Inflation. War. Recession. Market crashes. Interest rate hikes.
These are just some of the headlines we’ve seen during the last few months. Many people are scared and don’t know what to do. During these times, it helps to pause, observe, plan, act, and adjust.
So many things play at our emotions, especially with the media and social media throwing hundreds of messages at us all at once.
When we feel overwhelmed, it’s important to pause, take a deep breath, and then move on to the next step. If we can reign in our emotions and focus on the facts instead, we can figure out the best move we need to take to make sure our family and investors are taken care of.
What facts can we observe and collect?
It’s important to look at the hard facts and data so we can draw our own conclusions. The data can help us see what problems we may be facing.
For example, as real estate investors, we care a lot about housing prices.
What dictates housing prices? Primarily supply and demand.
For supply data, you can ask your realtor for the data in your local market and see how much supply is being added to the housing inventory each week via listings and how many building permits are approved. The latter will reveal how much new construction is coming online to add to the supply.
For demand, you can ask your realtor for data on how fast those listings are going under contract. Your realtor may also have access to how many offers, on average, the listings receive.
One data point that captures both demand and supply is the Months Supply of Inventory (MSI), which is calculated by dividing the current months’ inventory by a rolling 12-month calculation of pending sales. MSI seeks to determine how many months it will take the market (in its current condition) to absorb all the active inventory. So, we’re easily able to see if the market is favoring buyers or sellers. Generally, a balanced market ranges somewhere between a four- and six-month supply. If MSI shows fewer than four months, the market favors sellers; if it’s above six months, buyers have the advantage.
In Florida, MSI is 2.1, indicating there is only 2.1 months’ worth of inventory on the market. This means that it’s not likely for pricing to come down because sellers have more of the negotiation power.
After we‘ve observed and gathered all the facts, we consider how the situations they represent impact us today and how they may impact us in the future. Based on that conclusion, we can create a plan of action.
For example, one thing people are worried about right now is what will happen if real estate prices decrease. The wonderful thing about real estate as an investment asset class is that we have four ways we make money on investments versus other assets classes where there is usually only one way to make money.
In real estate, we have:
Cashflow: in other words, we get recurring income.
Appreciation: meaning the price of real estate can increase over time.
Loan Paydown: as our tenants pay down our loan each month, our equity increases.
Tax Benefits: The government gives us an incentive to provide housing in the form of depreciation tax benefits.
With stocks, on the other hand, most of the time there is only appreciation and sometimes there is cashflow in the form of dividends.
Because we don’t rely on just appreciation in real estate, even if the price of real estate goes down, there are still three ways to make money on investments: cashflow, loan paydown, and tax benefits. These three allow us to continue to pay the bills and ride out whatever “crash” there may be. If we plan to mainly invest for cashflow, loan paydown, and tax benefits—and leave appreciation as icing on the cake—we can remain calm and keep investing.
Keep a healthy amount of cash reserves as a safety net in case anything happens as well.
Act and Adjust
Another important thing that changed recently is the interest rate. In January, an investor could get an investment loan in the 4% range, now we’re in the 5-6%+ range.
But, we can plan to analyze our deals with the higher interest rates, and just offer what makes sense and where we are still happy with the cashflow we receive. We know inflation is high, and if we don’t invest, our money is guaranteed to lose 8% or more or purchasing power a year right now. By adjusting and acting, we can keep investing. Even with higher rates, we are still in control of our investment decisions.
Arianne Lemire, former speech language pathologist turned real estate investor, was able to retire with real estate as a passive income by the age of 27. She now co-owns more than 2,400 multifamily rental units in the Southeast with partner investors.
Lemire is a big foodie, travels several months a year, and is passionate about sharing financial freedom strategies with others. She helps busy professionals retire in 1-3 years through wealth consulting and real estate investing partnerships. You can reach her at www.wealthgym.com, www.youtube.com/AskArianne, or https://www.instagram.com/theariannelemire/.