Tag: supply and demand

One of the big financial stories of 2022 was an end to the historic low interest rates we have enjoyed for more than a decade. The shock is causing people to ask Are Interest Rates too High?

 

Although rates are still below their sixty-year average, last year ended with mortgage rates sitting at nearly double where they had sat at the beginning of the year as the Fed spent the year ratcheting up the cost of borrowing to try and cool down an economy of rapidly inflating currency.

 

If you follow the housing market, you have probably heard that these higher interest rates make it a “bad time to buy.” Is that true?

 

To find a coherent answer, we have to differentiate the way homeowners think about interest rates vs. how investors think about them.

The Effect of High Interest Rates on Homeowners

The main impact of high interest rates on homeowners is that it becomes more expensive to buy or refinance. 

 

Because the mortgage payment is higher on the same principal balance, homeowners and aspiring homeowners tend to put off their purchase or refinance goals because they simply can’t afford it. This is especially true in periods of high inflation, when everything has become more expensive.

 

The one thing that could get homeowners back in the market is if prices start to come down. Those mortgage payments won’t be as high if the principal balance gets smaller. If homeowners catch a dip in prices, they may end up getting a great deal on a home with a lot of headroom to appreciate.

 

That’s why the Fed does the interest rate thing in the first place. Raising the price of borrowing decreases the demand in the market, which causes prices to fall — a counteracting force to inflated costs.

 

We have seen both of these effects in various markets — a slowdown in home transactions, accompanied by a dip in home values.

The Effect of High Interest Rates on Real Estate Investors

Higher interest rates tend to take the wind out of homeowners’ sails. With real estate investors, though, it’s a little different. 

Cash Flow

What happens to your cash flow when mortgage payments become more expensive? Obviously it eats into the cash flow … but that may not be as big a deal for a real estate investor. Why? Because in a time of high inflation, rents may have gone up as well. There could be little net change on the cash flow.

 

Of course, inflation may drive up other costs, like insurance and repairs. Eventually you hit a rent ceiling where tenants can’t afford it and the demand disappears. There are a lot of factors to consider.

 

Of course, investors who bought early enough to take advantage of low interest rates and rent increases are sitting pretty right now. But higher interest rates are not all bad news for real estate investors. 

Appreciation

Same as with the homeowners, investors stand to benefit from a decline in prices that could follow in the wake of a decrease in demand. If the goal of investing is to “buy low and sell high,” watching for prices to dip after an interest rate increase represents an excellent chance to “buy low.”

 

If interest rates ease up within the next year or so (as they are expected to do), you may have the opportunity to refinance into a lower interest rate and a higher valuation — possibly pulling out enough cash to make another property purchase! 

 

When you buy turnkey rental properties, be sure to wear your investor’s hat. Take the advice of many successful investors and think long term.  The house you buy today will definitely appreciate and be more valuable in the future despite any dips along the way. 

 

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Remember, interest rates change minute-by-minute. You could get lucky or unlucky when you lock your rate, regardless of the environment. Trying to “time the market” is usually a fool’s errand. That’s true with stocks, it’s true with real estate, and it’s especially true of interest rates.

 

The better course of action is to establish the criteria — e.g. cap rate, cash flow, projected ROI — under which you are a buyer. 

 

The beauty of real estate is that every market is different, and every property is different. With an expansive-enough pool of properties to pull from, a winning property can emerge from any economic environment … and you can be a buyer at any point in the cycle, adding cash flow and tax benefits to your portfolio.

 

Whatever happens with interest rates, or any other metric, MartelTurnkey will continue doing what it does best — bringing no-brainer, cash-flowing investment opportunities in growth markets to our select pool of savvy buyers. Reach out to us today if you want to be one of them!

It bears repeating (because most people find it remarkable) — most of our clients buy turnkey rentals from us sight unseen. How can they do it? They get a profession complete a home inspection for Turnkey Rentals.

