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The real estate market is constantly changing. Economic conditions, consumer confidence, and supply and demand levels all affect how hot or not a market is. This can make it hard for a new investor to know when to invest in real estate and if right now is the right time to get started or not. If you want to get started in real estate investing, take a look at how and when to get started in real estate no matter what the market is doing.
There are times when market conditions may appear like an unfavorable time to start investing in real estate, but there's always an opportunity to profit and prosper in real estate -- it's simply a matter of knowing what opportunities lie in the present real estate market.
A buyer's market is reflective of high inventory and low demand, which often pushes real estate values down. High inventory can be due to a number of factors. For example, the coronavirus pandemic has produced decreased demand for certain property types, including office, hotel and lodging, and residential rental housing, particularly in high-density urban areas. The Great Recession also resulted in a strong buyer's market, in which real estate values were extremely depressed, making it an ideal time for investors to pick up properties for cheap prices.
A buyer's market can be a great time to get started investing in real estate because real estate values are often down and sellers may have a strong desire or need to sell, meaning you as the buyer can ask for lower prices, concessions, or other creative terms when buying. If you want to get started in real estate and it appears to be a buyer's market, determine what real estate markets hold the most investment opportunity. Very rarely are all real estate property types and local markets impacted in the same way. You may find more opportunity with residential fix-and-flip or rental properties compared to commercial real estate rentals or vice versa.
A seller's market is reflective of low inventory and high demand, which often pushes real estate values up. Low mortgage rates, a lack of rental inventory, or high rental prices may help create the right market conditions to increase demand for residential housing or other asset types. A seller's market is often referred to as a "strong market" by the media or other investors because values are high and demand is strong. This can be a competitive time to enter real estate, but it doesn't necessarily mean it's a bad time to start.
If it's currently a seller's market, look at what sectors have the most opportunities and aren't at risk for oversupply in the next six to twelve months. The self-storage industry is a great example of how an asset class can appear strong and ripe with opportunity but flattened out after investment dollars, interest, and values went up for the asset class because supply quickly outpaced demand in many markets. If you're buying for a long-term passive investment, even though the investment may cost more than it did a few years ago, there should still be opportunity for future capital appreciation or to benefit from earning cash flow through rental income or passive income like dividend payments. Long-term investments like rental property or real estate investment trusts (REITs) are great investments to target in these market conditions.
Just make sure you don't get caught up in the competition or expect too great of a discount in the given market. All too often, I see new investors expecting discounted prices unreflective of the current market, and they get beat out by other investors who realize they can pay more right now and still profit. Conversely, it's common for an investor to get overly excited by the competition that they overbid and end up paying too much for the property in the long run. Know your numbers. If the real estate investment is focused on passive income, let your income analysis determine how much you can pay without your yield or return being negatively affected.
A balanced market means supply and demand are stable for the specific sector and market. Real estate values, competition, and availability don't favor the buyer or seller and allow for standard negotiations to take place. Balanced markets aren't achieved as often as one may think or expect, but if it appears to be a balanced market, it's a great time to dive in head first to real estate because an investor can expect to have access to financing while facing moderate competition and fairly priced real estate.
Being capital ready
Knowing when to start and how to invest optimally at the given moment is great, but it doesn't hold much value if you don't have the financial resources to be able to buy the real estate investment. Being properly funded and having the cash or ability to get financed is imperative and should be a focus as you prepare to invest in real estate.
How much cash you have to invest is a large factor that will not only help you determine how to invest in real estate but will clue you in to when you can invest as well. If you don't have much saved, focus on buying low-cost investments like REITs, which can be purchased for just a few hundred dollars, and continue setting money aside for future real estate investments.
If you want to actively invest in real estate, managing the property or project yourself, you'll need quite a bit more cash before you can start investing. Commercial real estate is often much more expensive than residential real estate, requiring tens of thousands to hundreds of thousands of dollars to invest. Residential real estate can be purchased for a few thousand dollars, particularly if you use creative buying strategies or tens of thousands of dollars. Familiarize yourself with the average real estate investment price in your target market and financing options available based on your financial situation. This will help you determine how much is needed before you can begin investing.
If you have the funds, the knowledge, and the time available to dedicate to your investment portfolio, the time to start is now. Perfect investing conditions rarely come along, and there will always be challenges -- even in markets with high investment opportunity. The longer you wait to start, the less time you have to invest and have your money grow for you. Just remember, due diligence is key. Understanding current market conditions while also looking forward will help set you up for success.
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The richest in the world have made their fortunes in many ways, but there is one common thread for many of them: They made real estate a core part of their investment strategy. Of all the ways the ultra-rich made their fortunes, real estate outpaced every other method 3 to 1.
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