What Does a Housing Market Slowdown Mean for Real Estate Investors? | Think Realty | A Real Estate of Mind
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What Does a Housing Market Slowdown Mean for Real Estate Investors?

Whether you’re looking to fix-and-flip or invest into rental properties in 2023, it’s crucial to understand how the market will impact your ROI.

When there’s a housing market slowdown, the demand for homes drops. A slowdown for fix-and-flip real estate investors may imply that there could be fewer offers on their listings or they might not get as much money for their homes when selling the property.

For real estate investors who are looking to buy a property, a slowdown will lessen the competitive nature of the market – giving investors a unique opportunity to make their money on the buy instead of the sell. Buyers are less likely to need to compete with multiple offers and can potentially find more homes.

Whether you’re looking to fix-and-flip or invest into rental properties in 2023, it’s crucial to understand how the market will impact your return on investment. Let’s dive into a housing market slowdown and how REIs can still scale in the macroenvironment.

 

Signs to look out for in a housing market slowdown

Several housing market indicators point toward a slowing housing market. Let’s take a look at a few.

Housing inventory is starting to increase

For the last few years, low housing inventory has been a concern. Housing shortages have influenced rising home prices, and real estate investors and developers have been working to eliminate that deficit by rehabiliating aged homes. According to a report from Realtor.com, the national inventory of active listings increased by 46.8% over last year in November 2022. With more available homes, buyers can afford to be more selective about their opportunities.

Fewer mortgage applications are being submitted

The Mortgage Bankers Association (MBA) reported that Mortgage applications in the US declined 1.9% in the week ending December 2nd, after a 0.8% drop in the previous period. With fewer mortgage applications, fewer homes are being sold.

Sellers are dropping prices

Sellers who need to sell their homes are now dropping their prices. According to a report from Redfin, a record 22% of homes for sale had a price drop in September. While the median home-sale price was down 0.5% month-over-month in September, it still rose 8% on a year-over-year basis to $403,797.

Fewer people are shopping for houses

In the last few months, mortgage interest rates have risen sharply. The increased rates make it more challenging to afford a home and have increased the cost of capitals for real estate investors looking to purchase their next investment property. In October, just 16% of consumers said they thought now was a good time to buy a home, according to a monthly survey by Fannie Mae.

Of course, this doesn’t mean no one is shopping for a home. There are many home buyers out there for investors with fix-and-flip properties. But the demand has dropped off from its peak, and has created a higher demand for rental housing.

 

What does this mean for real estate investors?

Whether you’re already a real estate investor or thinking about getting started in real estate investing, you’ve likely been keeping up with current news about the country’s economic status. In the last few months, there’s been a lot of buzz around recessions and at-risk investments—making many investors take pause on their current strategy or re-evaluate how to scale in the current market. Whether we’re in a recession, about to enter one, or far away from one, many agree that we still have a winding road ahead.

While market volatility is not exactly painting a rosy picture, investing in real estate can offer some stability when the economy slows. These primary factors can make real estate a good buy-in:

  • People still need housing. Regardless of the state of the economy, people still need a place to live. Demand for rental properties can remain steady or even rise during a recession, and when there’s a housing shortage, there’s a limited supply to go around. That’s when real estate investors can rely on a steady stream of rental income.
  • Recessions can yield bargains. If a recession causes a hot housing market to cool, opportunities can open up for rental or fix-and-flip properties to be bought at lower price points – allowing investors to make money on the buy and have more flexibility in their exit strateg

 

Rental property investment

Owning a rental property offers numerous advantages during a housing market slowdown. A properly purchased and managed rental will provide your or your portfolio with a steady monthly income. This extra cash is precious during a recession phase when you might need it yourself or want to take advantage of opportunities to buy.

Buying a rental property might be an obvious choice. As long as you can keep tenants, renting out property will generate steady income through a slowdown.

There are different types of rental properties you might consider. This could include single-family rentals, multi-family properties (duplexes, triplexes and quadplexes), apartment buildings or condominiums.

