Inflation is high, interest rates are skyrocketing, there’s a recession on the horizon, the bubble is about to burst! We’ve all heard it before. “The market is going to crash and if you invest now, you’ll lose it all.” Sound familiar?
Investing in real estate at any time is intimidating and can be overwhelming. That’s the main reason we started Six-Figure Landlord. We wanted to provide the mentorship to give first time (or return) investors the confidence they need to actually make the move and invest in real estate.
But because it’s such a big move all the comments we hear about it being a bad time and about the market crashing can be scary.
Here’s the thing, 95% of the time these comments are coming from people who either have never been or are not currently real estate investors. If you listen to people who are actively invested in real estate you will rarely hear these comments.
Now, with the market the way it is, we will say that for buy and hold investors like ourselves it is much harder to find cash flowing deals in growth markets, but we firmly believe that now is a great time to invest. Let’s look at the top reasons why people are saying now is a bad time to invest in real estate.
High Inflation
First, inflation is high. This is an easy one to respond to. Great! Real estate is perhaps the best hedge against inflation. According to the Motley Fool property values have outpaced inflation growing by as much as 19% YOY. If inflation scares you, you should put your money into real estate.
But that leads us to the next one.
Interest Rates Raising
Second, interest rates are skyrocketing! When combined with the high inflation this makes the monthly payment for a home astronomical. Especially when compared with the rates and prices of just a couple years ago.
Rising rates can actually be helpful to new real estate investors. The direct effect of rising rates is higher monthly payments, the indirect effect is slower growth or falling home prices. Why is this a good thing?
It may not be good in the traditional sense because it makes finding a cash flowing deal much harder. However, when you do find a deal that has positive monthly cash flow you can go into the deal with a lot more confidence that it is a good deal.
Despite what some people think, interest rates will not continue to rise forever. The economy is already showing some signs of slowing down. As the economy and inflation slow down the Fed will eventually lower rates. As rates come back down (We feel pretty confident that this will happen much sooner–maybe mid 2023–than people think) this can turn your okay deals into great ones.
Buying in on a deal that only cash flows $200/month now with a 7.5% interest rate can become $500+/month in cash flow if you can refinance down to a 5.5% interest rate in the future.
The Coming Recession
Third, there’s a recession on the horizon. This is great news for owners of rental properties. During recessions we usually see home prices come down a little bit, but rental rates do the exact opposite.
Think about it, what happens during a recession? People lose their jobs, businesses go under, paychecks shrink. As people lose their jobs or downgrade and suddenly can’t afford a home there is a mass exodus from owning homes to renting.
This exodus drives rental rates higher. Real estate is one of the most consistent performing assets in high growth markets AND in recessions and down markets. As long as you buy a property that will have positive monthly cash flow you should feel confident that your asset will continue to perform and should even improve during a recession.
The Bubble
Fourth, the bubble is about to burst! We’ve heard it a lot from our students that the real estate ‘bubble’ is going to burst. Some have compared it to the 2008 crash. Let’s be clear, the current market and the pre-2008 market have very little in common.
In 2008 lending requirements were much lower than they currently are. As a result thousands of investors were investing in properties that had negative cash flow. They justified the negative cash flow because of the scorching appreciation (we did see some of this crazy appreciation over the pandemic). When markets cooled, like they are doing now, and home prices dropped suddenly all of these ‘investors’ were holding onto assets that not only were costing them hundreds or thousands of dollars a month, but that were worth less than they owned on their loan. Enter: the mehem.
Largely because of tighter lending laws we won’t see the same crash as we did in 2008. In 2008 many borrowers were at a huge risk of default, now they can’t get loans. This tightening of lending laws has in fact created a limited inventory of homes which is a hedge against a market crash.
However, even if home prices were to drop by 50% or more we would be fine. We only purchase homes that have positive monthly cash flow. That means that regardless of what home prices do I am making money every month. If the home price drops, we are making money and can wait for them to come back up. If the home price goes to the moon, we are making money every month until we decide to sell the property.
Don’t let high inflation, high interest rates, a recession, or the perceived risk of a market crash stop you from investing in real estate. NOW is always the second best time to invest in real estate, the best time is in the past. Don’t wait, start looking for deals and make the move to become a real estate investor. If you need help, reach out! We’re here to help you do what we have already done and what we’re still doing. Both of us have bought properties this year despite all the naysayers. You got this!
Your real estate coaches,
Dallas and Greg
