The first thing I need to re-emphasize, as I always do, don’t panic. Good real estate markets come, go and return again. Real estate is a very forgiving asset. If you invest in a property at the top of the market, don’t worry, the top of the market will be substantially better someday. Likewise, when buying rental properties, the wealth is in longevity.
Now, what the heck is up with this real estate market? Interest rates are skyrocketing, buyers are running for the hills, inflation is through the roof, and the dreaded home inspector is back. Still, values remain stable, and rents are increasing. Let’s look at why.
I will start with interest rates. Yes, they are rising, however, the reality is they’re just returning to reality. Sub-three percent 30-year fixed rate mortgages were unreasonable. Rates that low drove investors to more speculative things like private equity funds gobbling up rental properties. With increasing interest rates, you are seeing the large Wall Street funds slow their purchasing, leaving more properties for us to acquire.
The most significant reason prices are holding steady is inventory. The United States is still short millions of units left over from the great recession, especially single-family dwellings. Add to this that builders are packing up their toys and heading to the beach for a while, fearing the slowing market. This will exacerbate the inventory problem even more. A secondary but substantial reason for stable values is “new fresh real estate listings for sale” are down 19.4%, according to Lawrence Yum, Chief Economist of the National Association of REALTORS®. He does not see that improving until people get accustomed to the new normal of the increased interest rates.
Now to the question of the deal, what rocks do we need to turn over to find them? First, I’ll tell you where not to look; distressed properties. There is so much equity in real estate now. There is little reason to let a house fall into foreclosure. “Distressed properties are almost non-existent,” says Yum, representing less than two percent of the sales today.
The secret may be in pending sales. We have a record number of pending transactions (real estate with an executed purchase agreement between a buyer and a seller) that do not close. Real estate contracts are a dozen or more pages long, that must meet dozens of contingencies to get to the closing table. Over the past couple of years, waiving many of these contingencies by buyers has become common to get a contract accepted. Times have changed. Now buyers must qualify for a mortgage, the house must appraise for at least as much as the buyer is paying, and home inspectors are back in the transaction. Our opportunity may be finding these properties that did not sell after a 30-60 day escrow. The sellers may be frustrated with the process and may look at offering an investor a better deal to move on with their lives.
I hope this helps you build wealth in your real estate investments. If you want more information on generating more revenue from your rental properties, check out Kingpin Landlord. You can purchase it at Barnes and Noble or Amazon at the links below.
Scott Abernathy, MPM, RMP, GRI