Markets are ever changing and that is no different for real estate. Though there is the broader real estate market the localized markets within it have their own character too. Keeping a gauge on both is key to knowing when to shift.
What worked for the past five years may not work anymore. Think about anyone that was buying Bank REO’s (bank owned foreclosures) from 2011-2016 – those layups are gone. There isn’t more supply than demand anymore and banks are listing these near fair market value.
That is a very specific example of when an adjustment needs to be made, some are not as obvious. Recognizing it is half the battle.
How to Track the Real Estate Market and Shift if Needed
1.) Overall Real Estate Market
The first thing we want to do is gauge the overall market which can be done by looking at some simple data.
- Existing Home Sales
- Interest Rates
- Building Permits
What is the status of the above items?
If existing homes sales are growing then we are likely still in a strong market, couple that with low interest rates and increased building permits we get a tone that the overall market is strong.
Flip that the other way and if foreclosures are rising, interest rates are up and building permits are down then we know the overall tone of the real estate market is weaker.
This helps us make a judgement on whether its a buyers or sellers market. However, this can vary within individual markets.
2.) Buyers or Sellers Market?
Once we gauge the market on a whole, we then need to determine the status of the markets we actually do deals in.
Best I can do for you is give a personal example. The first five years of my real estate investing was focused in South Florida. It was and kind of still is a market in appreciation mode. It was also a market where you could find cash flow on rental properties.
Well, with all the appreciation the cash flow equation changed. To find a cash flowing rental property in that market is very difficult now and has been for more than a year as most sales prices are just to high.
With the current low interest rates and a lot of people relocating to Florida the demand still seems to be there (though not as strong as last year) and prices are still inching higher.
Basically it is still a seller’s market. However, I wanted to be a buyer and continue to acquire rentals. So what was there for me to do?
3.) Making the Shift
With all that was just said it was time for me to make a shift. What was working for me the first five years wasn’t going to work anymore (or atleast be an uphill battle, and remember I’m ambitiously lazy) so even though I wanted to be a buyer guess what I did?
Shifted – I actually became a seller in my local market and a buyer in outside markets.
The last rental property I acquired in South Florida was February 2017. I then shifted gears and sold one of my earlier purchases in August 2018 to book that appreciation I mentioned earlier and apply that money to multiple cash flowing opportunities in cheaper less volatile markets.
So in a way, I needed to to talk a step back in my property acquisition in order to take two steps forward.
My shift took me to a small market in the middle of Massachusetts, where cash flow is easier to find, but appreciation pretty much isn’t a thing. This scenario is about perfect for my goals and there isn’t a bunch of competition driving up prices, thus I can negotiate the heck out of deals as well.
This is also how I found myself investing out of state, which is something I never thought I’d do.
However, a shift needed to be made for me to continue building a cash flowing rental portfolio.
Whether you are just starting out or are already in the game, understand what your goal is, what your real estate business is and then see if it works for your area or the current market cycle.
If not, then it may be time to shift your location or your strategy. Unfortunately we do not live in a bubble so what worked yesterday may not be a winner today.