I often hear people complaining that there aren’t enough deals right now. Maybe they’re struggling with how to make money in the current market—or maybe their old model just isn’t working as well as it did in the previous cycle. It begs the question: How well do they understand their market?
Most real estate markets are localized and geographic, and there can be multiple sub markets. For example, I’m sure the luxury housing market is much different than the affordable housing market.
So, what about you? Do you understand your current market well enough to take full advantage of this market cycle?
Work With What the Market Gives You
Your job as an investor is to work with what the market gives you, so be careful of trying to put a round peg in a square hole. Many of us experienced a severe downturn in the housing market after 2008, and it continued for several years. Some areas normalized more quickly than others. Some states worked through their distressed mortgages more rapidly than other states, and some areas may not have been impacted that much at all.
Responding to ’08 and ‘09, some investors facing this mostly-distressed market adopted strategies like short sales, REOs, pre-foreclosures, and buying at auctions. Those strategies worked well for several years. But don’t base your business only on auction buying in 2018! In other words, I think real estate investing can go sideways when investors try to apply outdated models and strategies that worked in a down market to a new up market (and the reverse is also true).
So, when I hear complaints these days that “there aren’t as many deals,” “prices are too high,” or “there’s too much competition,” how much of that is based on being a little too attached to certain strategies that just aren’t working in an up market? As I said before, your job as an investor is to work with what the market gives you.
Keeping an Eye on Real Estate Market Trends
Over the years, I’ve realized the importance of keeping your pulse on the real estate market where you’re doing business. The good news is there are many vital signs that can tell us what’s going on in your current real estate market and how it compares to the rest of the country. One of my favorite authors on the subject is Robert Campbell, writer of Timing the Real Estate Market. In the book, he gives us five vital signs that show what the current local market is doing:
- Existing Home Sales
- Building Permits
- Mortgage Loan Defaults
- Foreclosure Sales
- Interest Rates
The good news with the real estate market is that it changes slowly, much more slowly than the stock market. As things change, you may have time to react and craft a strategy for the coming cycle. And remember that investors who think that things will just remain the same probably started investing after 2011.
Related: 5 Strategies for Finding Deals in Today’s Hot Market
So, my first advice is to look at your current investing strategy, determine your real estate market (i.e. buyer’s or seller’s, increase or decrease in market time, whether values are increasing or decreasing, etc.), and look at what the vital signs are telling you about the next six to 12 months. Then, determine the best strategy. My business coach always tells me that a given strategy is usually only good for 12 to 18 months.
Once you have an idea what is going on in your market, it’s much easier to be proactive. You’ve checked the hard economic data. You’ve checked with other experienced real estate agents, appraisers, contractors, and investors to see what they’re seeing. Now, maybe it’s time to come up with a new game plan. If you’re normally a buy-and-hold investor in a down market, maybe it makes more sense to do some fix and flips instead (until prices come back down), especially if the prices in your market keep going up and demand is still high for housing with limited supply and low market time. This probably makes sense if there’s population and economic growth with relatively low unemployment and interest rates in the short term.
I know our strategy with notes is much different in up markets. We tend to hold more re-performing assets since they’re going up in value due to increasing equity coming back into the marketplace and increasing pay histories, whereas in a down market we sold almost everything that became re-performing so we could go back to market to buy more.
What’s Your (Next) Strategy?
So, what’s your strategy for today’s market? Maybe you’re house hacking because prices are too high and you need higher rents. Or maybe you’re focusing on high-end flips. Or maybe you’re virtual wholesaling in another market. Perhaps you’re even venturing into commercial or multifamily.
I’d love to hear if (and why) you’re changing your strategy for today’s market—and more importantly, what do you think you’ll be doing two years from now?
Please share below!