 

This gives many homeowners and real estate investors heart palpitations — especially those that like to crawl into crawl spaces and scrape every eave with a screwdriver in search of rot before they even think of making an offer.

 

For those who have better things to do than crawl into crawl spaces and scrape eaves, however, that means a lot is riding on the home inspection report. 

 

That sheaf of paper, prepared by a professional home inspector based on a multi-hour visit to the property, is your best glimpse into the bones of the house … and your best indication of whether or not, from a physical and structural standpoint, you’re buying a tank or a lemon.

 

Here are three tips for the inspection stage of your turnkey rental purchase, so you can feel confident about your investment.

1. Screen the Inspector

If you live far away from the prospective rental property, you probably don’t know any local home inspectors. 

 

We can recommend some to you, but it’s important to remember — the home inspector is your guy, not ours. The buyer hires the home inspector, because the buyer is the one with more to lose if the home turns out to be riddled with defects.

 

So take the time to call the inspector and do some due diligence. Make sure (s)he is licensed and has positive reviews online. You don’t have to use our recommendations. If you find someone you like better and the schedules line up, by all means go with the inspector with whom you feel most comfortable.

2. Don’t Be Alarmed By a Long List of Defects

Home inspectors are thorough. Inspection reports, especially those for older homes like the ones we acquire and renovate, tend to identify dozens of defects. You are paying someone to go through your property with a fine tooth comb.  

 

If you have ever bought a home or investment property in the past, you have probably encountered this. That long list can be scary. 

 

Take heart. It’s nearly impossible to make an older home “perfect.” Even brand-new homes have defects. Most of them have little or nothing to do with the economic function of the property, or even yours or the tenant’s ability to enjoy the property. They are just bases the inspector is required to cover.  See something really concerning? A phone call with the inspector can clarify the findings. 

3. Compare the Scope of Work with the Report

We rehab every property that we acquire and bring to market as a turnkey rental. That rehab leaves behind a paper trail — specifically the scope of work, an official agreement with contractors and subcontractors as to what work must be done.

 

We provide a summary of the scope of work for every turnkey rental. When you get your inspection report back, compare it to the SOW.  If something seems to be askew, ask about it. 

 

In other words, the inspection becomes an opportunity to keep things honest — to verify that we actually did the work we told you we did. Isn’t that a good feeling?

 

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Read here for more info about buying turnkey property sight-unseen. Suffice it to say, at MartelTurnkey we fully expect — and wish for you — a robust home inspection process when you buy one of our turnkey rentals. Why? Because we have nothing to hide. Message us today to find out how easy it is to add one of our cash-flowing assets in growth markets to your own portfolio.

We take for granted the notion that real estate appreciates in value. It’s why so many people yearn to be homeowners — not just to have a place that they “own,” but because it turns your personal residence into a vehicle for wealth creation. Not because you pay yourself rent, but because the property itself grows in value.

 

But why does this happen? It’s worth understanding the mechanism behind the appreciation of real estate, if for no other reason that it’s not guaranteed. Real estate can and does lose value. As we speak, some property somewhere in the US is becoming less valuable.

 

Understanding why real estate becomes more valuable (or less valuable) can help us make good investments by only buying property that is likely to appreciate.

 

To figure out why does anything have value let’s go back to Econ 101 — supply and demand. 

What is the Demand?

 

Let’s start with demand. For something to have value, people have to want it or need it in the first place.

 

Real estate obviously fits the bill. People need shelter in which to live … soil in which to grow things … buildings in which to do business. Humans need space, and as long as space is a thing that can be owned, people are going to want to buy it.

Follow The U-Haul Trucks

If you want to pick which real estate is going to appreciate, follow the demand. We sometimes say “Follow the U-Haul trucks” of the people moving out of one city and into another. If a city is growing economically — if big employers are bringing new jobs to that city, if people are flocking to move there in droves, if it’s a burgeoning tourist destination — demand for real estate in that city will almost certainly drive the prices up. Even ugly, outdated, or distressed property will increase in value.

