Are you a speculator or a real estate investor?
This will be the most important distinction in terms of whether you win or lose in the real estate game over the next 5 years.
Lessons from the Last Housing Boom (and Bust) Cycle
Home prices are soaring today and some real estate speculators are trying to jump into the markets that are shooting up the fastest, hoping to benefit from the upside of the real estate roller coaster.
However, more experienced real estate investors—especially those who have been through the real estate boom and bust cycle over the last decade—have seen first hand that speculating is a dangerous game. They understand that relying on home price appreciation in order to make a profit is a very high-risk proposition, and ultimately just a form of gambling.
Savvy real estate investors don’t gamble. They don’t buy based on price trends and appreciation projections. They buy rental property based on real estate fundamentals, because they know residential investment property is the best asset class around if you buy right.
Smart investors make money when they buy. Their return on investment is not dependent on future price appreciation, nor severely impacted by a market downturn. This is because they buy performing properties that generate stable streams of cash flow from the day they close. They buy in healthy markets with job growth, population growth and other indicators that drive strong rental demand. They are careful to select markets where price-to-rent ratios are advantageous to investors, and markets where home prices and market rents are affordable to people making the median income.
In the last real estate crash, the speculators got caught with their pants down and lost their shirt. This was not primarily because the markets they bought in crashed down 50% in value (although that didn’t help), it was more so because market rents could not cover their expenses. Since they were holding properties with negative cash flow and relying 100% on appreciation in order to make a profit, when the market turned downward so did their ability to continue holding the properties and paying out the negative cash flow every month.
Why Indianapolis Is Different
Investors who purchased in Indianapolis, on the other hand, experienced only a 7% decline in home prices throughout the entire recession. Most importantly though, during that period of home price decline market rents remained relatively stable and in some cases even increased. So, investors that bought right in Indy were able to maintain (and in some cases even increase) their streams of cash flow during the national real estate downturn.
Smart investors buying today have taken careful notes on who won and who lost in the last boom-and-bust cycle. Accordingly, they are focusing a significant part of their buying on Indianapolis, which is largely regarded as the most stable real estate market in the U.S.
Lifestyle Design is the Name of the Game
These investors also understand that buying and holding cash flow properties (not flipping for short term capital gains) is the key to lifestyle design. Continually growing your streams of passive residual income that flow to you each month enables you to cover more and more of your monthly expenses without working, and therefore enables you to recapture your time, enhance your freedom and mobility, and design your lifestyle. This is the motivation and laser focus of savvy investors in today’s market.
Why Indianapolis in 2014?
Solid Market Fundamentals
In the 4th quarter of 2013, the unemployment rate in the state of Indiana dropped below 7% for the first time since 2007 and continues it’s downward trend. Indianapolis stands out as the shining star, leading the way with continued job growth and a 5.8% unemployment rate (1 of only 20 large metros in the U.S. with an unemployment rate that low). Correspondingly, the population is growing (up more than 15% over the last decade) as people move in to take the new jobs, and so grows the pool of qualified tenants.
Demand Going Up, Supply Going Down
According to the Metropolitan Indianapolis Board of Realtors, 2013 saw the most homes sold in the Indianapolis market since 2008. 2013 showed an 18% increase in annual home sales compared with 2012, a trend which continues upward today. 2014 has already seen an additional spike in demand and a corresponding decrease in supply. Over the last 3 months alone, available inventory has declined 14% in Indianapolis according to Altos Research and now stands at about a 4.5 month supply of homes, which is about 25% less than most experts consider to be a balanced market of 6 months inventory supply.
Don’t Miss the Boat
2014 is already shaping up to be a seminal year in the Indianapolis property cycle. Solid investment properties are already becoming scarce and it is only Q1. Whether you want Indy to be the primary focus of your buying strategy or whether you want to use it as a diversification hedge while also buying in more aggressive growth markets, now is the time to start looking if you don’t want to miss the boat.
About the Author. Matt Bowles is one of the founders of Maverick Investor Group. Maverick helps individual real estate investors buy performing residential investment property in the best real estate markets. Maverick monitors local market trends and presents private buying opportunities for turnkey real estate—new or fully renovated rental properties with tenants and local property management in place—in the most investor-advantaged markets. Click Here to learn more: http://www.maverickinvestorgroup.com