New Year, New Market

If you are a smart investor you read and stay up to date with the market. But as you read, you find that different people have different opinions as to why the real estate market has shifted, which range from the presidential election, the stock market, the price of a barrel of oil, employment reports, changing interest rates, etc. The fact is, all these are intertwined and they all have a chain reaction effect on real estate. While you cannot make a huge immediate impact on the direction of any of these factors, you can make changes in your game plan for investing in real estate in the New Year.

As we all know, the real estate market is cyclical. The majority of last year the market was at the height of its cycle. At the end of the year to present the market has begun to cool down or at least level off. Investors are no longer purchasing houses expecting one sales price and selling it for a much higher price because it “appreciated” while it was being renovated. Today investors are selling their investment properties for the original after repair value they had projected or a bit less if the renovation was not up to par. This has become the new norm. With that said, there are still a few sub markets in each of our markets that continue to sell fast and for record prices. However, those too will eventually cool down. I have mentioned many times that it is best to purchase investment real estate based on today’s values not anticipated appreciation one cannot control.

Here are a few items I would recommend when investing in real estate in today’s market.

1. Buy based on 5%-10% below today’s after repair value. If you are looking to purchase an investment property with the intention to buy, fix, and sell you should do so using today’s ARV minus 5%-10%. For example, if the ARV of a property is $200,000, I would subtract at least $10,000 and my new ARV would be $190,000. Now with the new ARV I will calculate my purchase price off of the $190,000 projected ARV NOT $200,000.

2. Add a little extra to your renovation budget. You should always have a cushion built into your renovations but that is not what I am referring to here. What I mean is to budget in a few extras. For example, if homes in the area sell without a fridge, budget for a fridge and stand out. If every listing in the area has laminate wood install engineered wood. I am not telling you to over renovate but to budget for those small extras that provide a great return.

3. Price right the first time. As a real estate broker I see and work with many sellers/investors that price wrong and sit on the home for longer than they should. Many sellers think that if it does not sell at a high price it can always be price reduced or that they need to price it high to make room for negotiations. While this may work in an area with very low inventory this will usually backfire in the market we are heading into. I suggest pricing the home correctly and holding firm. This will attract more traffic/showings and ultimately an offer.

Following these simple guidelines can prepare you for the new market this New Year. In fact, they can always be used to increase the chances of success with any investment. Just keep in mind that they might decrease the volume of deals in a seller’s market but not if you work harder and smarter. As always make all your transactions a win-win and the deals will keep coming.