Changing Real Estate Market

According to real estate coach Mike Ferry, the housing market in North America is definitely changing. With the exception of strong markets in the metro Seattle and the greater Dallas-Fort Worth areas, the rest of the country has slowed down.

Ferry describes this as the "perfect storm" brewing: "The days on market is extending...Sellers are very unrealistic on pricing due to the four-year upward swing in the market...There are more FSBOs and Expireds, you have properties overpriced...Agents are not responding to the conditions of the market quickly enough and are overpricing properties...We have a possible interest rate hike [at the end of this year]...and then, just to make the whole thing more fun, we have a US Presidential election taking place..."

Canadian markets have been hit hard due to the change in energy prices affecting the Calgary-Edmonton market, the foreign investments tax in Vancouver, and overbuilding in Toronto.

While Ferry considers this a part of a normal real estate cycle, investors would be well-advised to prepare for this change.

Happy Investing!

Real Estate Investment Strategies

Real estate markets are cyclical. 

No one knows when the next downward market will begin,

but when it does... you'll wish you were a "safety first lender" 

collecting predictable and secure cashflow

rather than a "property owner"

holding on to a property that is declining in value.

Are YOUpreparing to thrive during the upcoming downward market cycle?

You see... fortunes are made in "down" market cycles,

not "up" market cycles like we are currently in. 

We're excited for the upcoming buyer's market,

but the transition from a seller's market to a buyer's market

requires a lot of patience and can be very painful for those caught unprepared.

  
Here's one

solution for thriving during the upcoming market shifts:

(1) Sell real estate equities while it is still a seller's market.No one knows how much longer today's seller's market will continue,but there are plenty of warning signs indicating it may not last much longer.

(2) Convert your "at risk" equity based investments, 

into "safety first" investments as a private lender / mortgage investor.

(3) Collect a predictable stream of income from your mortgage investments

while waiting for the next buyer's real estate market.

(4) When the buyer's market cycle has arrived, sell your mortgage investments and use the cash to buy positively arbitraged investment real estate.

(5) There's a season for buying, a season for selling, 

and a season for just holding what you have. 

A huge part of being a safer investor is lowering your risk by 

sitting out of the equity market during the worrisome transitional times.

While no one know for sure what lies ahead in our economy,however it's our belief that the current rewards of direct real estate investment do not outweigh the risks. 

Don't get me wrong,

there are people who will make money buying real estate in today's economy.

I just think they are taking a bigger risk than they need to.

I love owning real estate and while there are

LOTS of benefits of real estate ownership there are also lots of risks.

When the investment risks outweigh the upside potential,

you need a different investment strategy.  This is exactly why now may be the time to change your focus from acquiring real estate investments to

acquiring mortgage investments.  

Here is the "risk versus reward" concept in simple terms:

If you could flip a coin and triple your money each time it came up heads and lose 50% of your money each time it came up tails, you'd be wise to make that bet as often as possible. If you could earn 10% profit each time the coin toss came up heads and lose 50% of your money each time it came up tails, you'd be foolish to ever make that bet. In both of these examples the risk is the same (lose 50%), but the rewards are drastically different (10% profit versus 300% profit).

In today's real estate and stock market, the risk of loss is not significantly more than it was a few years ago, however the potential for gain has dropped astronomically.This risk-reward analysis has pushed me out of acquiring direct ownership of real estate and into debt based investments.  For those who are relatively new to my newsletter, you'll know that I'm not a fan of the stock market.  While I still happily own a lot of investment real estate as a tax shelter and hedge against inflation, the majority of my personal investing has shifted to mortgage investments rather than real estate.  

A debt based investment like mortgage investing is a guarantee of a specific outcome.  You will either: (A) get the interest rate stated on the note or (B) you will get to foreclose on the real estate collateral for a fraction of what the market value of the property was as on the date you made the original investment.  

If your investment horizon is long enough you'll probably do great as a property owner even if you buy at the top of our current market cycle.  After all, while we are currently in a seller's market of real estate, we are in a buyer's market for long term debt. Real estate prices are at all time highs, while mortgage interest rates remain at all time lows. I would rather "over pay" for a property once and "under pay" for my interest rate every year for 30 years than vice versa. It's very possible that today's interest rates are a once in a generation phenomena, so if you are young enough it could very well make more sense to load up on as much positively arbitraged real estate as possible rather than investing in the security of mortgage investments.  However, a lower risk / potentially higher reward formula (especially for older investors who have less time to benefit from the asset of extremely low long term fixed interest rates) is to acquire positively arbitraged mortgage paper and wait for the reward side of real estate investing to increase.  

