Real estate investing is one of the greatest wealth building strategies of our time. However, it can get a little frustrating when it’s hard to find great deals in your market.
Real estate markets have become very hot (i.e. competitive) in many areas. The media are just starting to understand how hot these markets are, and market forces have driven prices up while depleting the inventory of solid investment transactions.
The three main causes of competitive markets:
1. The demand for real estate investments is greater than the supply. There are more people buying than selling investment property at a discount.
2. Prices have risen so much for properties on the market listed with agents that there is very little equity left to make a profit. Properties on the market listed with agents are the easiest deals to find, which means they’ll have the most competition as well.
3. The properties are sold at a price higher than their value as is. Investors are paying too much for properties, or homeowners are buying renovations and are willing to do the work themselves to get into a home at a lower price.
All of these can create a seller’s market. It’s very typical of the east coast, the west coast, and the major metropolitan markets, where the real estate market has been on the rise for the past five to ten years, as we are seeing right now. We will remain in a sellers market until people are no longer willing to overpay for properties or there is a big economic change, like an interest rate hike or something similar to that. the mortgage collapse of 2008.
The real estate market cycle will most likely change when the average, middle-class worker can no longer afford to overpay for a house or mortgage payment, as wages and incomes do not increase at the same rate. as real estate prices go up. This is where most of the major markets are headed right now.
So what can investors do now to continue to find great deals and profit in real estate?
There are only two options, and you can choose either or do both.
1. Dig deeper and start outbound marketing to find deals directly from owners instead of relying on listed properties.
Direct mail is a great way to reach non-market properties. Send a letter to homeowners to let them know you are interested in buying their home. The downside of digging deeper into your hot markets is that it will cost you a few advertising dollars to find off-market properties.
On the plus side, the properties you get will be able to return for a higher price because you are in a sellers market. You probably won’t be able to buy and own properties in these markets, and neither would you, as the cash flow will likely be negative and the risk of the property losing value over the next few years is very high.
2. Start locating properties in virtual markets outside of your place of residence that have less competition and more deals available.
Right now, I’m targeting several states in the Midwest, where prices are still quite low. Properties in these Midwestern markets generally have good positive cash flow. The risk of property loss in value is very low as these markets generally do not have high appreciation and depreciation cycles like the coasts and major metropolitan areas.
It leaves all of your investment options open for you to explore wholesale, creative finance, rehabilitation, buy and hold and / or passive real estate investing (i.e. private loan). You won’t see the massive price appreciation in these markets like you see on the east and west coasts which I see as an advantage as it creates good diversification for your investment portfolio.
Now is a good time to sell all the properties you own in the sellers’ markets and move those investment dollars to the Midwest markets, where you can buy a lot more assets to get more cash flow. while minimizing your risks. Wait a few years for prices to drop in the sellers ‘markets, then put your money back in those markets to buy low and go up the next cycle to the sellers’ market. This is effective for single-family and multi-family properties.