 

What if jobs are leaving a city or a neighborhood? People are moving out? The town is dying? Even the most beautiful homes and commercial buildings will start to lose value, because the demand just isn’t there.

How Much Money Can This Property Make?

Another key factor to the demand for any given piece of real estate is its economic value — how much income can a particular class of property generate? Consider the booming eCommerce industry. It had a profound effect on the value of real estate. Warehouses to store all these products along the supply chain came into heavy demand, so the price of warehouses went up. Meanwhile, with fewer and fewer people shopping in stores, retail property has struggled to appreciate and even lost value.

What is the Supply?

A resource can’t just be in demand to be valuable — it has to be in limited supply too. 

 

Humans have an inelastic demand for breathable oxygen. We need it to survive. So why don’t we have to pay for it, like we have to pay for bottled water or heart surgery? Because (for now), breathable oxygen is in abundant supply. No supervillain has yet figured out how to take us all hostage by monopolizing the supply of breathable oxygen … so despite our insatiable demand for it, breathable air has no market value and remains free.

 

So what about the “supply” of real estate? It’s an old cliche — you can always print more money or issue more stock, but they aren’t making more land. Real estate is a kind of real asset — a tangible resource that is in limited supply.

Inflation 

Let’s talk about printing money while we’re on the subject. Real assets tend to gain value in times of great inflation of the currency (like the one we find ourselves in now). As currency becomes more plentiful, it becomes less valuable. It takes more of that currency to buy things. One of those things you can buy is real estate. Because of inflation, it takes more money to buy the same piece of real estate — meaning inflation has inherently forced its value higher!

What About All That Undeveloped Land?

But is real estate really in short supply? Over 96% of the United States is undeveloped land! Let that sink in. That’s a lot of real estate. Doesn’t that disrupt the supply/demand balance?

 

Not necessarily. Remember, some of that land is on the sides of mountains. Or hostile to the cultivation of crops. Or just so far away that it would be prohibitively expensive to run roads, power lines, water lines, and sewer lines to them. Or it’s just too far away — no one wants to live there. 

 

We come full circle back to demand. Yes, there is a lot of land … but how much of it is in demand, for one reason or another?

The Real Estate That Is Most Likely to Appreciate

We can start to look at the supply of real estate in terms of “pockets of demand.” Suppose a city has a thriving urban core full of arts and entertainment. Lots of people want to live there or open a business there … but there are only so many homes and commercial spaces in that space. The demand is high, but the supply is limited … so that real estate is likely to appreciate.

 

What if a school district is widely recognized as the best in the city? Every family is going to want to live in that school district so their children get the best education. But there’s only so many houses in that neighborhood. Limited supply plus high demand equals appreciation. 

 

You have to be careful about chasing school districts into the suburbs. Thriving suburbs tend to have lots of new houses under development. If builders are constantly adding new houses to the market, they are increasing the supply, which pushes values down. If the demand is strong enough, this may not slow down appreciation, but there’s always a chance that the neighborhood will get overbuilt, with more houses than there are people who want to buy them — especially if a recession hits unexpectedly.

 

By contrast, urban core areas tend to have a much more limited supply. You can tear down old buildings and replace them with new ones, but the property supply is what it is. Homes in nice urban core neighborhoods in growing cities are some of the safest bets for appreciation. 

 

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As you can tell, supply and demand is much more than numbers on a page. It’s a story — the story of a city, a neighborhood, a piece of property. Understand the story, and you can glimpse the future. 

 

MartelTurnkey goes the extra mile to understand the story of every turnkey rental in our inventory. We don’t just buy any property in any city. We specifically look for the markets, the neighborhoods, and the property classes most likely to generate cash flow and appreciate in the near future. 

 

Reach out to us today and let us fill in the gaps so you can invest with confidence — and grow your net worth!