“As the tide goes out you see who’s naked” – Warren Buffett
Save The Economy or Save The Banks?…UUUMMM…Save Yourself!
I participate in many private groups that gather research, data and opinions on the economy and its impact on real estate. Considering recent iconic events and based on the information I have to date, my key take aways and summary are as follows:
- Rates on 10-Year and 2-Year Treasuries have dropped significantly. It seems the Bond Market is betting that rates are at or near their peak regardless if the Fed raises rates .25 bps in the coming days.
- Pandemic-related fiscal stimulus along with more than a decade of ultra-low interest rates and quantitative easing resulted in significant excess deposit creation in the US banking sector.
- Due to the velocity of deposits and inability to loan out the money quick enough, some banks invested excess deposits in long term treasuries and mortgage backed securities that have lost value during the rapid rise in US interest rates.
- The Fed’s “Bailout” of these banks might have provided “confidence in the baking system” but it also is resulting in higher inflation due to the money that was created to cover the losses. In the end, the value of the dollar was just debased as a result of this action.
- Whether or not the Fed continues to raise rates, this latest banking crisis reinforces the importance of investing in stable assets and including contingency & reserve funds in the operating budget.
Consider the following options for your specific situation:
- Deposits are insured up to $250,000 per depositor, per bank
- Move to a credit union (Depositors/Members are shareholders) or large bank (Investors are shareholders and are Too Big To Fail)
- Consider money market accounts if you require liquidity
- Consider short term treasury bills if preserving value
- Buy precious metals for an inflation hedge
- Invest in real estate for cash flow, appreciation, tax benefits and to build generational wealth
*The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
What To Consider Before Investing In Real Estate Right Now
Is now a good time to invest in real estate? As the economic outlook becomes a little murkier, this question is on many investors’ minds. Many people are worried about inflation, layoffs and broader macroeconomic conditions that seem to make this an unsuitable time to get into real estate. However, despite the economic news, some investors might still be thinking about making a purchase.
Why Some Investors Might Consider Purchasing A Property
• Demand and supply dynamics: Similar to other industries, the multifamily real estate market is heavily influenced by the interplay between demand and supply. One of the main reasons for this is that the basic need for shelter makes real estate relatively recession-resilient, and with a housing shortage in the U.S., demand is strong. Even when economic conditions are challenging, people will always need a place to live, as they cannot adjust their housing needs in the same way they can adjust their consumption of other goods and services.
• Time in the market: Based on my observations, much of the hesitation to buy real estate comes from a desire to time the market. I’m seeing a number of investors who are pining for a year or two ago when interest rates were super low, and, as such, current rates now look terrifying. However, I believe there’s recency bias in this perspective. The last time the Federal Reserve funds rate was above 4% (where it is at the time of this writing) was in 2007, according to Forbes. That wasn’t when it crossed 4%, though. The Fed had to reduce it to 4% (and eventually went much lower) because of the Great Recession. Going back further, much of the ’90s had rates exceeding 5%. Deals still happened, and a number of investors have since found success. I believe time in the market beats timing the market.
Risks Of Investing In Real Estate Right Now
Of course, there are risks involved when investing in real estate, and it’s important to be aware of them in today’s economy. The primary risks include:
• Economic instability: This can have a significant impact on real estate investments and lead to increased vacancy rates and decreased profits from rental income. If you are considering investing in real estate, it is essential to make sure you or your investment firm have adequate reserves in place to help withstand any dips in the market.
• Rising interest rates: High rates can have a major impact on real estate investments, as they drive up borrowing costs and make it more difficult to maintain positive returns.
Identifying Investment Opportunities In 2023
Warren Buffet is known for saying, “Be fearful when others are greedy and greedy when others are fearful.” Right now, I’m finding that many real estate investors, brokers and lenders are fearful. There are interest rate concerns and inflation woes, and all of this means that many people are staying put.
Transitioning to the long-term perspective, real estate investment is a marathon, not a sprint. No one can predict with certainty what the future of the real estate market will look like five, 10 or 30 years from now. This is why investors who are considering purchasing a property this year must ensure they are taking the right approach and conducting their due diligence. In doing so, they can identify the real estate opportunities that are right for them.
If you are a real estate investor looking to invest in today’s market, I would take the following precautions:
• Conservative underwriting: I recommend taking a conservative approach when making underwriting and rent growth projections in light of the current economic climate. While rent growth has been high in recent years, the pace is slowing, and it is important to be realistic when setting assumptions for future growth.
• Ample reserves: To help increase the security of your investments, ensure you have ample reserves when pursuing a real estate deal. This might help mitigate the impact of market and macroeconomic fluctuations.
• Securing the right debt: Investing in real estate comes with the risk of rising interest rates, so it is important to consider which measures you need to take to protect your investments. Do your research about which funding options best suit your needs, such as fixed-rate debt or interest-rate caps, for example.
Nobody knows what will happen over the next year or two. However, I believe the future outlook for real estate is bright. With a long-term perspective, real estate has the potential to provide a steady stream of passive income, though it’s still worth noting that there could be short-term fluctuations in the market. By focusing on fundamentals and taking a long-term approach, investors can ensure they’re capitalizing on the right opportunities for them in the real estate market.