Don't you wish you could go back to the buyer's market of 2011-2013 and double down on direct ownership of real estate? If you've been investing long enough, don't you wish you would have sold everything in 2007 and just sat out of the market for a few years?  

You might consider stripping the 'at risk' equity out of your current rental properties (through sale or refinance) and then place that equity into a safety-first senior mortgage investment until the next buyer's market comes around.  Done correctly this will increase your cashflow and profitability while simultaneously reducing your macro investment risk.  It will also keep you in a relatively liquid position for when the next buying opportunity arrives.  Mortgage investments are much more liquid than real estate investments.  Any time I can increase yield while simultaneously lowering risk,I definitely want to pay attention to that opportunity. 

Here are links to a few blog articles that discuss these

risk reward concepts in more detail:

How to Predict Real Estate Prices

http://www.hasslefreecashflowinvesting.com/how-to-predict-real-estate-prices/

Borrowing To Invest Can Increase Cashflow and Lower Riskhttp://www.hasslefreecashflowinvesting.com/borrowing-to-invest-can-increase-cashflow-and-lower-risk/

Here are a few podcasts and webinars

that discuss the nuts and bolts of mortgage investing:  
http://www.hasslefreecashflowinvesting.com/media-2/ 
http://www.hasslefreecashflowinvesting.com/video/video-series-investor-financing/ 

If this email was helpful to you, please consider forwarding it to your friends. 

Best regards,

David Campbell

Real Estate Investing Strategist 

http://www.hasslefreecashflowinvesting.com/

Happy Investing!

Investing in a Seller's Market

Hello fellow real estate investors! Today's guest blog is courtesy of real estate cash-flow investor David Campbell from http://www.hasslefreecashflowinvesting.com/
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We are in a seller’s market.  Prices are up.  Inventory is low.  Properties in the hottest markets are selling over asking price with multiple offers.  Investors are paying “more than they want to” just to get a deal done.  The ratio between rents and purchase price is favoring sellers and squeezing investor buyers out of the market. Another way to describe this trend is that CAP rates are decreasing, or “compressing”.  We are approaching a delicate part of the market cycle where the flood of inexperienced investors is driving prices up to places where experienced investors shake their head and wonder, “How is the winning bidder ever going to make a profit?”   

Wouldn’t life as an investor be easier if the market gave you clear signals about the future?  Interpreting investment signals is a mix of science, artistry, and luck with a bit of clairvoyant magic thrown in.  In today’s blog, I’ll share a few of the directional signals I use in making real estate investment decisions.   I will also talk about what investment strategies and buying opportunities I am excited about in today’s seller’s market.   

A common mistake investors make in reading market signals is what I call, “You see what you look for and you look for what you know.”  If you are seeing prices going up all around you and all you are looking at is prices, it would be natural to assume that if you buy now the price will go up next month.  As sophisticated investors, we know this is not true and we need to learn to look beyond price and historical price trends.  Appraisers are trained to look at what price similar properties sold for in the past 3-6 months.   Appraisers are required to always look in the rear view mirror at prices in the past.  In an upwardly trending market, homes will be selling higher than appraised value.  It makes sense that if your home is in contract at a price higher than the previous sales comps, it won’t appraise at the contract price.  A low appraisal doesn’t mean a home isn’t worth the contract price.  A property is worth what a reasonably motivated buyer and seller agree to.  A maxim to remember in real estate: “You will overpay for every property you ever buy; if someone else is willing to pay more, they, not you, will become the property owner.”    

Simple economics teaches us that as you lower the price of your property there are more buyers.  As you raise the price of your property there are fewer buyers.  However, if you only have one property to sell, you only need one willing buyer.  In a seller’s market, the seller of a performing income property is not typically in a rush to discount the price to find a buyer.

The above graphic illustrates the yin-yang relationship between pricing and quantity of buyers. The centerline represents market value.  As you move above this market value, you attract a smaller percentage of prospective buyers, reducing your chances of a sale which typically increases the time it will take to locate a buyer at that price. Conversely, as you move below market value, you attract a much larger percentage of potential buyers which typically shortens the time it will take to locate a buyer at that price. One of the important take aways from this illustration is that there is a range of market prices for every property. Take appraisals with a grain of salt.  Appraisers don't provide a price range; they must isolate a single market value based on a subjective series of adjustments to historical prices.  The marketplace where investors compete represents all of the “bid” and “ask” prices of buyers and sellers in real time.  That’s why you will see buyers in a seller’s market paying higher than appraisal.  That’s also why you will see sellers in a buyer’s market selling for less than appraisal.   

