By Tod Snodgrass
It is not a question of if, but when, the US real estate market goes into its next cyclical downturn.
There is good news and bad news in the Real Estate Investor (REI) market these days. The former is reflected in a roaring economy, lower unemployment numbers, incomes are up overall. The latter are the normal economic forces at work that impact the RE market in general. In this case, examples of a potential looming downturn include:
a. Shrinking inventories in many markets
b. Rising interest rates
c. The fact that it has been 10 going on 11 years since the onset of the last RE downturn.
None of the above means you should stop doing what works best for you as a REIer; but, as the old saying goes, forewarned is forearmed…meaning, there are growing storm warnings in certain local and regional markets that the wise investor ignores at his or her own peril. And let’s face it, real estate investing is a cyclical business. Individual local/regional markets go up and those same markets go down.
Property Investor Options and Advice
1. Buy and Hold (B&H) REIers. Potential positives about B&H is the opportunity for positive cash flow. As long as the economy keeps growing, landlords can usually raise rental rates on an annual basis to at least keep up with inflation, and maybe add a little extra as well, depending on the local rental market. However, downside risks exist as well, especially when the next recession hits the economy. Here is why: During an economic downturn, layoffs are inevitable. Many of those who get laid off are of course renters. When the paychecks stop, rent payment default problems for landlords are often not too far behind.
Advice: Currently, appreciation has driven the overall value of rental units to all time highs in many RE markets. In light of this, you may want to refrain from buying rental units right now, unless the deal is really spectacular, since you do not want to get caught with overly-expensive units in a potentially declining rental market.
2. Fix/Flip. For those in the buy/rehab/sell end of the market, times have been pretty good for several years, depending on where you are situated in the country. What you want to avoid is the squeeze play that befell relatively large numbers of fixer/flippers in the last housing recession. During the 6-24 months that fix/flip REIers are typically involved in rehabbing a property, the market can turn and go south. Suddenly you may lose money, not make money, on the project. Such losses can bring about catastrophic results for individual investors who are “all in” on a rehab project. During the last housing recession, thousands of investors lost millions of dollars because their investments were ill-timed (in hindsight). Many declared bankruptcy and lost everything when they could not find a buyer for the REI property and had to sell it at a loss.
Advice: Switch from fix/flips to straight wholesale contract flips. Fortunately, if you have any knowledge at all about fix/flips then you already possess much of the info you need to do contract flips. Why consider the contract-only route? Four potential reasons include:
a. You can accomplish several wholesale contract flips in the same time frame that you can finish one fix/flip.
b. Unlike rehab jobs, which typically involve hard money lenders, contract flips require:
* No “skin in the game” money, i.e. 15%-30% upfront + a reserve account in some cases
* No upfront costs
* No credit checks
c. After you have done several successful flips, you will have the funds to then move onto fix/flips and/or buy and holds because of your substantially strengthened financial condition.
d. There is an almost unlimited supply of flip money available, assuming the deal is right (low LTV, you already have a cash buyer lined up for use as exit strategy money, etc.).
In summary, whether you are a B&H or fix/flip investor, be aware that what worked in the past may not apply next year.
What We Do: Quickly provide short-term, first position, private capital funding, in smaller amounts, on a cash-on-cash investment basis, to real estate investors.
Contact info: Tod Snodgrass, firstname.lastname@example.org, 310-408-7015