Common Mistakes Real Estate Investors Make
Becoming a real estate investor is not as easy as it seems. In fact, it’s quite easy to make mistakes! If you are considering investing in real estate, you must do your homework and strive to adequately prepare yourself for what investing requires.
While infomercials will tell you that investing in real estate is an easy way to make big bucks, the reality is that investing in real estate is plenty challenging and there is no guarantee you will make money – in fact; recklessness can lead to you losing money.
Many unseasoned real estate investors will lose a lot of money. That is why you need to plan very carefully and consult with the right people, including an experienced real estate agent before you commit to an investment deal.
Whether you are planning on flipping houses, becoming a rental owner, or just interested in learning more about real estate investing, check out the following information so you can avoid many of the most common mistakes new real estate investors make.
1. Not planning carefully
When you are in the financial position to do it, buying a property as an investment can seem like a great idea. You spot a deal; you might as well jump on it, right? Not exactly. Real estate investing professionals are insistent on the fact that proper planning always proceeds a purchase, not the other way around.
Many new investors want to buy a property and then figure out what to do with it. You should do the opposite. Come up with your investment strategy first, then buy properties that fit that strategy.
2. Failing to build a sound investment team
Real estate investing is not something that you do solo. It takes a group of professionals to navigate the incredibly complex world of real estate investing. Picking these people will a vital part of your success. You need all these people because each is (or should be) an expert in their respective fields. They are all required when you want to start making real estate deals and do so in an informed and intelligent manner.
If you are planning on remodeling and/or renting properties, you will also need a team that can take care of all the many tasks that such efforts involve – like a painter, an electrician, a plumber, a roofer, a flooring installer, a cleaning service, an HVAC technician, a lawn maintenance team, and a general handyman.
While you may be able to do some of the tasks these people would help with, you cannot do all of them. And if you are seriously getting into investing, you are not going to have time to do the rehab and repair work on your own.
3. Not learning enough about real estate investing
Real estate investing is complicated. It involves a lot of moving parts. It is regulated by strict laws and regulations. You have to do your homework to understand things sufficiently to make informed decisions.
You do not have to be a master to start investing, but you should have a plan to educate yourself thoroughly over time. And you should most definitely start doing your homework now before you spend any money so that you can make the kind of smart decisions that will increase your odds of success.
4. Not understanding the local real estate market
Have you heard the saying “all real estate is local”? When it comes to being a real estate investor, this statement couldn’t be more spot on. As a real estate investor, you need to understand the land value, home values, inventory levels, absorption rate, and the average days on market of properties for sale.
All of these data points help determine whether it will be a prudent move to purchase a particular property.
4. Not understanding cash flow
When acquiring properties, investors often forget that this requires them to maintain and keep the property in prime condition. No one else is going to do this for them after all! Real estate investors need to keep enough cash on hand to cover the cost of any emergency damages etc. There is also the consideration of hiring a property manager who will (most likely) need to be heartily compensated for their time.
Investors should also take into account important considerations, such as the fact that they must cover all costs if a property goes unrented for a month or many months. There are many and multiple costs that should be taken into consideration before moving forward with a real estate purchase, including those costs associated with closing costs, commissions, carrying costs, and more.
5. Not having multiple exit strategies
You probably have a plan for your property – but do you have a plan B and a plan C? Often, a program will not work out the way you were expecting. If you do not have contingency plans, you can find yourself stuck with a property and not have a way to fix your situation.
For example, maybe you plan to fix up and flip a home. But what if that does not work out as expected? Perhaps it would be better to rent the house instead until your goals can be realized?
6. Assuming that real estate investing will make you wealthy quickly
Contrary to popular belief, there is no “get rich quick” hack in real estate investing. While it may be nice to romanticize the idea of getting rich overnight, this is not how it works. Thus, it’s essential to remain persistent and patient as you seek to realize maximum return on investment. Investors will need to be able to do their homework on keeping up to date with the real estate market in order to see sizable enough returns in the long run for the process to be long-term wealth-building strategy.
7. Spending too much on an investment
One of the biggest reasons that real estate investments don’t result in a return is the fact that the property was purchased for too high of a price in the first place. After purchase, money is handed over in a way that the financial outlook is locked into place, no matter how good or bad of a deal you purchased the property. No matter how hard you work, in profitable markets and in bad, the price you paid is the price you will have to deal with long term. Conducting solid research or consulting with a professional is the best way to avoid scenarios of overpaying.
7. Failing to do due diligence
There is typically a feeling of tension when you are trying to find and close a real estate deal. You often need to move quickly to get a property when the time is right, which can make it easy to tell yourself that you don’t need to do your due diligence before a house purchase. But you do. You absolutely need to do your due diligence. Otherwise, you could wind up with a property that sucks away your money and leaves you with nothing to show for it. Research is always vital when buying an investment property.
9. Not thinking big enough
The real money in real estate investing comes with volume. Doing a single deal at a time – while often necessary at the beginning – is not the way to make it big. You need to have an ongoing process of finding deals, making purchases, and selling as appropriate. You have to start somewhere, but remember that to be genuinely successful means you will need to expand your enterprise over time. More Doors = More Money.
10. Buying in the wrong area
The area in which a property is located is just as, if not more important, than the actual property itself. Some locations will never have an issue turning or selling real estate, while with other places, you may face a bit more difficulty. Make sure to do your research on local information such as crime rates, school quality, and local attractions that could all help or hurt the long-term value of your property.