Everyone is talking about when the market will drop. First, let’s look at what has been happening. Real estate has always been a great investment vehicle for many investors because there are many different ways to invest. You can do it passively or actively. You can fix and flip properties, wholesale them, develop properties from the ground up, finance investments, build a rental portfolio, and invest in commercial or residential properties, multi-family or single-family. There is an opportunity for any investment you like, big or small, short term or long term.
The Market Has Been On The Rise
The real estate market has been on fire for the last 24 months. Prices have risen almost every month, with no end in sight. Historically real estate has appreciated 3% annually. Of course, there are peaks and valleys year over year, but in the long run, that equates to a 3% per year appreciation.
Some areas have skyrocketed by 25%, 50% even 100% in the last 24 months. Why is that?
There are a few reasons:
- Supply and demand
- People relocating to different markets
- More people are working from home for the first time, therefore spending more time in their homes and wanting larger or different spaces from which to live and work.
However, the two biggest reasons are:
- Low-interest rates
- Easy Money
The Fed has flushed the system full of money. As a result, banks have wanted to lend, people have extra cash from the pandemic, and the buying of corporate debt has made it easy for companies to leverage growth. This, along with historically cheap interest rates, has created the perfect storm for rising prices on everything, including real estate.
Demand Is Slowing
Now we can see things changing on the horizon. Rates have doubled in the last 90 days. Inflation is pricing people out of the market. The stock market has pulled back 20-30% from its highs a few months ago, and it doesn’t seem like inflation is slowing down much.
What’s next?
Corporate earnings will get hurt, and corporations will stop investing in their businesses. They will start buying back their stock and laying people off. Be prepared to see unemployment rise in the next 12 to 18 months.
To think these negative actions will not affect the real estate market is naive.
So what do we do as individual investors to make it through this transition?
- Don’t stick your neck out. Now is not the time to take considerable risks. Be conservative.
- The short term is better than the long term in developing and fix and flips. Stay nimble and move quickly.
- Don’t be afraid to miss out on a deal. It’s always better to miss a deal than get into a bad one.
The best barometer is always your gut. If the deal doesn’t make sense, just pass on it. There will always be other deals.
I read a great quote last week from Ray Dalio. He said, “Now is not the time to lose money.” He is one of the wealthiest men in the world. An investing savant, and even he has realized that you can’t always make money.
Sometimes living to fight another day is the best outcome.
If you need an asset-based loan to fund your real estate investments, get pre-approved here or give me a call at 248-385-3750