Many investors are finding it challenging to locate the deals that provide good cash flow.
Traditional real estate investing is in a tricky spot right now. The Fed has raised interest rates by more than 4% during the past two years in an effort to slow inflation and mitigate its effects on the economy. As a result, mortgage rates have more than doubled during the last 18 months.
In addition, housing prices have seen unprecedented growth in recent years. The average sales price in the U.S. has been steadily rising since 2012, skyrocketing during the pandemic. As housing prices have increased, rents have as well, but not at the same relative rate. In fact, the rent-to-price ratio has been on the decline for the past decade, resulting in reduced cash flow potential for traditional assets.
These unique market conditions have made traditional real estate much less affordable for the average investor. Many have been forced to find alternative ways of building cash flow and asset appreciation in their real estate portfolios.
Opportunity Still Exists
On the surface this may appear to be a dilemma; however, some investors see it for the opportunity it presents. No, it’s not time to dust off that résumé and find a new career, it’s time to adapt.
Cash flow is king, and there are still real estate markets that provide it in abundance. Sometimes it simply requires entrepreneurs to look for investment opportunities in more niche markets.
One industry, in particular, has consistently outperformed traditional residential real estate and has seen growth year over year, even during the pandemic.
Thanks to specific demographics, economists have projected that this asset class will be in high demand for the next two decades. That asset class is senior housing.
America, like many other nations, has an aging population that is outpacing its younger counterparts. People are living longer. Their golden years, when they require special living accommodations, have also increased. This longevity is due to many factors: advancements in health care, education around diet and exercise, improved living standards, etc.
According to the U.S. Census Bureau, every month 120,000 people reach the age of 85, and 70% of them require assistance with their everyday tasks.
This booming senior population could either present a potential crisis or an incredible opportunity, depending on the response of health organizations, housing providers, and investors.
What is so unique about this investment strategy is that these homes can generate many times the rental income of traditional single-family rentals. As far as the demand for this type of investment is concerned, it is based on demographics, not what the markets are doing, providing both cash flow and stability.
Historically, real estate has been one of the best hedges against inflation. Real estate that generates significant income performs even better, which is why so many are turning to the in-demand niche of senior housing.
Tips for Success
No matter what real estate investments you decide to pursue, here are a few general tips to help you weather current and future market conditions.
1. Know your goals.
Understanding your goals and the steps it takes to achieve them will keep you on your path and reduce the chance of missteps along the way. Knowing your goals also keeps you more focused and motivated.
2. Know your limits.
Be clear on your limits and where you are willing to compromise. As supply dwindled and housing prices rose to unprecedented levels during the pandemic, many investors were so eager to get into deals they often overpaid. Now many are sitting on assets that have likely reached their appreciation ceiling, trying to sell to buyers who are facing substantially higher mortgage rates.
As an investor, you know it’s critical to do your due diligence. But make sure to analyze the numbers objectively. That way you won’t get caught up in the emotion of an oversaturated market and end up with debt-to-income ratios that are beyond your comfort level.
3. Streamline your financing process.
The housing supply has fluctuated dramatically over the past three years. When supply is low and homes are moving fast, it’s important to be agile. Have your finances ready to go, so once you decide a property is right for you, the time needed to complete the deal is relatively short. It also helps to build relationships with your lenders as much as you are able to expedite the closing process.
4. Communication is key.
Make your network work for you. Investing in real estate is about communication and building relationships with the right people. Partner with people and organizations who have your best interest at heart. This doesn’t happen overnight, and it also requires you to be the kind of person others can depend on. You’re a busy person, and you can’t answer calls or emails as soon as you receive them. Remember, however, that people have options, and they just might prefer to work with someone they feel appreciates their time and urgency.
With the right strategy, you can set yourself up to succeed regardless of market fluctuations. Don’t be afraid to look outside the box. Your next great investment might be closer than you think.