Fears & Your Predictions?

Question

So my wife and I are reaching our saving's goal for our first STR investment property. We have around $25k saved up for initial money, and will soon have over $12k for emergency funds.

How are you dealing with fears (if you have them) of how the housing market is behaving? Obviously, inflation is at an all time high, inventory is low, prices continue to increase, and interest rates are rising. As a first time investor, I'm having difficulty trusting the market to correct itself through increased rate hikes by the Fed. If inflation continues to outpace wages, and housing prices continue to rise (and everyone ALWAYS wants more for their house, especially seeing how sellers made out over the past couple years) along with high interest rates - how will anyone be able to afford to buy a home or invest in the real estate market?

The difference in monthly mortgage payments is significant when moving from 3% to 5.25%, and it looks like interest rates will continue to rise.

This doesn't seem like it will end well. I don't know how we can avoid another recession, or perhaps more likely, a depression. And if that does happen, who will be able to afford to travel and book all these AirBnB?

Someone, tell me I'm crazy - and that my concerns are unfounded. My wife and I are in our mid-40's and desperately want to leave our regular W2's. But we certainly don't want to be forced to return to them with our tails tucked between our legs because the market fell out from beneath us.

Bruce Woodruff · Answer

This is not record inflation, nor are interest rates high right now. As I've said before in this forum, my first house came with an interest rate north of 16% and inflation was over 10%. It doesn't matter. Everything is relative.

The right house is always out there, you just may have to reset your expectations and parameters. And people always travel and want to have fun, they just do the same.

One of my favorite quotes is from General Stonewall Jackson -"Never take counsel of your fears".

Trish Mccoy · Answer

If you are worried about interest rate rising....I would suggest getting in now.   Once you are in - you can always refi down the road.    I am in escrow on a new property and have to accept the 5.5% interest rate I am getting.    If the travel slows down....it most likely will be to the fly to destinations and not the drive to destinations.  However having said that, I always have a plan B - and that is usually to rent long term.   People always need housing.    Regarding your last para graph... I don't think it's an either or...success or fail...sometime you have to navigate through some waters in the beginning.  Maybe just one of you want to quit your w-2 jobs in the beginning ... Just make a plan - and have a plan B, C and D.    If things don't work out, change course.   In my opinion, the only failure is to not begin.

Dave Stokley · Answer

Love this Ken, especially the first paragraph. To add on, if you have a high-end property and demand slows you can drop the price and offer a better product than those who were previously priced lower. I think owning the higher-end STRs really gives you a lot of flexibility and cushion, even though paying more for it may seem intimidating.

Ken Boone · Answer

@Matt M. That is true, but for investments, CDs were earning 18% interest rates during the early 80s as well ;)  Different times for sure!

Ryan Moyer · Answer

The thing to be concerned about is not a real estate bubble or inflation.  It's the travel market.

While far from the only thing that matters, a large part of the real estate boom we're in is the explosion of the travel market and STRs in particular.  Especially in vacation markets.  Homes in Broken Bow aren't up 150% in price because real estate is more expensive and people want to live there enough to pay it.  They're up 150% because revenue is up 150%.

The potential concern would be that the travel boom is a temporary post-covid blowoff, and things will return to the status quo eventually.  I don't think that will happen, but it's plausible.  You'll see lots of people saying stuff like "travel has fundamentally changed forever" and yada yada, but that's exactly what people were saying about work from home stocks and tech growth stocks last year and now a lot of those are down 50%-90% while the broader stock market is only down 10-20%.

I could potentially see something similar happen in the real estate where a travel pullback pulls the real estate market as a whole down a little bit, but the most dependent/bubbly locations where people only buy because of the travel market are effected far more.

Again, I don't think it will happen, but it is far more plausible than people give it credit for.  I am still buying, but being careful not to over leverage.

Malcomb Stapel · Answer

@David Taylor  as others have mentioned, discretionary spending can go out the window if the dollar weakens ( which it will ). Be very conservative with your underwriting, and don't rush. There is a fine balance between being aggressive and being reckless!

Ken Boone · Answer

@David Taylor The real estate market ebbs and flows.  Things have been increasing for years and as history will show, there will be a downturn.  Will it happen in 6 months, will it happen in 1 year, will it happen in 5 years?  Nobody knows.  If there is a recession or depression as you suggest, the first things people quit doing is spending discretionary money.  My strategy has always been to buy high end STRs with amenities that bring in a premium rate.  My thoughts are that if/when a recession hits, the people renting my STRs are not affected and keep going on vacation anyway.  If that happens I may have to lower prices some, but I can get through that with no problems with my properties.

Will I buy another property right now?  In my market, because I know it well, and I am experienced with how to make an STR in my market do well, I would buy under the right conditions.  One thing is for sure, I would have to put a lot more down for me to feel comfortable with a loan right now in this market.  Sure putting more money down typically means less return, but I invest for cash flow.  I want to make sure that anything I might buy today, will cash flow tomorrow if prices and more importantly rent drops.

I have seen people in this market take on extraordinary amounts of debt on properties that will not cash flow if the rental demand drops prices by 10%.  These people will be hit hard and when this happens, not if but when IMO, these people are going to be hurting and the market will cycle all over again.

My STRs are in in a year round vacation destination location.  If you are buying an STR in a non vacation destination, then make sure you can be profitable if you have to flip it to an LTR.

Josef Hardi · Answer

Hi David,

As a fairly new investor, what you are saying sounds very familiar. A couple of things we do to deal with our fears/anxieties:

1. Having a realistic runway. One thing that my wife and I have accepted is that we will not be leaving our W2 jobs soon. We are giving a realistic runway for our dream of being financially independent (about 10 years). If it comes sooner, great. We do have plans to purchase a property every year, we have one primary and closing on our second investment property (duplex).

2. Calculate your numbers well. If you get anxious, go back to your numbers. if you cannot afford the monthly payment due to interest rate, then change your strategy (perhaps switch market, or explore different loans).

3. Have an exit strategy. For example, in case your STR does not work out. What is the numbers if you change that unit into a LTR ?

Be encouraged, and also be patient. You are on the right path to a better future!!

Nathan Gesner · Answer

I don't have fears, but I'm definitely discriminating. I bought three large properties last year, the last one in October, but I'm not interested in buying anything right now unless a real strong deal fell in my lap. I have one property listed for sale and intend to 1031 Exchange the funds into a vacation home somewhere, but I'll do so with the understanding that it may not produce much profit if the market turns. That's OK with me because I want something that pays for itself and earns enough to pay for my travel so I can visit 1-2 times a year for vacation.

The rates are increasing, competition is fierce, and nobody knows what real estate will do in the next 5 years. However, there have been successful investors in every market. You have to watch the market, plan for the worst, hope for the best. If you hold onto it long enough, real estate is always a winner. I wouldn't be investing in flips or something with negative cash flow in hopes of gaining appreciation.

John Underwood · Answer

No fears and I'm buying houses!

Fears & Your Predictions?

Most Popular Reply