“Rents are Up”, “Rents are Down”, “Prices are Up”, “Prices are Down”, “Showings are Up”, “Showings are Down”… you can get whiplash just reading headlines these days. Most of these headlines are market specific, and they could be different if you just shift the time frame observed by a month. So, how are they relevant? Let’s take a deeper dive into this.
Guest post provided by M. Jane Garvey, the President of Chicago Creative Investors Association. With several decades of real estate investing experience including several doors right her in the KC Metro in Platte City.
How Do Headlines Affect Your Business
Headlines are attention grabbers. Many people see them and don’t bother to look for the details. In today’s market we can see two headlines that are exact opposites in two different new stories on the same day. Some people will have seen one, other people may have seen the other. They will have divergent views of what is happening, and if they haven’t dug any deeper, they may be misinformed. As far as accuracy of the stories – even a broken clock is right twice a day. We can paint any picture we want if we observe things in a market like this and choose the right location and time frame.
What these headlines do affect is the perception people have of the housing markets. Most people only have experience with their own rent or the value of their own home. Most have a preconceived notion of what is happening. There are headlines out there that will reinforce their perception.
As an investor, there are always opportunities. Sellers who perceive that there are very few buyers, or that prices are headed down are more likely to accept offers that give you the opportunity to profit. In any market, there are sellers who need to sell due to life circumstances. Some of them can’t wait for the market to shift. Be prepared to buy, if the price is right.
Even when the overall market is struggling, there are often market segments that are doing well. Starter homes can be doing great while luxury homes are struggling. Office properties can be appreciating while malls are struggling. Tulsa, OK can be seeing good appreciation while Minneapolis isn’t. Dig into the data and figure out if the market fundamentals for an area, or market segment, support your investment strategy.
When we face a confused market, the risk is bigger, and the rewards can also be bigger. As investors, we can “sit it out” to avoid the risks, or we can mitigate the risks and seek those bigger rewards. Your decision on which strategy to choose will likely depend on where you are in your investing journey.
How do we mitigate risk?
Due diligence.
Research the heck out of the property, the market, the people, and the legislative climate in the area. If the market is slow, you will have plenty of time to do this, and much of it can be done before you identify a particular property.
Buy low, sell high.
This is way too simple an answer, but it is important. The more risk involved, the lower the price you should pay. If you think you will have a longer holding time before you get a fix and flip sold, you need to account for the extra holding costs in your purchase formula. “70% of After Repaired Value – Repair costs” may not be the right price. 60% might be the right ratio. Run the real numbers and figure out the ratio for your market.
Multiple exit strategies.
When we were buying a rehab in Dec 2008 as the housing market was collapsing, we negotiated for seller financing that allowed for the very-likely scenario that it would be more appropriate to rent than sell when the rehab was finished. This indeed was the case. We than went to a lease-option as our sales strategy to recover some of our rehab costs, and to minimize the headaches that would come with a rental.
Have reserve funds lined up.
Keep loads of reserves so that you have the flexibility to change direction as needed. Reserves are not necessarily sitting in a bank account, but they should be funds that are accessible quickly if needed. A good backstop will keep your portfolio safe from the unplanned wild pitch.
Don’t put all your eggs in one basket.
It would be better to make a handful of smaller investments than one big one. If you don’t personally have the funds to do this, get seller financing or share your investments with other investors. Keeping the investments small compared to your portfolio size is like diversifying your portfolio in the stock market. They may not all be big winners; but you have more shots at it.
There are always sellers who need to sell. Likewise, there are always buyers who need to buy. You can minimize your holding time by making sure you are providing what they want. Buyers are not all the same. Providing an outdoor pool in International Falls, MN will not get you the same return on investment as providing the same pool in Orlando, FL. In one place it is an unwanted maintenance nightmare, in the other place it is almost a necessity. Figure out who your buyers are likely to be and cater to them.
There are always renters looking to rent.
Taking the time to figure out what a renter will value is important to maximize rent and minimize holding time. This also varies with your market. Do some research before you figure out your rehab plan.
Your strategy matters.
To be effective in our investing we need to be providing solutions. Buyers and sellers with problems will be more likely to work with us if we can provide a solution that benefits them in their situation. When there is a scarcity of buyers or sellers in your market, the more tools you have the better. Take some time to investigate the educational programs that your local real estate investors association offers. Also check into the educational programs that are offered in National REIA’s National REIAU program (www.nationalreiau.org). The more you learn, the more problems you can solve. Learn, while put your plans in action.
Looking for more education? Check out MAREI’s Offerings on our Calendar of Events including
- Monthly Meetings
- Weekend Master Classes
- Express Success
- And other local and pop up events.
