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The Real Estate Market is Changing, Now What?

Someone asked me this morning how real estate investing was going these days to which I chuckled and said, "it's not going at all right now." There was silence on the other line.

As someone who is a staunch proponent of vacation rental investing as well as a fan of real estate investing in general, my answer likely surprised her. I think people assume I should always say that vacation rentals are a great investment because of my background (and absolute love of them as a product), but it's not the case all the time. In fact, in general I don't think they are a great investment at the moment (except in some rare and unique cases).

Real estate investments, like great stock picks, make everyone look smart in an rising market, but what happens when the market flattens or worse, declines?

I remember back in my stock market days, first during the dot com bubble burst and then again in the real estate crash of 2007. During both of these events, people openly wondered, "how could this happen?" Yet leading up to both of these major events, we were trained as brokers to advise clients that markets go up and down and to be prepared for the downside risk being higher for investments with bigger upside potential.

So many investors forget that when the market is going up. They nod their head as you explain it and they tell you that they don't mind risk...and it's true, they don't...until they start to lose money. Shockingly, the second the market starts to go the opposite direction of up, the phone starts ringing off the hook at brokerage firms worldwide with panicked clients. "How could this happen?"

As I explained to my friend on the phone this morning, if you are going to play in the big leagues, you'd better be prepared for both the upside and the downside.

The great news is, in real estate, in my opinion (and based on decades of research), the downside tends to be less than some other investments, simply because you actually have a useable physical product-a home!

As great as real estate is, that doesn't mean that every moment in time is perfect for investors to invest in it.

My advice in this market, save your pennies sister.

In the midst of the ever-changing landscape of the modern economy, one thing remains clear: saving money is a prudent and essential financial strategy. While there are numerous investment opportunities available to those looking to grow their wealth, there are also several reasons why it makes sense to prioritize saving money for now. If I'm wrong and real estate continues it's upward trend, the worse scenario is that you miss a few opportunities. However, if real estate has a continued pull-back, you'll be glad you saved those pennies so that you can snatch up properties cheaper, later.

The Current Economic Landscape

The current economic climate is characterized by uncertainty, inflation, and rising interest rates. With these challenges in mind, it becomes increasingly vital for individuals to save money rather than diving headfirst into high-risk investments.

Vacation Rentals: Not today, but they will be again.

While vacation rentals have been a lucrative investment for me and many of my clients in the past decade, the landscape has evolved considerably in the past year, with new data showing reason to believe that the potential for high returns is less certain than it used to be.

Let's consider an example: imagine you purchased a vacation rental for $280,000 three years ago with a 5% interest rate on an investment loan. At that time, it might have seemed like a fantastic investment opportunity, and it may very well have been. The demand for vacation rentals was strong, and interest rates were relatively low. However, if the same property were to be purchased today, it would likely cost the buyer over $450,000, and the interest rate on an investment loan could exceed 10%. This dramatic increase in the cost of entry, combined with higher interest rates, significantly impacts the overall return on investment.

Market Saturation and Occupancy Decline

Furthermore, the vacation rental market has become increasingly saturated over the last year. Inventory has doubled in many areas, making it more challenging for property owners to stand out in a crowded market. Additionally, the U.S. vacation rental market has faced declining occupancies in the past year, in part due to changing travel patterns and the ongoing impact of the global pandemic. My main investment area in particular was also ravaged by back-to-back hurricanes from which we are still rebuilding.

These factors make it clear that investing in a vacation rental is no longer the foolproof, high-yield investment it may have been over the past couple of years. Purchasing a vacation rental today could involve much greater risk, higher costs, and potentially lower returns compared to just a few months ago.

But don't fret-if you currently own a vacation rental, you likely obtained it with cheap money and, if you have a place that is well-maintained, updated and great location, it will likely continue to generate decent revenue.

If you have a unit that you haven't maintained as it should be-now is the time to take inventory, update your unit, convert it to a long term rental or figure out how to be a better owner. Not something owners that don't like to do maintenance want to hear, but hopefully those owners will be put in a position to sell and give someone else an opportunity.

The Importance of Saving Money Given the uncertainties and potential pitfalls in the current economic climate, saving money is a wise choice IMO for today's market. Here's why:

  1. Emergency Fund: Having a substantial savings cushion provides financial security in case of unexpected events, such as medical emergencies, job loss, or unforeseen expenses.

  2. Reduced Financial Stress: Saving money can reduce financial stress, allowing individuals to navigate the ups and downs of the economy with greater ease and peace of mind.

  3. Opportunities for Future Investments: While saving may not provide immediate high returns, it offers the financial flexibility to seize opportunities when the market is more favorable or when unique investment opportunities arise. In real estate, you realize your gains when you buy and sell. There is no shame in hoarding cash now so that if and when prices decline, you are on the sidelines ready to buy the best properties.

  4. Wealth Preservation: In an uncertain economy, preserving wealth can be just as important as growing it. Saving money ensures that you don't risk your financial stability.

  5. Retirement Planning: Saving money is an essential component of a solid retirement plan, providing the funds needed to maintain a comfortable lifestyle in one's golden years. I love investing in real estate for retirement-but only when it makes sense. In the current conditions, CDs may make more sense so it's wise to take inventory of the environment and invest accordingly. Getting stuck only investing in what you love may cause you to miss out on some great returns.

While I don't enjoy the market not continuing to rise any more than the next investor, I want to share this. For the last decade, it has become exceedingly difficult for young families, people just starting out and those that make an average salary to purchase a home or even to afford rent. I hear stories from my cousins and my daughter of getting beat out on a small starter home by an investor paying cash with no inspection period looking to rent out the home.

Investors, I get it, you know I do. But wanting to further the lives of the generations behind us may be more rewarding than financial gain. I'm thankful for the investments I have been able to make, but I'm just as thankful to step back and say, "they should have the same opportunities my generation and those before us had in owning a home." So while I am going to continue recommending to my investors that now is not the time to be buying vacation rentals, I will tell the generations behind me to jump in now while we are not buying. What seems expensive today will be so different than where things are in 30 years.

I remember my first home. It was over 30 years old, located in a neighborhood without any fancy amenities, pretty standard-and it worked perfectly for me. I purchased it for $130k (the mortgage payment was $1100 a month, with an interest rate that I was so happy to get at 7%). My friends and family could not believe I was spending so much money on my first house, lol. The year was 2001.

That same house is on Zillow today for $362k, or you can rent it for $2300 a month. My point is, had I not purchased that house (and so many after it), I would have missed up on all that upside equity and worse, had I been renting during that time that money would be in someone else's pocket. Keep in mind, that was before the Great Recession so that home has had it's ups and downs over the last 25 years and is still worth almost triple what I bought it for. Had I not purchased a home, with that 7% interest rate, I would never be where I am today.

Twenty and thirty somethings-your life changing moment is here. Find a house, buy it, build a life. In ten to fifteen years, your world is going to be so different than it is today, but I am more than certain you will not regret making that decision today. For those of us that have been blessed to ride this ride as far as it can go for now, sit back and think about where we started. The time will come again for investors to swoop in, but for now, It's our job to help the next generation start their journey.

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