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What Do You Sacrifice When Your Returns are Declining?

Leon Yang
2 min read
What Do You Sacrifice When Your Returns are Declining?

Around two years ago we were witnessing one of the best opportunities to invest in real estate ever. The tremendous drop in real estate prices across the board, coupled with the lowest mortgage rates ever recorded, created a wonderful opportunity to invest in real estate. Whether the investor was a buy and hold investor or a flipper, or even a real estate agent, there were so many bargains around that the margin of safety was high enough that you can still make money while making mistakes.

But what about now? The glut of foreclosed homes available for sale has dried up. The pickings are slim. The hedge funds are getting in front of all the available inventory. The good old days are over. But does that mean you have to give up investing in real estate?

I don’t think it is time to stop investing yet. Though I had to struggle a bit myself trying to adapt to the new market. I am not used to seeing the new prices. It creates a challenging situation for me to hit my return numbers. While once upon a time I could flirt with the idea of getting a 12% cash on cash return on a property in a good neighborhood, now I am looking at the prospects of barely hitting 6%.

So what Can I do?

My first action is to increase my leverage.

The more I borrow to purchase a property the likelier that my returns would be higher. In the past I could achieve a cash flow positive on a property I borrowed money on. Now I am constantly struggling with whether to put less down with a negative cash flow property or more down to break even cash flow. Furthermore, the more leverage I have, the greater risk I am taking. That is always something any investor has to seriously consider.

My second move was to shift my investment more towards condos and townhouses, which yield a higher return but I am uncertain whether it’d be a better appreciation play.

I am still a bit resistant as to branching into lower quality neighborhoods. That’s one area I am trying my best to keep.

While it sounds like it’s been all bad news, I’d say the reason I am so negative is because I had recently experienced one of the best times to invest in real estate. It has been difficult to adjust to the current times.

But I have to say, even in today’s environment it is still a good time to invest, even if you have to lower your standards a little bit. The more important question for you to think about is what will you have to make a sacrifice on to purchase your next property. Will it be a lower return? More leverage and risks? Another neighborhood?

What do you think?

Photo: dnnya17

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.