About This Episode
Episode #216 – Real estate prices seem like they are getting out of hand! And now, interest rates are creeping up. Is this a good time to wait for a correction and sit out as a real estate investor? Or are there still opportunities? This is the question Coach Carson answers in this episode of Ask Coach.
It feels like real estate prices keep going up and up and even getting out of hand. And now interest rates are going up as well. And so is a real estate investor. Should you just sit out and wait for a correction, or is there still opportunities out there in the market? You should take advantage of that’s.
The question I’m going to answer today’s episode of Ask Coach, and we’re getting started right now.
Welcome to the Asked Coach edition of the podcast. If we haven’t met yet, I’m your host, Chad Carson. You can also call me Coach. And my mission here is to help you get out of the financial grind so you can do more of what matters in the Asked Coach podcast series is where I do my best to answer your burning questions about real estate investing and personal finance. I want to thank Vincent and Gongoro from YouTube who actually asked this question.
But I’ve gotten a lot of very similar questions from other people, and the gist of it has been, hey, things are getting out of hand, prices are going up, and now even interest rates are going up. That’s been an additional question lately, as interest rates have changed over the last month or so in February 2022, in March 2022. And my first response is that no market is perfect. There are always challenges, no matter what market we’re in. And this sort of inspired me to go back and think about some of the historical markets and let’s even just go back to 1981.
For example, interest rates at 1981, on average, were 16.6%. These were the days where in the 70s, inflation became a big problem and they just couldn’t tame inflation. And the Federal Reserve, led by Paul Volcker, started ratcheting up interest rates to unseen numbers before then, up to 16% with the mortgage rates. The Federal Reserve had their own interest rates. But the point was it was very difficult to make cash flow in those days.
And yet investors were buying at that point. In later years, tax laws changed and depreciation changed, and there’s all sorts of upheaval in the market. Overall, though, the real estate market went up over the long run. Even with some dips, investors still made money in those markets and they were still there. The same can be said in the 90s, in the 2000s, during the recession of 2008, nine and ten.
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My point here is I think a better question to ask is not should I try to time the market? And the better question is, how can I make it work in today’s market? This is one of those things that Warren Buffett and Charlie Munger, who I like to follow a lot, always say that it’s just a losing game to try to time the market. That doesn’t mean you don’t try to study the market. But here’s a more productive way to study the market.
You look at the market and say given the fact that I’m in a certain location where the price dynamics are, such as they are, I’m in another time and place where interest rates are what they are. How can I make money today? How can I buy a property that protects me over the long run, that also builds wealth for me, that maybe make some cash flow as well? The how question, the opportunity question is the difference in mindset here. So I’m going to give you a couple of ideas.
My main approach when I’m buying real estate investments is always to focus on the fundamentals. The thing that can make you money through ups and downs. And here’s a couple of ideas. Number one is you always pay attention to the market. So the local market.
I don’t mean the interest rate market. I don’t mean the overall economic market, although those are important. But you can control where you invest within your overall market. So which neighborhoods, which streets, which price ranges, which types of property? You just in general, want to find regions of the country that have strong economics, where job growth is happening, where it looks like job growth will continue happening for the long run.
You also want to see the supply being relatively limited. This is why I love investing in infill neighborhoods. This means instead of on the outskirts of a region, I try to find the neighborhoods to the existing neighborhoods, the older neighborhoods. I just like the charm of those neighborhoods anyway. But it’s really hard to find land in existing neighborhoods.
So if you find a lot or if you find a house which is just a building on top of a lot, it’s hard for the new construction to compete with that because the lots and the land is so expensive there that they have to go on the outskirts of the town to build there. And if you have something that’s desirable, you have a town with a town center, you have a park in the middle of the town, or you have a school district or something. If it’s limited, if that’s a limited commodity that people want to get and there’s job growth in that area, you owning one of those limited properties is going to increase in value over time if the overall market is doing well. So that’s kind of a fundamental that doesn’t change whether no matter what is happening in the market, you look for those locations. I talk about this a lot in my blog and courses I teach in my YouTube videos and podcasts.
But it’s just a theme worth repeating. Finding a strong market that fertile, rich soil to invest in is number one, that’s how you can control your own destiny. The second is to build in a profit on every deal when you go into the deal. Now, this might seem hard today when interest rates are even going up a little bit, when you’re in a high price market where the price to rent ratio seems kind of out of whack. But here’s a few different ideas.
