Like the housing market, the most popular real estate investment strategy changes from year to year. What worked for investors last year may not be indicative of what they should be doing in the future. Investors are, therefore, not advised to practice a reactive business strategy, but rather implement a proactive one. Don’t, for one second, think that mimicking the successful strategies of last year will pave the way to success this year; shifts in the market will see to it that such efforts fall short. Instead, it is important to stay ahead of the curve and use strategies that are specifically tailored to today’s market conditions. Before you make your first move, consider which real estate investment strategy will compliment your bottom line.
While the volume of homes flipped over the course of last year reached its highest level in nearly a decade, slight changes in market indicators have actually leveled the playing field for other real estate investing strategies to take hold. Though still wildly popular and profitable, flips may have more competition for the title of best real estate investment strategy in 2016.
If you hope to maintain an edge over the competition, make sure your current method of investing, including your real estate investment portfolio is in line with what the market is currently dictating.
Which Real Estate Investment Strategy Is Right For You?
Real Estate in the Stock Market
It is important to note that there are more ways to make money in the real estate industry than investing in properties. Sometimes finding real estate deals is as easy as buying into respective stock options. Those looking to capitalize on the direction of the real estate market will want to consider the impact recent trends have had on the stock market. Real estate stocks are performing well, and should continue to do so for the foreseeable future.
Real estate investment trusts (REITs), in particular, look primed to offer investors attractive returns. Over the course of 2016, REITs have managed to outpace the rest of the S&P 500. According to REIT.com:
“The total return of the FTSE NAREIT All REITs Index, the broadest benchmark of the U.S. REIT market including both Equity and Mortgage REITs, was 9.99 percent in March and 5.86 percent in the first quarter, while the FTSE NAREIT All Equity REITs Index was up 10.17 percent in March and 5.84 percent in the first quarter. In comparison, the total return of the S&P 500 was 6.78 percent in March and 1.35 percent in the first quarter. The FTSE NAREIT Mortgage REITs Index’s total return was 4.48 percent in March and 1.28 percent in the first quarter.”
What’s more, REITs are expected to benefit from an impending influx of capital. In April, real estate is going to be given its own sector on the S&P, effectively removing it from the financial umbrella it currently resides under with banks and traditional lending institutions. The move is expected to generate a lot of interest in the new sector, and should witness hedge fund managers allocate a significant amount of capital to the new sector in order to properly diversify their current portfolios. At the very least, an REIT portfolio will remain an attractive option for those looking to implement a new real estate investment strategy.
Investing In Secondary Cities
There’s no doubt about it; 2016 sales are evidence that real estate is on track to outpace last year’s numbers. According to a recent report issued by Realty Trac, one real estate investing option continues to outshine the rest: rehabs. “179,778 U.S. single family homes and condos were flipped in 2015, 5.5 percent of all single family home and condo sales during the year,” said the report.
“The 5.5 percent share of U.S. home flips in 2015 was up from a 5.3 percent share in 2014, marking the first annual increase in the share of homes flipped following four consecutive years of decreases. The share of homes flipped in 2015 increased from the previous year in 83 of 110 U.S. metropolitan statistical areas nationwide analyzed for the report (75 percent).”
The amount of people actively flipping properties is the highest it has been since 2007; inventory is certain to be tight in some regions. However, finding real estate deals isn’t necessarily difficult in today’s market, but rather requires an alternative perspective. Instead of concentrating on the most popular cities and the largest price points, consider the prospects of secondary cities. While it is true that there is a lot of money to be made in New York and California, subsequent profits may not warrant the amount of competition you will be facing.
In what may very well be the best real estate investment strategy this year, many entrepreneurs are trading the large spreads of gateway cities in for less competitive secondary markets. Smaller markets continue to be a good basis over the gateway cities.
For what it’s worth, recent success of spillover markets (the Seattle market spilling over into outlying neighborhoods like West Seattle, White Center, Burien) are indicators that investors are starting to notice similar trends in secondary cities across the country. Secondary and spill over markets include college towns where there is always a steady pool of students and professors.
Those looking for promising real estate investing strategies should strongly consider expanding their search criteria to include secondary cities outside of those that may be saturated with investor activity. If you are new to a city, it couldn’t hurt to look into the local real estate auction process; these events can result in some great deals. The relative opportunities provided in smaller markets should offset what are likely to be smaller spreads. However, perhaps even more importantly, secondary cities are expected to experience a boom of their own. Demand should increase as more investors shift their attention away from gateway cities. Those that start investing in secondary cities sooner rather than later may be rewarded for being at the forefront of what could end up being a popular real estate investment strategy.
Buy & Hold Investment Properties
Maybe the best real estate investment strategy for you deals with rental properties. Again, the real estate market is firing on all cylinders. Impressive appreciation rates have seen home values return to where they were prior to the Great Recession. What’s more, real estate is in a better position than many initially expected. Even first time homebuyers are getting in on the action. However, those looking for a viable real estate investment strategy may have a hard time seeing the value in rehabs; if it costs more to acquire a home, spreads are essentially diminished.
Fortunately, a viable real estate exit strategy exists in every market: good or bad. When home prices drop, investors are advised to consider rehabbing, but when prices are as high as they are today, one real estate investing strategy trumps them all: buy and hold investment properties.
Rental properties are entirely capable of offsetting today’s high prices with attractive leasing rates. If for nothing else, rental prices are high enough to warrant the acquisition of a relatively expensive property in the right market. Since profits are not solely dependent on selling the property immediately, investors can capitalize on today’s high rents before they sell in the future. While returns may not be immediate, they have the potential to be much higher than a standard flip. So while you end up paying the high price up front, as dictated by the market, you make up for the extra expenditure over the course of renting the property out.
Which investment strategy would you most like to implement?