate – the lower the better
- Liability – understand the terms of loan repayment and the liabilities you agree upon. Get help from your legal advisor on this matter.
Manage Risk
Managing risk requires you to take some precautionary strategies.
- Keep yourself constantly updated on the market conditions
- Never make wild guesses on any investment and always be on the lookout for low-risk properties
Credit, Credit, Credit
Avoid borrowing if you base your investment on speculation. If you were to rely on borrowing, make sure your credit score is good.
Avoid borrowing to buy a car or spending money via credit cards. These debts add little to no value to your financial state and eat up on your savings. An older car with no credits is way better than paying a high-interest car loan. You can obtain a home equity line of credit to improve your credit score instead of using the money to buy cars or take vacations.
Also remember, banks are not the only option to draw out a loan for your investment. Banks can be a pain to work with and the liabilities they put you through are too risky. You can arrange for a type of credit called ‘purchase money’ which allows you to take a loan from the seller.
When you opt for Private money, make sure you always read out the terms and get legal help before agreeing to the loan terms. Generally, it is safer for you to seek low-interest loans from known friends and family instead of private bankers.
Protect Your Assets
Avoid debts that might put you in liability and risk your other assets. Learn to diversify your risk. In the event of liquidation, your other properties should remain unaffected. Borrow money, not more than how much you need to pay for the property and buy properties at discounted prices. In the event of self-liquidation, a low-risk property should be able to pay off the debt by itself.
Plan to Repay
Have backup plans for the repayment of your loans. Primary repayment could be made using the rental income and if it is not sufficient to find a secondary source of income to make up for loan repayment.
Manage Well
Learn to manage your tenants, colleagues, and partners well. Take time to improve your management skills
Stick to conservative investment when it comes to real estate. Be very careful with how you spend your money.
Investing is a Lifelong Activity
Real estate investments bear fruit only when you consider doing them for a long time. Investments have to be a lifelong activity and to get maximum profits, it is always recommended to go for long term investments rather than a short term quick sale.
Set up a line of credit with home equity, commercial banks or private investors. Balance your short term needs and your long term goals. Monitor your cash flow and see how much you would need for living and how much you can save up for investment. And plan your investments with these figures in mind.
Conclusion
Focus on spending less and investing more. When you get into real estate investment, make sure your strategies are based on real market data and not on speculations. Be wise and choosy with each investment you make and always have backup plans to minimize your losses.