Appraisals are “lagging indicators” of value, not “leading indicators” of value.   A lagging indicator confirms a previous price trend but it does not predict the future.  A leading indicator helps you predict the future.   When you hear someone say, “You should buy in such and such hot market because prices appreciated XYZ percent in the past year,” remember that person is describing a lagging indicator of value not a leading indicator. If you would like to see into the future of real estate, look for leading indicators of value not lagging indicators. 

You will have an economic advantage if you know how to evaluate the leading indicators of real estate demand, supply, and one of the most overlooked real estate signals - affordability ratio.

While you can’t change the signals you are getting from the market, you CAN change your investment strategy depending on what signals you are getting.   We are currently blessed with incredibly low long-term fixed interest rates.  Low interest rates are a signal for how to invest.  While current prices are high relative to rents, interest rates remain low.  One of the best assets to acquire in this seller’s market is the ability to control long term fixed low interest rate debt and to use that debt to create positive cashflow now and in the future. 

If you can borrower long term fix rate money at 4% and invest in a property or note that produces a profit of 6% or more, how much money would you like to borrow?   As much as you possibly can!! This strategy is called arbitrage.  Positive arbitrage means you are making money on the bank’s money.  You can’t do anything about today’s high prices, but you can focus on winning through positive arbitrage.   Over 30 years you will make more money paying a “seller’s market premium” for a property and financing it with today’s insanely low interest rates (4-5%), rather than buying cheaply at the bottom of a “buyer’s market” and financing it with traditionally historical interest rates (7-8%). 

Here are two Hassle-Free ways to create positive arbitrage in today’s seller’s market. 

Option One is for the long term investor (10 years or more) who is (a) targeting higher yields, (b) is willing to take on a little more risk to achieve higher yields, and (c) is looking for a blend of positive cashflow, tax benefits, equity build up, and shelter from inflation.  The formula is simple: buy a rental property whose CAP rate is greater than the interest rate on the financing used to acquire the property.   A good goal is to achieve at least a 2% spread between the long term fixed interest rate and the CAP rate. While you may be able to achieve a CAP rate to interest rate spread higher than 2%, you may not like the quality of property that comes with higher CAP rates.   Hassle-Free Cashflow Investors gravitate towards newer properties that are lower hassle to manage and have lower risks associated with property maintenance.

Option Two is for the income investor who is looking for a combination of safety, semi-liquidity, and immediate cashflow. The formula is to borrow money at a low rate to be a lender at a higher rate.   You can borrow capital (aka equity stripping) at today’s long term fixed interest rates around 4-5% from a bank using equity in properties that you currently own.  You then use the proceeds of the loan to buy income producing notes (aka hard money lending) secured by quality real estate in first position at conservative LTVs that produce interest income of 8% or higher.   For example, if you borrowed $100,000 against your $125,000 free and clear rental property (80% LTV) and you make a $100,000 loan @ 10% secured in first position against a single family property valued at $133,333 (75% LTV) you would have two assets - a house and an income producing note  - and you would have one liability - the mortgage on your $125,000 rental property.  The income from the note @ 10% interest rate would produce $10,000 a year income and the cost of your rental property mortgage @ 4.5% interest rate would consume $4,500 of interest expense.   You can create a $5,500 annual profit out of thin air just by moving $100,000 equity from an existing property into equity in an income producing note.   Remember, you still own the rental property and the profit from the rental property is exactly the same.  The profit comes from putting your equity to work in two places at the same time your equity controls the property and the note at the same time.   Assuming the income producing note is in first position at 75% LTV, if the borrower stops paying you can foreclose on the asset and it’s like buying the property at a 25% discount.  In fact, some hard money lenders prefer making loans to borrowers who are unlikely to repay the loan.  They call it a “loan to own” investment strategy.  Making hard money loans in a seller’s market is a great way to produce income and potentially acquire real estate at steep discounts you are unlikely to find in the currently competitive seller’s market.

David Campbell is a savvy real estate investor, whose strategies I always admire. I hope you have enjoyed this blog.

Happy Investing!