If you’re closely following recent real estate trends, you might have noticed the market is starting to slowly cool off a bit.
In many places we are no longer seeing the meteoric rise in prices in general anymore. Of course, some of your markets may be different, but overall, we have to start worrying about the possibility that the prices either have plateaued or that we may be heading for a slight dip.
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Is Real Estate Still a Good Investment?
With that in mind, is investing in real estate still a worthwhile proposition?
I think so.
But we may have to be a bit more selective in what we buy. Instead of buying properties with the hope of appreciation, we should be focusing on purchasing properties that offer a good cash flow. After all, irrespective of the market, a good cash income producing property will always produce cash for you.
Even if you bought a property for $100,000 that is only worth $50,000, as long as it brings you $10,000 net in rental income each year, I bet you will still have a happy face (and you will figure out how to scrunch up enough cash to buy a similar one for $50,000).
The Importance of an Exit Strategy
On the other hand, if I own a property that is worth $200,000 now instead of $100,000, which still brings me $10,000 net a year, it may be tempting to think of an exit strategy. After all, the return against real market value has gone down from 10% to 5%. Keep in mind, however, that your true return is still 10% because you bought the property at $100,000. If I can use the $200,000 (let’s not account for taxes right now despite its significant role) to find a better investment that will yield me 10%, thus earning $20,000 a year, isn’t it worth considering?
I suppose this scenario is more relevant in my market. In Las Vegas, the prices have gone up high enough nowadays that it is very difficult for me to find a property in a good neighborhood that can produce a cash on cash return above 5%.
I am not going to get super rich investing in the market now (although I think it is still a great return in the long run, which some of us may not have the patience to pursue), so maybe it is better for me to sell some of my portfolio holdings and look at other real estate markets that can provide me with a better cash flow option.
You could also refinance your properties that have gone up in value and use that cash to invest in properties that yield higher than your interest rate. If you could find an income producing property that nets you 10%, you may be better off to refinance your properties with a lot of equity at 4.5 to 5% (I hope?) instead of selling (to avoid the tax issue) and use the cash to buy the new property. Of course, I always suggest you should be careful with leverage.
Or you can always sit and watch the events unfold. Sometimes patience works as well.
All I am saying is, if you think your market has peaked, what would you do? Do you have a solid exit strategy
We’d love to hear from you in the comments!