How to Profit From a Hot Real Estate Market (Even if it’s a Bubble)
Is there another real estate bubble or not? We’ve been debating that a lot lately here on BiggerPockets.com.
I have enjoyed the discussions, but like in the past, I doubt any of us will correctly pick the top (or bottom) of a bubble. Warren Buffett reminds us:
“The only value of stock [or real estate]forecasters is to make fortune-tellers look good.”
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The future of real estate is even harder to predict than stocks because we have the added difficulty (and advantage) of each local market having its own ups and downs, benefits and weaknesses.
So, given the difficulty of predictions, this isn’t an article about speculation on the future. This article is about the present and how we can profit from it.
Liquidity: The Big Advantage of Today’s Market
If we can’t predict the exact timing of market ups and downs, should we ignore market cycles all together? Not at all. Benefiting from the present and predicting the future are two different things.
The primary reality I see as an advantage in my local market (the upstate of South Carolina) and probably in the rest of the country is simply this:
The market is much more liquid than it was 4-5 years ago.
I own a small and simple business that primarily holds long-term rentals. I also flip and wholesale properties from time to time. The current state of affairs has some definite advantages for all parts of my business.
When I flip or wholesale properties, it's now much easier to get rid of properties quickly. There are more buyers looking for product, and there are more lenders willing to loan to those buyers. If I can find decent product, I can get rid of it and make money.
But doesn’t that also mean it’s harder to find the deals because of competition? Sure. But just like in the run-up years of 2003-2007, I can take measures to separate myself from the crowd. My strategy includes:
- Hustle, pure and simple
- Get narrow and small, instead of big and broad
- Use better negotiating skills to my advantage
- Go find someone to serve (not to sell to)
Small, nimble investors who hustle like crazy and focus on serving others never have problems finding deals or making a lot of money as a flipper or a wholesaler. Just try it for yourself and see.
Why it Might Be Time to Sell Some Rentals
As a long-term landlord, a liquid market also has definite advantages. First and foremost, I can now sell some of my rentals at retail prices.
I certainly don’t want to sell my best properties just because the market is getting hot. I plan to live off of the growing income streams from my best properties until the cows come home. But selling my losers or less than ideal long-term holds is a way to cull my portfolio and free up time, energy, and capital for better opportunities.
In my business, my partner and I have spent the last couple of years systematically picking and then getting rid of our bad deals from the past. Here are some of the criteria that have helped us find our losers:
- The neighborhood is bad and not getting any better.
- The next door neighbor is bad and not getting better.
- Operating costs are higher than average (e.g. too much lawn maintenance, carpeted floors that require replacing more than hardwoods, large square footage that requires too much paint at each turnover, etc.).
- Capital Expenses are higher than normal (e.g. expensive roofs with too many lines and angles, large footprints that require more HVAC systems and more plumbing to break, long driveways with excessive maintenance).
- The property just attracts bad tenants. This could be for some of the reasons above, and it could be because of other issues you can’t fix, like a bad layout.
In several cases we sold our loser property for less than our investment. But the important thing is not whether we lost on this deal or not. The main criteria is what we can do with the cash and the free time and energy that selling this property gives me.
As you work on selling your loser properties, you can also use the liquidity of the market to proactively rearrange and optimize your capital within your portfolio.
Restructure Your Capital While You Can
Unless you’re Dave Ramsey, you’ve probably used debt to build your real estate portfolio. Used safely, I think this is a great strategy because it allows you to expand and get better returns on your beginning capital.
But there comes a time when you should pull back and increase safety instead of maximizing growth. One of the most important parts of my personal wealth building plan is to get a large portion of my portfolio free and clear. Free and clear real estate reduces the risk of your portfolio and reduces your personal stress level so that you can experience the primary purpose of investing: to enjoy your life!
One strategy to get your properties free and clear can be done in any market. It involves amortizing and snowballing debt. You can learn more about this technique from my BiggerPockets.com article (“The Snowball Plan“) and other good ones on BP, such as “How to Create a Million Dollars of Wealth in 13.3 Years ” and “An Aggressive Plan to Pay Off Your Mortgages Faster.”
But a liquid market also gives you another route to free and clear properties. You can strategically sell some properties that have accumulated a lot of equity, pay your tax, and use the balance to pay off debt on remaining properties. I wrote more about this strategy in "The Buy 3, Sell 2 Plan.”
When I use this plan, I typically target selling properties that were bought as short-term holds. These are usually single family house in good locations that were picked up for low prices, often during the downturn. The cash flow is not outstanding on these properties, but we controlled big chunks of equity.
If you also choose to free up equity from some of your properties, it will allow you to simplify your portfolio and your life, as I’ve alluded to above. But even if you don’t want to simplify, you can deploy that capital into other investments that generate better cash flow. Those better opportunities might include:
- Paying off high-interest debt, either personal or in your business
- Buying your own seller financing notes at a discount
- Buying other notes at a discount
- Loaning money to other investors flipping or renting houses
In all cases here, the theme is to take what the market gives you. If it’s giving you liquidity, take it and figure out how to profit from it.
How Are You Adapting to Today’s Market?
As I’ve said, I don’t know if we’re in a bubble. I doubt anyone else does, either.
It is always prudent to prepare for and hedge against all worst case scenarios, including bubbles. But once you’ve done that, it’s time to go out and ride the waves of whatever conditions we happen to experience in the marketplace. This is how fortunes are built.
So, what strategies are you using to take advantage of today’s market? What are you doing now to increase your own wealth and cash flow?
I’d love to hear from you in the comments below.