Where do you see prices heading within the next 5 years? Advice?

Question

Hello,

I currently have two rentals, and I am looking to purchase more in the coming years. Most prices that I see on the average house sales would not really work for buying and holding in my market right now, and I was wondering about your opinions on where prices will head in the coming years. Do you think that there will be a drastic price drop in large metro areas, or maybe just stagnation of prices and these recent higher prices are just the "new normal"? Personally, I do not see prices dropping by very much, but maybe just stagnating from this point on for the next 5 years or so. This is a much different scenario compared to 2008, with much more interested home buyers and investors (also large investing conglomerates), and many young professionals who are now hungry to buy starter homes. I am debating purchasing a home right now with a 3 percent down mortgage for around 250k, just for me to live in and rent out the 2 extra rooms to help pay the mortgage. None of these houses around here for sale even come close to renting out for the 1 percent rule, unfortunately. Even houses in fixer upper condition are still selling for well over what I would need for the 1 percent rule.

Sergey A. Petrov · Answer

The best time to buy a property in your area was a few years ago. The next best time is today.

Conner Olsen · Answer

@Sam Zawatsky The 1% rule was created around 2010-2013 when homes were half of what they are now and interest rates were 3%, it's not a good metric. Cash flow is a much better metric to use because it takes cost of debt and expenses into account. If you want to increase your rental income then put a house on Airbnb, VRBO, or FurnishedFinder as a STR or MTR. I increased by rents from $2,450/month to $5,600/month by just furnishing my rentals. It takes a little work but totally worth it.

Chris Seveney · Answer

@Sam Zawatsky

You should not buy houses based on where you think prices will go. You should look at each deal, what it can get you for income and what is risk involved. If you are a long term investor and look to hold for 20 years go back in history and see if prices ever were lower 20 years later…

Charles Clark · Answer

The more I look at this the more I come to the same set of conclusions.

This real estate investor trend/boom/etc. really took off after 2008 when prices were artificially low. The last 2 years had absurd appreciation (not entirely real due to inflation) which make many deals work.

However I doubt the next decade will be nearly as attractive from an investment standpoint. My guess is the appreciation from the last 2 years is so high that the next 5 will be poor. Combined with high interest rates and Wall Street entering the business I think the arbitrage opportunity for buying rental properties available to the average person and renting them at any kind of return is over for most people.

You see this with investors talking about "investing" in things like short term rentals, furnished rentals, refurbish properties, etc. but the reality is all of those have a significant work component added to make them profitable.

Ben Bagnall · Answer

Do you have options for small multifamily in your area? That will likely get you a better rent yield.

To your question on market outlook, I look at many of the fundamentals that led to appreciation over the last few years - lower than average construction starts, millennial family formation, the overall supply/demand imbalance - and they have not materially changed. These factors should continue to support the housing market. The primary shift has come from higher interest rates and what that means for affordability. That suggests to me that once the data is clear that inflation is easing, and therefore the tightening cycle can end, we should start to see the real estate market turn around as well.

I have had two properties listed for sale over the last couple months and I can tell you that, at least in my market, the shift from a seller's to buyer's market is noticeable. Properties drawing heavy open house traffic and strong buyer interest are coming away with no offers. Houses that would have sold in a few days are now staying on market for several weeks. While this makes me cautious to take on any fix and flip projects, for buy and hold it presents a nice opportunity. For the first time in a long time, you may find you have leverage as a buyer in negotiating price and terms. In other words, you may be able to "make" a deal that fits your criteria even if it wouldn't assuming the list price.

Dan Nelson · Answer

@Sam Zawatsky I agree with much of what people are saying here and definitely what @Conner Olsen posted.

And to answer your original question, there are just not enough properties on the market, and that might not change for years and years. Prices in most major cities have been going up for over a decade now, and if they come down, I do not expect it to be much. It is just hitting smaller towns and communities now. Building is at a standstill and many people still want to buy so there is no immediate end to rising prices in site. I live, work and invest in Chicago and the only regret I have about my investments was ever waiting for a great deal. I wish I had bought 3 times as many properties as I did when I was younger. You can be as conservative as you want, but I regret how conservative I was when I started.

If you buy a decent building in an area where properties tend to appreciate and take care of it, it will appreciate. You will be able to refinance overtime and buy more without additional investment.

Casey CJ Noble · Answer

@Sam Zawatsky - I feel your pain! The 1% rule is getting very hard to come by, and the current interest rates don't lend a hand in giving comfort deviating far from that rule. While hard to find, there are certain pockets around town that these can be found, usually ones that need a bit of a facelift but nothing too major. The market has certainly cooled a bit and I see sellers are no longer seeing the bidding wars, homes are staying on market longer, and seeing price cuts. I think opportunity is definitely out there and buyer negotiation may be shifting in our favor some.

Bryant Mortimer · Answer

@Sam Zawatsky

Time IN the market, not timing the market! No day trading in real estate.

Taylor L. · Answer

I think this is a great time to be a house hacker. The rental market is tight in most areas so there is plenty of demand. Strong support for current prices.

Conner Olsen · Answer

When people talk about the 1% rule they are assuming it's a 20-25% down investor loan. You are talking about a 3% down owner occupied loan. That's a HUGE difference. That's comparing apples to oranges because the loan products are not the same. It is very rare to put down 3% on a home that has increased in value 25%+ in 3 years with a 5-5.5% interest rate and cash flow when you move out. Breaking even is pretty impressive at that point.

Where do you see prices heading within the next 5 years? Advice?

Where do you see prices heading within the next 5 years? Advice?

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