There’s not just one way to make money. One classic way of making money in real estate investing is buying low and eventually selling high. So you could think about trying to find distressed real estate or real estate where somebody is willing to sell it a little bit of a discount just to move quickly because you have cash and they’re willing to sell it quickly. Yes, I know it’s a competitive market, but there are still people out there who would be willing to do that, and maybe they won’t sell it quite as big of a discount as they would ten years ago. But do you need as much of a discount if you’re buying in the right location and it still could be a good deal and maybe getting a 10% or 20% discount is still pretty good.
So looking for properties that you can buy on the front end at a discount, also very similar to that is looking for properties you can add value to. So it might be that the seller this is very common. Maybe they inherited this property and the property needs $50,000 worth of repairs that this family is not willing to do. But you as an investor who has a team of contractors and you have a property manager to help you out, maybe you’re willing to do that. Maybe you have the cash to do that where they’re not.
And that would be the way to buy it at a little bit of a discount or a lot of a discount. And that would also be a way you can improve the property and make it even more valuable. It’s called adding value and remodeling a property is kind of the most tried and true way to do it. But there are other ways to add value. I’ve seen buying properties that have legal issues, title issues.
If you have an attorney who can help you solve some of those. I bought tax liens and tax lien properties in South Carolina, and then we went to do a lawsuit to fix the title and clean it up. That’s a whole other story. I can do another coach episode on that at some point. The point is, though, figure out what you can do to learn this business and learn how to add value to properties, and that will make you money whatever type of market you’re in.
And then finally, I think the biggest opportunity for today, if you look at historical interest rates, we’re still really low. We’re in the 4% range below 530 year fixed interest rates. And so the fundamental way you make money on a long term hold is number one, start with a good location that has long term growth prospects and then find a property where the income on that property, the total income that it produces, after all your expenses, is greater than the cost of your financing. So, for example, just simple numbers. I’ve done a YouTube video on this and buying in high cost locations.
But if you have a cost of funds, that’s three and a half or 4%, you can buy a property that has a net operating income and an unleveraged yield of about 5%. That margin between your cost of financing and the income that property produces, that will build in a profit for the rest of your investment period. And yes, rents can kind of soften up a little bit, but you’ve got that nice margin of one or 2%, for example, maybe more in some cases that will make you money over time. And as the rents go up, then you make more and more money. But your interest and your mortgage is fixed over the long period.
That is a recipe for making a lot of money when combining that with a great location. So all that to be said, I could talk more details about it. I want to kind of close it up here. That is the approach that I’m taking today. More of just being in the market continually.
And you might not buy as many properties in a competitive market like today. You might buy fewer properties, but you can have to make more offers to find the deals than you will in a recession or a time when it’s a lot easier to buy properties. But the point is you’re always in the market. You’re always compounding your knowledge. You’re learning more, you’re getting better as a real estate investor, and you can just continually stay in the market instead of trying to time it, get in, get out.
I think that’s kind of a losing approach. I don’t think that’s going to win over the long run. I’m sure some people try to do it, but hopefully this will help you out. This will give you something to think about that you can control, that you can do. You can learn and proactively.
Get in there and try to buy your own properties. I hope you enjoyed this edition of the Ask Coach podcast. If you like to have your question featured in a future episode, just send an email to [email protected] We get more questions and we have the ability to publish. But to increase your chances, be sure to keep your question as clear and short as possible.
Number two, keep it relevant to the topics of real estate, personal finance, early retirement and personal development. If you like the show, I’d like to invite you to subscribe to my free email newsletter at coachcarson. Comreitalkit. In addition to weekly updates, articles and behind the scenes tips from me, my email newsletter subscribers get my Real Estate Investing toolkit, which includes a property closing checklist that I actually use when I buy properties. A real estate deal worksheet, a tenant screening criteria checklist and other spreadsheets, and goodies that will help you on your journey to financial independence.
Using real estate. You can get it all for free at coachcarson. Comreichoolkit. I also want to take this time to thank the people behind the scenes who make this podcast possible each and every week. This includes my podcast editor extraordinaire, Michael Win, my amazing virtual assistant, Megan Thompson, my wife Carrie who helps me behind the scenes and is my partner here at Coach Carson.
And of course thank you to all of you, the listeners of the show who make everything possible. This show exists for you. It exists because of you and I really appreciate you being here for another episode. Everything I’ve shared with you in this episode has been for general education purposes. I have not considered your specific situation or risk before buying your own investments.
Be sure to consult a financial real estate and or a legal professional until next time, I’m Chad Carson. You can also call me Coach and this is a show all about helping you get out of the financial grind so you can do more of what matters. See you next time. Bye.
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Links & Resources
- DON’T BE CHEAP! – How to Double Your Money in a High Priced Housing Market: https://youtu.be/F-bsP-InDLA
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