The more units you have to rent out, the more passive income you can generate. However, remember that more units can mean higher maintenance costs and more responsibilities. You can use a property manager to oversee your rentals, but that comes at a cost and can detract from your profits.

 

Financing your rental property

You can consider several financing strategies to purchase rental properties—conventional mortgage, cash, private money, etc. Many investors who need to get money quickly to purchase a rental property turn to long-term hard money loans to buy rental properties.

Choosing the right loan is essential for maximizing profits and ensuring you can make the payments if you can’t get a tenant immediately. The quicker funding process and less stringent lending criteria of hard money rental property loans, also known as DSCR loans,  make them an excellent option for fast funding. There’s very little paperwork required for both fix-and-flip and rental properties, which speeds up the process.

Private investors or companies fund hard money loans. Traditional long-term financing from banks comes with a cumbersome process that requires a lot of paperwork, underwriting, and background checks. Traditional lenders do this to ensure buyers will pay the loan back, and the process can take a couple of months, depending on the type of loan.

Hard money loans are the opposite—hard money rental loans, also known as debt service coverage ratio (DSCR) loans or no-income mortgages, can be approved in a couple of hours and require little paperwork. What does that mean to you?

  • No tax or personal income documentation is needed
  • Loans are based on rental property cash flow
  • The qualification guidelines are much more flexible

 

Real estate investors who don’t want to jump through traditional lenders’ hoops for long-term financing can all reap the advantages of taking out hard money loans for rentals.

 

Fix and Flip investing

Fix-and-flip is the strategy of purchasing a property—typically a distressed one—at a discount, renovating it, then selling it at a profit. Fixing and flipping properties can be an excellent investment strategy when the economy seems unsettled, though it can be tricky since the number of ready and willing homebuyers could decrease. After all, if an investor purchases and fixes a house, and then isn’t able to sell it—they’ve spent a lot of money and made no return on their investment.

However, even in a market downturn, it can be possible to keep flipping houses and potentially make a profit on the investment. If you can find a qualified buyer relatively quickly, flipping homes could allow you to pocket significant profits if you’re buying homes at rock-bottom prices.

Keep in mind, though, that at least to get started, real estate can require quite a bit of capital. If you don’t have the reserves available to pull off a project in cash, you can always explore options like fix-and-flip or bridge loans with a hard money lender.

These unique loans are often short-term and have interest-only options, allowing flippers to invest with little money, knowing they’ll pay off the loan when the property sells. Here are some more benefits investors get with fix-and-flip (bridge) hard money loans:

  • They often close faster than traditional home loans. From application to close, a hard money fix-and-flip (bridge) loan can take as little as a few days or just a couple of weeks.
  • Their underwriting process is less rigorous than with a traditional loan. Hard money lenders place more weight on the value of a property used as collateral than on a real estate investor’s personal finances or employment history.
  • Hard money lenders pay less attention to a borrower’s credit score and debt-to-income ratio. That’s because hard money lenders aren’t required to follow the same regulations as traditional lenders.

 

Final thoughts

Volatile and fragile economies can be intimidating, but they can also bring opportunities for both seasoned and inexpereinced real estate investors. In a slowdown market, it’s crucial for investors to maintain flexible exit options and ensure each deal can successfully result in a positive ROI to move forward.

With capital thinning in today’s markets, it’s more important than ever to leverage relationships with trusted lending partners to access the financing you need to power your REI business.  Kiavi’s flexible loan programs are built to help you scale through reliable capital, easy online processes, and dedicated support to maximize your profits in the current market environment.

Ready to explore financing options for your next investment property? Get started with Kiavi today to get pre-qualified in less than 10 minutes.

 


*Kiavi collaborates with this organization by allowing real estate investors to leverage a custom online technology platform that uses modern technology and data science to access financing quickly, efficiently, and reliably. The above is provided as a convenience and for informational purposes only; it does not constitute an endorsement or approval by Kiavi of any of the products, services or opinions of any external corporation or organization or individual mentioned. The information provided does not and is not intended to, constitute legal, tax, or investment advice.

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