If the Great Recession didn’t personally impact you, you most likely know someone who has been impacted. Although we’d love to put all that behind us, whispers are getting louder about the possibility of a “bubble,” and the word “crash” is weaving its way into headlines.
So, let’s pay homage to Winston Churchill’s famous line, “Those who fail to learn from history are doomed to repeat it,” and outline three elements crucial to success in any venture, including today’s residential real estate market.
More isn’t always better
Although it might seem that you can’t turn on a TV in America without seeing a reality show or a commercial for house flipping, this segment of the real estate market has not reached pre-recession highs. And, that’s a good thing.
During the last cycle, many individual investors attempted “flipping,” and its close connection to the financial meltdown left it viewed by much of the market in a pejorative manner. However, post-recession, both banks and successful investors have applied sound parameters and safeguards to ensure a proper investment strategy.
The result is fewer flips. In fact, it took eight years to get to the highest number of flips annually since 2007, and last year’s 179,778 homes flipped is still below 2005’s peak of 259,192, according to RealtyTrac.
The same study found that year-over-year growth of flipping’s share of total sales is slight, increasing only 0.2 percent to 5.5 percent in 2015.
So, where’s the opportunity?
Disrupt the business model
The adage “buy low, sell high” applies to all investment strategies. Those successful in flipping, in any market or economic cycle, follow the sound principle of finding homes below replacement costs, thus having built-in equity from the start.
But, opportunities for short-term gain might be limited by demand outpacing the supply of homes and a consecutive 49-month streak of the median U.S. home sale price increasing year-over-year as of March 2016, according to RealtyTrac.
To this end, flip the traditional flip approach by keeping the investment for the long-term rather than selling as soon as possible post-renovation. This portfolio-type investment strategy of “hold, accumulate, then flip” has been afforded to and utilized by large-scale investors for years in both the residential and commercial real estate markets, and it’s often seen as a less-risky investment type.
The advantage of this approach opposed to investing in the stock market comes from mitigating large-scale fluctuations. This investment strategy has often been overlooked or impeded by the barrier to entry for small and midsize investors until now.
The opportunity to rent the asset can create consistent and well-performing cash flow, offset debt service, and allow for inevitable appreciation to occur until a point that the sale price provides a high enough return on investment. This approach allows investors to step over the nickels and focus on the dollars, and it’s a great time to be a landlord.
Since 2009, the government’s measure of consumer prices has risen approximately 10 percent while average rent is up nearly 14 percent.
Most recently, RealtyTrac’s first quarter 2016 report found that rents are rising faster than median home prices in 45 percent of the U.S. markets analyzed, and with wage growth outpacing rent growth in 43 percent of the markets, there is room for increasing rental returns.
And, with 75.4 million millennials at an age of rental potential, the already strong rental market is poised for a steady demand long-term.
Diversify investments
Diversity is key to minimize risk potential in any investment strategy. In creating a residential real estate investment portfolio, keep in mind ripple and enterprise markets.
The core of a market is often the first to rise and the first to fall. Investments made outside of the core, in surrounding markets dubbed “ripple markets,” are an acute and savvy approach for several reasons.
From an investment perspective, within the densely populated areas, there is limited supply to build an investment portfolio and the product available is usually offered at market cost — often eliminating investor equity.
Similarly, as the key residential markets continue to experience high absorption and rising prices, the markets on the fringes — the ripple — will become most desirable to renters and homebuyers, especially the workforce demographic.
Another marker that investors are following is one referred to as “enterprise markets.” If an area is beginning to burgeon, as seen through commercial development such as large-scale industrial or office construction, residential real estate investors act quickly to secure large blocks of homes in reasonable proximity.
The theory is that a large demographic prefers a high quality of life, and living close to their work is an amenity.
If we learn from our past to gain more success in the future, we’ll understand why the traditional flip isn’t dead — it’s changing.
In today’s market, savvy investors have an opportunity to see the big picture regarding wider-spread geographic opportunities, buying less and holding for longer terms to increase the potential of creating more wealth.
Giovanni Fernandez is the owner and CEO of National Real Estate. Follow National Real Estate on Facebook or Twitter.