Adapting Real Estate Strategies in a Changing Market

Recently, I wrote of the need for real estate investors to treat their investments as a business like any other business.   My point is that in any type of market there are new opportunities, if one can identify them quickly, and adapt their strategy to take advantage of the changing market.  Certainly, the real estate market is changing.  Interest rates are creeping up, and in many formerly hot markets, there are more sellers than buyers, as houses sit vacant.  Yesterday’s strategies no longer work, so in order to survive, the real estate investor needs to adapt.  How do we do that?

If you have been using a strategy that you are comfortable with, and have been successful with, it may be difficult to change.  However, you need to be proactive in your planning.  While a strategy may have worked well in the past, you have to realize that no strategy works forever in every market.  For example, several years ago, buying pre-construction properties was the hot strategy to employ.  By putting a small deposit down to secure a property before it is built, and selling it for as much as hundred of thousands more than the price you paid.  Many people, myself included  made a lot of money using this strategy.  The combination of low interest rates, and rampant real estate speculation, this strategy seemed like a “no brainer” to many.  However,  surely anyone with a basic understanding of economics will realize that everyone goes in cycles, and nothing lasts forever.   Interest rates do not remain low, and prices do not go up forever.  Unfortunately, many people who entered into real estate investing during this time do not grasp this concept, and are hanging on thinking that real estate always goes up, without adapting their strategy.  It is always best to be proactive and to adapt your strategies rather than have the market force you to adapt. The key is not to be so focused on working your plan that you fail to see the big picture around you.  Many investors are working so hard to implement their strategy of rehabbing a property to flip, or securing financing that they lose sight of the economic environment they are operating in.  If anyone was looking last year, they could see a slowing of the housing economy, the rise of real estate agents, and new inexperienced investors, always a sign of froth in any type of markets.  The problem is not not many investors were paying attention.  As an investor, you should always be paying attention to potential changes in the market for pitfalls to avoid, and new opportunities.

As the market changes, you can do one of two things, one change your strategy, or two, change where you employ your strategy.  In the first case, you may conclude that pre-construction investing no longer works as there are less people to buy your properties.  However, you may decide that with less buyers, there are more renters in the market.  So, you shift your attention, and strategy to buy and hold single family homes or multi units for long term appreciation, and cash flow.  This is a case of changing your investment strategy and goals to adapt to the changing market.  On the other hand, you may decide that you still want to utilize the pre-construction strategy, but just not in areas you are currently in.  Formerly hot markets such as Florida, Las Vegas, and Phoenix, now have an excess of housing inventory as speculators try to dump their properties.  So, those markets would not be a good place to utilize a pre-constrcution strategy now.  However, there may be other markets which are more stable, and still growing, Texas for example, which this method may still work for you.  You may also have to lower your expectations as 30-50% annual appreciation is not the norm.  If you were able to take advantage of the recent rise in housing prices, good for you, but the past is past.  Focus on the current market and the future.

What am I doing to adapt to this market?  Am I changing my strategy, or am I changing the location where I am using this strategy.  I am doing both.  Pre-construction or building spec houses are not as lucrative as it once was, but there are still opportunities in othe markets.  I sold my holdings in Phoenix last year where I have done well in pre-construction spec homes.  I am still doing spec houses, but in different markets such as Austin and San Antonio, where the housing market is still strong and growing.  I’ve also targeted the lower end, and the luxury high end of the market, as these segments of the housing  market is less vulnerable to a slowing economy, and rising interest rates.  I’ve also pursued other strategies.   As a full time real estate entrepreneur, I now need greater, and more consistent cash flow.  I am targeting larger multi units apartments or commercial building with the goal of purchasing one by the end of the year.  With a stronger rental market, now might be an opportune time to pursue this strategy.  I am also developing a subdivision, and selling lots.  With the slowing economy, I don’t want to be holding on to vacant properties for an extended period.  By selling lots, I can sell more quickly to builders, and have them take the risk of producing spec houses in this market.

These are just some of the ideas I am pursuing to adapt to this market.  There are many more real estate investment strategies, and locations you can consider, and you should be doing if you wish to succeed in real estate.  As the dynamics of the market is always changing, so should our approach to real estate investing always be evolving.