Real Estate Strategy Overview

There are many ways to invest in Real Estate. But the profitable ways (for the little guys) are different, depending on where we are in the real estate cycle. To help identify the cycles, I've broken them down with the following nomenclature. It should be noted, that in real estate, different towns can be at different stages of the market, depending on how far they are from the nearest Metro area. So you can have a situation where Natick is in a Frothy Market, but Sutton is in an early stage rebound. Knowing which market is in which stage is key to picking the right strategy to maximize returns.

 

Early Stage Residential Real Estate Rebound:
Homeowners, rejoice, the dark days are over. Characterized by risk aversion by the average home buyer, this it a point in the real estate cycle where property perceived as risky sells below its intrinsic

It's not a question of "buy and hold" or "fix and flip",

it's about the right strategy for the right part of the cycle.

value. Buyers begin to chase safe property with few flaws, and offering multiple bids for homes in good condition, appropriately priced, in desirable locations. This is a good market for "home flippers," but location needs to be scrutinized carefully.

 

Investors Should....

 

  • Owners of Condos/Duplexes Should: Keep renting them. Condo cycles are peak when single families are no longer available in mass supply. Further, rents typically increase during this period.
  • Owners of Multi-Families should: Keep renting them. Multi-family cycles are peak when new investors begin to hit the market and credit is loose. Neither are typically true at this stage. Further, rents typically increase during this period.
  • Flippers Should: This is a good flip market. Properties in good locations that need work are often overlooked, as supply is still large enough where most buyers will wait around. However, properties that are in A condition remain scarce, and home buyers pay Premiums.
  • Multi-family buyers Should: Purchase property. Rents are often low, and valuations are low. Both items will improve in the coming years.
  • Builders Should: Purchase land now, before prices normalize. If you can get financing.

 

 

Mid Stage Real Estate Market With Steadily Increasing Prices:
Characterized by reduction in risk aversion by the average home buyer; sales at most price ranges happen with in 180 days, supply and demand are equal, and prices have been in positive territory year-over-year. Developers are willing to build on spec in developments that exceed 5 houses on a more regular basis. This is a good market for spec housing, potentially fix and flipping, but the margins in flipping will be smaller. It may, or may not, in certain locations, be a good market for mulit-family to condo conversion flipping.

 

Investors Should....

 

  • Owners of Condos/Duplexes Should: Keep renting them. Condo cycles are peak when single families are no longer available in mass supply. Further, rents typically increase during this period.
  • Owners of Multi-Families should: Keep renting them. Multi-family cycles are peak when new investors begin to hit the market and credit is loose. Neither are typically true at this stage. Further, rents typically increase during this period.
  • Flippers Should: This is a tougher flip market. Properties in good locations that need work are no longer overlooked, reducing the margin for home flippers. Homes need to be really broken and busted for flippers to succeed, but these are risky properties, to be bought only when the Investor has a solid margin of safety. However, properties that are in A condition remain scarce, and home buyers pay Premiums.
  • Multi-family buyers Should: Purchase property. Rents are often low, and valuations are low. Both items will improve in the coming years.
  • Builders Should: Purchase land, but smaller single family lots will have seen prices normalize. More strategy is required about the end game, but rising home prices will probably protect margins.

 

 

Frothy Real Estate Market:
Often Characterized by median sales prices jumping at more than 5% a year, with inventory not keeping pace with supply. Bidding wars push prices up on good condition neighborhood homes, and homes elsewhere are below market prices. Buyers risk aversion decreases, as they focus on housing fitting their needs, and the lack of availability drives decision making. This is a good market for mulit-family to condo conversion flipping. It can be a good market for spec housing, but at this point land prices are jumping smartly, and caution needs to be maintained. Interest rate risk must be watched closely. Although banks should be restricting credit in this market, often, the reverse is true - lending increases.

 

Investors Should....

 

  • Owners of Condos/Duplexes Should: Get out! Sell now and 1031 exchange into something with more cash flow. Or sit tight on profits and wait for the next pull back.
  • Owners of Multi-Families should: If a 1031 exchange to a bigger building with more cash flow is possible, this is a good time. If condo -conversions are possible and a good idea for your building, that is an even better way to go. New investors begin to hit the market push prices up.   Further, rents typically increase during this period.
  • Flippers Should: This is a tougher flip market. Properties in good locations that need work are no longer overlooked, reducing the margin for home flippers. Homes need to be really broken and busted for flippers to succeed, but these are risky properties, to be bought only when the Investor has a solid margin of safety. However, properties that are in A condition remain scarce, and home buyers pay Premiums. If the end is near, Flippers should reduce standing inventory, so as not be caught when demand softens.
  • Multi-family buyers Should: Be cautious! Make sure cash flows are strong and the building doesn't need near term capital. Rents may stop going up and even fall in the next phase, and will burn those that are over extended.
  • Builders Should: Purchase land that is ready to go, as land with 2 or 3 year development cycle could come on when the market softens, crushing margins. Land is no longer cheap, and margins are thin, as every contractor with a hammer is now competing for the same pieces of land.

 

 

 

Falling Real Estate Market
Smart investors in falling markets raise cash, for two reasons: Prices in 6 months will be cheaper than they are now, and cash on hand allows the sidestepping of credit issues for purchases, which is important because credit quickly dries up in a falling market, as banks restrict lending. Investors do well at foreclosure auctions, short-sales, (both in a fix-or-flip mentality). but must be careful to build in extra margin to account for increase days on market and falling prices. Generally, condo conversions will not do well as the first-time buyers run for cover, and inventory in this market increases.

 

Investors Should....

 

  • Owners of Condos/Duplexes Should: Sell if you can, don't wait for the bottom. It is deep and long for these properties.
  • Owners of Multi-Families should: Sell if you can, don't wait for the bottom. It is deep and long for these properties. Avoid condo-conversions at all costs. Rents may decrease, and vacancy may as well. Cut rents to stave off vacancy. If the property is not over leveraged, you can hold and ride it out. Make sure cash flows are good; anticipate rental income decreases of 20%.
  • Flippers Should: Don't flip in a down market.
  • Multi-family buyers Should: Wait till the bottom of the cycle. There will be foreclosures, rehabs, and many properties available for a song when we get there.
  • Builders Should: Raise cash and wait for land prices to bottom.