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Having a strategy for managing your real estate investments when housing markets shift is smart, whether you own property in a metro area that’s starting to cool off or one that’s still rising.
Real estate flippers who buy, renovate and resell properties, as well as real estate investors who buy rental properties, can be keenly affected when the local home price appreciation slows or even declines. Properties may take longer to sell and rent prices may drop. Demand for move-up homes can slow, too, if current homeowners stay in their starter homes because they owe more to their mortgage lender than their current home is worth.
As a real estate developer and flipper in 2005 and 2006, I learned eight important lessons about how to not just survive, but thrive, in changing real estate markets:
1. Keep your company small enough to be nimble so you can respond quickly to changing market conditions. Keep your company headcount down by having consultants take on more tasks, including your real estate agent, property wholesalers and others who get early information on properties priced below retail.
2. Build a core executive group that’s smart and strategic so you can quickly pivot. When markets shift, people who can think on their feet and respond quickly will be able to spot opportunities and adjust strategically. A leadership team that’s rigid may hold on too long to business plans that no longer work in the current housing market.
3. Embrace change, look forward to it and have it get you up in the morning. Change is inevitable. Since you can’t stop it, so you might as well learn to love it. Every market inflection offers opportunities. Use the next market sea change to outthink your competitors.
4. Track asset-level, market-level and trade industry data. When you’re in the game and playing to win, you always know the score. One of the most telling data points to watch is how many days properties stay on the market, which is tracked by local chapters of the National Association of Realtors. Talk to your lenders, because they see transactions from purchase through sale. For example, as a Washington, D.C. hard money lender, I know how many flips sold at $725,000 in the Petworth neighborhood last month compared to last year.
5. Pay attention to the availability of capital. When capital is too readily available, it may seem like a good thing for a borrower. But, it’s important to ask why capital is so abundant. If the answer is there’s too much money chasing too few deals, that’s a flashing yellow light telling you to be cautious. Sit back and think carefully before each acquisition, double check your numbers and ask your team of consultants to review your plan critically.
6. Hold back a little cash or get to know a well-capitalized hard money lender. Softening markets create opportunities. Bargains abound during housing market declines and slowdowns. If you have cash, or a good connection to a lender, you can seek out frustrated landlords who want to exit the business and properties lingering on the market due to cosmetic challenges.
7. In the fix-and-flip business, speed and attention are your friends. Look for projects you can get into and out of quickly to reduce holding costs. Use zoning and permit expeditors to get your changes quickly approved. Plumbers, electricians and other trade professionals want to come into a clean site, do their job, leave and get paid promptly.
8. When you don’t like what’s going on in the local market, only buy great deals. Throttle back a little bit instead of making bids on every deal you see. Look for new projects located close to an existing project to make it easier to manage both jobs at once.
The Market Has Always Risen
Historically, home prices do drop, but they’ve always recovered and risen over time. Plus, an individual property may rise or fall in value faster or slower than prices shift in the overall market. You may not know for sure if you’re above or below the apex of the market, but if you stay in the game through good and bad markets, chances are you’ll do fine because home prices have historically risen eventually due to inflation.