How to choose an investment property
After a stellar few years of a red hot real estate market, fueled by cheap money and changing needs due to the Covid pandemic, it appears the economy as a whole is cooling off, and perhaps a recession looms on the horizon. Of course no investor wants to see that, but we must play the hand we are dealt, and often just understanding the current market conditions, whether good or bad, can open up some opportunities we may not have seen before.
A successful real estate investor must take a close look at the economy as a whole and both the local and national housing market. Understanding the forces at play is key to being able to find value where others may overlook it. Let’s take a deeper dive into these forces and see where our next opportunity lies.
Looking out to the second half of 2022, the economy is in trouble, there can be no doubt about that. The stock market is down significantly from its pandemic highs and inflation is raging across almost every commodity. Gas, groceries and energy prices are all skyrocketing.
Those are the facts, and when the economy contracts and goes into a recession, and we don’t know for sure if that has happened yet, it usually brings most new investments to a halt. We are likely to see home builders face some tough months as buyers are much less likely to want to or be able to purchase a newly constructed home with so much uncertainty
Inflation is quite high caused by several years of very low interest rates fueling massive investments and business growth, only to be exacerbated by pandemic related government stimulus money and shutdowns. Those two years of closed plants and factories have caught up to the economy and we are now left with too much money in the system and too few products on the market. Prices for commodities and household items have risen substantially.
The housing market had already risen to such high levels as people were moving due to covid related issues such as the work from home trend, so it is likely that home prices have already peaked.
The tool that the Federal Reserve Bank uses to control inflation is raising interest rates. The Fed has raised rates several times already this year and has said that they will continue to raise rates roughly every six weeks throughout the remainder of 2022. This will make mortgage payments rise and home prices decrease.
It is important to note that interest rates, while they are going up, are not by historical standards high, nor is it expected they will get to historically high levels. We are just coming off of several years of extremely low rates, and the rate increases may only raise them to average levels.
In order to spot opportunities in the future, we can look back to the recent past and see what happened in the real estate market and predict where we are likely to go. When the pandemic hit in early 2020, it caused a major shakeup unlike anything anyone had ever seen before. Many people of course were hurt financially as businesses had to close and jobs were lost. But very many people, on the other hand, experienced a financial boon.
White collar and office workers were able to work from home (WFH) and kept their jobs just as usual. Needing extra space for additional rooms such as a home office, urban dwellers fled to the suburbs in droves. Many also did not want to rely on public transportation due to social distancing needs which made the suburbs even more popular. Home prices in these areas skyrocketed. Values in many areas are up over 40% in less than two years.
The migration to the roomier suburbs was also fueled by extremely low interest rates. With rates rising, anyone who is already a homeowner will be very reluctant to move since they will not be able to get a mortgage with anywhere near the favorable terms they have now. We can be certain that the number of real estate transactions will drop dramatically from the past few years.
So as an investor, where are the opportunities, both in Texas and nationwide? Home prices are likely to fall, but with the rising interest rates, mortgage payments will not. It is also very likely we will see an uptick in foreclosures as happens with any recession. We have already in June seen a rise in vehicle repossessions, and although the numbers are not out yet, foreclosures are probably right behind.
Rents are certain to increase as well, due to inflation and a slowdown in new home construction. Certain markets around the country will still have relatively reasonable prices on rental properties, and will still exhibit strong rent growth. Cities away from the crowded and expensive coasts that are not reliant on cyclical manufacturing jobs are ideal candidates.
A quick Zillow search and one can still find good deals in cities such as Madison, WI, Columbus, OH, Iowa City and Lincoln, NE. The suburbs around Austin are also great places for investors to start looking. The deals will still be out there, it will just take a little more effort in searching.
Keep in mind that searching on free sites such as Zillow can be great, but competition for good properties is high, squeezing out your margins. For properties in Texas, pointer-data.com has listings of the best off market deals available to only a select group of investors, where less competition will mean bigger profits.
Short Term Rentals
The short term rental market may very well be saturated outside of the common tourist cities in places like Florida and the other Gulf vacation spots. Way too many jumped on that trend and a quick search on AirBnB shows many vacancies and very low prices compared to the last few years.
It’s very likely that many of these short term rentals will no longer be profitable and will be returning to the market and will be quite profitable as traditional long term rentals.
Looking out past 2022 and beyond, the real estate market for investors will look much different than it has for the past few years, but deals will still be able to be found. The fundamentals of investing are still the same, look for markets with strong rent growth and plentiful jobs. It’s going to be a little harder to find these properties but they will always be out there.
In good years, investors can find good deals on the MLS and websites such as Zillow. When these downturns inevitably happen, that is when it becomes crucial to have sources of off market deals. Wholesalers and websites such as pointer-data.com will be invaluable resources to have during the next few years.