Happy 2019 everyone! What a wild 2018 it was for the markets with all of the volatility. If you’ve been watching your 401k, stocks were on a roller coaster ride in 2018. As we kick-off 2019 it doesn’t appear that the volatility will slow down between the trade war between the US & China heating up, slowing economy in China, the US not able to fund its own government and the Fed (US federal reserve bank who is in charge of US monetary policy – meaning how much paper money is in circulation & interest rates – which affect how much extra money you pay back on credit card balances, mortgage loans, etc.,). Even real estate prices have jumped dramatically since 2009.
Now with all of this madness going on the economic expansion moving into its 11th year…
Real estate prices have been climbing as well and broadly speaking prices are back up near all-time highs.
According to J Scott there are 6 things you should consider when investing in real estate in this market.
So how do you make money in this market?
- Be certain of your numbers. Make sure that if you are buying a fix & flip or a buy and hold that you get exact pricing from contractors for all repairs. Not just estimates based on what you did previously or what your cousin thinks. Get solid quotes to ensure you know exactly how much the deal will cost you.
- Stay away from long rehabs. Due to the change in the market where appreciation has leveled off, it is important you aren’t in a project too long. Because the longer the rehab project the more time something could go wrong in which case you may incur longer holding costs and are not be able to sell, rent, or refinance as you had hoped.
- Have a backup strategy. If you are planning on a fix & flip but buyers disappear before you are able to sell, have an alternative strategy. Real estate is wonderful in that you have options for what you can do with a property, but you have to make sure the deal makes sense if things don’t go according to plan. Consider renting out your flips and make sure the property will cash flow should your plan falter. If you were planning on a rental perhaps you look at a lease-option which will allow you to charge a higher rent and lock in a sales price if rental rates drop. Having options is crucial in any real estate deal.
- Avoid thin deals. Make sure you have a good margin of safety on all your deals. For example, if you think the market may correct by 20% you need to have at least that much profit built into the deal. It’s important to focus on the percentage of safety versus the dollar amount. A $30k margin of safety on a $100k ARV (30% of the after repair value) is not the same as $30k margin of safety on $300k ARV deal (10% of the after repair value).
- Keep clear of leverage at all costs. Scott advises this as you don’t want to get stuck with financing that you can’t afford. I’m not as adverse to leverage if it is long-term and the payments make sense on your Plans A, B, & C. You don’t want to get stuck with short-term debt should the market tank and capital dries up.
- Stay away from high-end vacation rentals. The last tip for investing in 2019 is to avoid high-end vacation rentals. Airbnb is great and has opened up a lot of opportunities. When there is an economic downturn people will likely cut out expensive vacations early on which will hurt you if you are positioned at the top of the market. This rule likely applies beyond just short-term rentals, but high-end luxury flips, houses, and apartments. Folks tend to downsize and curb back their spending on housing when times get tough. Being positioned in the middle of the market will afford you flexibility as those former luxury renters drop down into the mid-market.
2019 may be the beginning of an economic downturn or merely a blip as the economy surges on. Regardless J Scott’s advice will protect the downside while still being an active real estate investor. Happy 2019 everyone and happy investing!