Predicting the future when buying real estate

Real estate isn’t like owning an active, cash producing business or like trading stocks. In either of these scenarios, you really don’t care if the market is going up or down. If you sell necessary goods, provide a service that your customers think is essential or know how to speculate, short stocks and hold for appreciation it really doesn’t matter what the market does.

Real estate is different.

While we don’t get afraid or angry when the market falls – we do care. A lot.

That’s because you make money when you buy. We do not subscribe to the concept that if you over pay that you can make up any over payment in the long run. While it may be true, it’s going to be a really, really long run.

Why not just buy it right from the beginning?

We advocate using solid fundamentals to evaluate the property. Figure out the max number you can pay for the property based on your investing criteria then do.not.deviate.

It sounds so simple but it’s hard to stick to the plan and remove your emotions from the deal. Using an evaluation spreadsheet like the one we use can be helpful.

In any case, it is good for you to know how to predict where the market is going. As buy and hold investors, it helps us know when we should sit in cash or go balls to the wall buying up more property.

The signs of a correction/pullback are also based on fundamentals.

Cities with Only One Main Industry Feel the Burn First

Think of places like Houston, Silicon Valley, Las Vegas, and Detroit. Each of these places is known for one primary type of industry.

Sure they may have significant dealings in other industries, but we are talking about cities where one industry immediately comes to mind when you think of it.

This time is no different. Oil soaked Houston is becoming a renter’s market. Even though they had a ton of demand between 2010-2014 by adding 95,000 jobs annually during that time, now, in 2016, the market is overbuilt.

The article cites an important metric, ‘renters hold the cards when market occupancy rate falls below 90%”. This sucks for Houston landlords because the article cites that rental rates are expected to fall into the mid-80s.

Bad news bears.

Unless you’re a buyer. In that case, now is the time to save your pennies and prepare to start buying from those that paid too much.

That’s why we like to invest in diversified cities with a large student base and variety of industries. It is no mistake that we invest in Columbus OH and Austin TX and keep close eyes on Dallas TX, Memphis TN, Nashville TN, Atlanta GA, Raleigh/Durham NC.

These cities are stable, bread and butter. They are boring. Boring makes money.

A Luxury Market Fall is a leading indicator

Like cities with only one industry, luxury housing is also on a bit of a financial ledge.

Think about it. When a city has one main industry and it declines, what happens to it? Anybody from Detroit knows it’s not a pretty sight. Luxury housing is showing its weakness in the current market. Tech hub San Francisco is experiencing a reduction in luxury property values.

Similarly, luxury housing doesn’t leave a lot on the table for property owners in the event of a correction. When people lose or have a reduction in their income, they seek ways to save money. They stop eating out, the downsize their space, they clip coupons, whatever. If your rental housing requires someone to bring in an above average salary, then you may want to reconsider.

In a mid-range property, people can upgrade from low-income and downgrade from luxury. We suggest trying to stay on the lower-middle to middle range of rental property so that no matter what, you are in someone’s price range.

Everybody starts talking about buying real estate

This one is an old Buffet-ism. Be fearful when others are greedy and be greedy when others are fearful.

When mainstream media starts talking about buying real estate or investment property, you know that’s a red flag.

Contrarian logic works at its best when it comes to investing.

Refer back to your investing criteria regardless of what the market is doing.

Remember, your portfolio is meant to work for you. Once you develop your investing criteria, stick to it and you will do well.

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