Maybe your brother-in-law, next-door neighbor, or a colleague at work, has told you that the real estate market "is going down the drain." They probably said to you that mortgage rates are at "unpayable levels" and that one of the following is going to happen: recession, lack of buyers, loss of equity as home prices fall, higher interest rates, and lack of lenders, among many others.
We would tell them: "Not so fast!"
At AMI Lenders, Houston's Premier Hard Money Lender, we continuously remind our clients that buying and selling opportunities in real estate can be had in any kind of market. Whether in a down or up market, investors with a well-thought-out strategy and who always keep the fundamentals of real estate investing in mind are poised to succeed. So, given the complex, post-pandemic economic environment facing us, we thought it would benefit our readers to review what we perceive as the fundamentals of real estate investments.
And yes, in answer to our title question, we believe investors should still be investing in real estate at the close of 2022 and the beginning of 2023, even with higher mortgage rates than those previously seen in the past 15 years. The profit you could eventually derive from your investment will not solely depend on the mortgage or loan rate you secure. Many other factors impact successful real estate investments, including pent-up demand, shifting demographic tastes, industrial activity, migration patterns within our country, and access to the right deals.
Fundamentals to real-estate investment
It has been said, time and again, that investing in real estate is like any other business endeavor: you must know what you are doing, what drives the market, and how to spot opportunities, among many other aspects. In the following list, we resume what we believe are some fundamentals to investing in real estate.
- Acquire deep expertise from one (or maybe two) types of real estate investors. Start by reading and learning as much as you can on one niche. What do we mean by a niche? For example, as it pertains to residential properties, you could either (i) buy and flip (sometimes without even putting the property in your name), (ii) buy, fix and flip, (iii) buy and hold to rent on yearlong leases, (iv) buy and hold to lease on short-term (through use of platforms such as Airbnb), (v) house-hack and live yourself on one part of the property, (vi) partition your plot and add an additional unit, or (vi) develop units from the ground up.
When it comes to your niche, you should fully understand what drives your investment property's value fully. Most of the time, as an investor, you will derive most of the value when you purchase the property. Still, it could also be that you can also extract some value from leveraging the acquisition or renovating and upselling the property. In previous blogs, we have shared examples of clients who spend hours driving around selected areas where they focus their efforts on understanding the social and demographic patterns which drive the desire to live in said area, spotting the most desired blocks, streets, and types of houses to invest in. They are successful because they have become experts in a real estate niche.
- Analyze and understand how it is you will derive value from your investment. Apart from property appreciation, there are many ways to extract value from your investment. A partial list of ways to derive value from a real estate investment would include:
a. Property appreciation (also known as a capital gain on the property we already mentioned).
b. Net cash flow from rentals (that is, the rent minus all obligations related to the property, such as property taxes, maintenance, upkeep, and fees paid to advisors, among others).
c. Leveraging your available capital to increase the number of deals you can participate in. For example, rather than putting down 40% on one rental unit, why not put down 20% on two rental units instead? If you have an almost paid-off mortgage, why not use some of the equity toward the down payment of another income-generating property? To do so, you could find a financial ally with deep expertise in financing real estate deals in all types of economic environments (not unlike AMI Lenders).
d. Opportunistic purchase and immediate "on paper" returns. For example, when someone needs to sell a property at a discount (for whatever reason), and you purchase it below fair market value, you have, in principle, the derived value on your invested dollars.
e. Could you add (if local zoning ordinances permit it) another unit to your plot of land?
f. Could you partition the existing living areas ("house hacking") and derive additional income from the same property through minor layout modifications?
- Understand how finances work. Investing in real estate involves being knowledgeable about budgeting, forecasting, financial modeling, and leveraging. If you feel that you are not up to par with your knowledge, should you not take an extension course in a local college or online?
- Understand how the law works in your area (also known as "your jurisdiction"). You want to ensure that you are duly protected in all your transactions, at least legally. And knowing what the law says will save you dollars from not having to incur attorney's fees.
Summary
We believe that investments in real estate should always be based on a clear understanding of the underlying fundamentals and that investors can succeed in almost any type of market by understanding how they will derive value from their resources.
If you are pondering a real estate investment in Texas in 2022 or early 2023, rely on the opinion of Houston's Premier Hard Money Lender, AMI Lenders. We have helped investors in Houston and surrounding areas obtain the financing they need for the last four decades, and we can tell you that now is still a good time to invest in Houston's real estate.
AMI Lenders Inc. is "open for business" and ready to help you get ahead in your personal financial situation. Consult with us as we are one of Houston's fastest closers and could become your financial ally. We fund our own loans and can move as fast as the law allows. Borrowers in Houston will also have a hard time finding lower rates for hard money or private loans than those we offer. We want our customers to succeed and take advantage of the financial opportunities offered by home ownership and real estate investing. Fill out an application for a loan backed by real estate with us today!
