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How To Invest in Rental Real Estate During a Housing Market Correction

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How To Invest in Rental Real Estate During a Housing Market Correction

housing

If you follow the real estate market or own rental properties in Portland Oregon, you know that the housing market is currently in a correction that could last a while.

For investors, housing market corrections are a great time to add properties to their portfolios because it’s possible to find discounted properties in cities where prices were climbing just 12 months ago.

Even though we may be entering one of the greatest buying periods in history for investors, there are rules that every investor should follow that will help them to navigate the real estate market over the course of the coming year.

Invest in hybrid cities

Ideally, cities that offer decent cash flow, are seeing stable prices right now, and have decent long-term prospects. These are often smaller cities nearby that entice renters because they are close enough to the ‘big’ city, while still being far enough away.

Some of the hybrid cities to consider near Portland Oregon include Beaverton, Aloha, Lake Oswego, Tualatin, Milwaukie, Astoria and Seaside.

Thankfully, ‘hybrid’ cities along the coast like Seaside are in demand now because tenants who can work from home want to live in an area that they enjoy without having to face a commute each day.

Negotiate with sellers

Negotiate! If you want to invest in markets with great long-term prospects, look for under-market deals. Once prices start to drop, sellers sometimes panic, and you can often find value. The data might not show this, but every experienced investor I know says that sellers are willing to negotiate right now. If you can buy below market rates, that offsets the risk of modest declines in the coming months. In this type of market, it’s more important than ever to use an investor-friendly agent who can help you navigate local market dynamics.

rental property

House hack

House hacking is pretty much always a good option.

This is especially true if you own a home with 1-2 unused bedrooms, or a vacant granny flat, you could rent those rooms out and earn an additional $1000 (or more) per room, in monthly income.

Stay away from flipping

Don’t start flipping houses. I don’t flip houses, so I’m biased, but I wouldn’t advise anyone to start right now. There is market risk, labor risk, and material cost risk. Experienced players are probably still doing well, but I don’t think it’s a good time for newbies to start flipping.

New construction might be lucrative

Prices on newly constructed homes are likely to decrease more than existing homes and could provide a relatively good value for long-term investors. Traditionally, new construction isn’t a great option for rental property investors, but with many developers offering incentives and discounts, I’m keeping an eye on newly constructed homes that are unique and in good areas. I don’t like cookie-cutter developments in the suburbs. It’s too hard to differentiate your property to prospective tenants and can create a race to the bottom in adverse market conditions.

Beware of short-term rentals

I think high-priced vacation rental markets are going to get hit the hardest. During the pandemic, demand for second homes skyrocketed alongside interest from short-term rental investors. That demand (not prices) has come crashing back down to earth (I don’t use that word lightly.) I worry that some STR investors bought at a bad time, and if demand falls off during a recession, there could be some forced selling. I never root for anyone to lose their shirt on a home they bought or an investment, but if that does come to pass, it could present buying opportunities.

More cities (including Portland) are starting to clamp down on short-term rentals because of the obvious reason that those properties are no longer on the long-term rental market and that’s one reason why rents are so high right now.

Explore creative financing options

Consider creative financing options, like Subject To (SubTo) and seller financing. These financing strategies offer the opportunity to buy real estate at lower rates than conventional mortgages and can help boost your spending power.

Hold on to what you got

If you bought property within the last 10 years with low-interest debt, stay calm and carry on. You may give back some recent appreciation, but if your property cash flows, rent growth is improving your cash flow and might continue to do so into the future—making it a solid long-term investment. It may sound boring, but deciding to hold a property that cashflows, has a low rate, and could see increased income is a good move in this market! The alternatives, such as a cash-out refinance, 1031 exchange, or selling and paying taxes, will likely yield worse returns than just holding on.

Use cash, if you can

If you have the means, consider buying with all cash. We all know debt is expensive. If you believe the consensus that price growth is likely to come in between 3% and -8% next year, then investing in real estate using high-interest rate debt may actually be dilutive to your returns compared with buying in all cash in the near term. If you buy a property generating income at a 4% cap rate, and assume 2% appreciation next year, then 6-7% interest rate debt will likely make your returns worse than if you buy all cash. Don’t believe me?

Become a private lender

As rates continue to rise, it could be a great time to shift at least part of your real estate strategy to the lending side. Returns on private lending can be as high as 10-14% in the current market, and demand for private loans is likely to rise significantly in the coming months. Your worst-case scenario as a lender is that you become an equity holder in the real estate property you are lending to. If researched and executed carefully, lending may produce much higher returns than equity investments over the next 12 months, with a dramatically lower risk profile.

Time the market if you have a crystal ball

Lastly, you could try to time the market, but that is notoriously difficult and something I would not try to do. Instead, I stick to the basics and look for good long-term opportunities. Remember, property values are not the only way you make money with rental property investing. You could try to time the market, but in the meantime, you’ll miss out on cash flow, loan pay down, and tax benefits.

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Hire A Property Manager

One of the best things that you can do during a housing market correction, and recession, is to hire a property manager to professionally manage your rental properties.

At Rent Portland Homes – Professionals, we have the property management team that you need to ensure that your rentals earn consistent ROI during all market conditions.

To learn more about the property management services we can offer you, contact us today by calling (503) 791-4610 or click here to connect with us online.