Is it still a good time to invest in real estate?

In the last couple of weeks, I cannot tell you how many times people have asked me, “is it still a good time to invest in real estate with everything going on?” My short and concise answer is “yes.” Let me explain why below.

As of early April 2022, the Fed is still concerned with inflation risks. Back in March 2022, the Feds were planning to raise rates by .5%, but only raised it by .25% due to the war overseas. According to a report by Marcus & Millichap, rates are expected to go up in 2022. As a result, the Feds expect to significantly reduce the federal balance sheet.

I am telling you this because, depending on who you are talking to, some people say we are headed to a recession, others say a recession is years away, and the rest say we are already in a recession (we just don’t know it yet). Here are the facts:

• We added 1.7m jobs in 1st quarter 2022
• Unemployment rate decreased to 3.6%
• 5.6% wages growth
• Retail sales are strong at 16%
• There are supply bottlenecks that are years from housing supplies meeting demand

But :

• Some operators are already experiencing BOV (broker opinion values) coming in lower than their expectations
• In a prior survey by Marcus & Millichap most buyers say they are no longer to be buyers if interest rates increase by 250 basis points

Nobody knows when the housing bubble will pop. However, there is no doubt that real estate goes in cycles. Therefore, every day that passes, we are technically closer to a recession. Whether that is 1 year or 10 years away, nobody knows. As real estate investors in a competitive market, we are pushed to do bridge loans with a 3-year term to take deals down. In my opinion, as long as we are conservative in our underwriting we should be fine. Let me explain what I mean by being “conservative”. One way I am being conservative is I am adding .5% to my cap rates on the front end. Additionally, I add .1% to the cap rate for every year we project to hold the property. This is because in the previous downturn cap rates decompressed by 1.5% in Kansas City and Indianapolis. Also, I “stress test” each deal to make sure that the mortgage can still be paid and we don’t lose money on the deal even if current interest rates increase by 100-200 basis points (1-2%). If either of those things don’t pass my stress test I walk away from the deal. Furthermore, interest rates and inflation can increase as much they want, but that is not going to change the fact that there is a housing shortage in America and as people get priced out of being able to purchase a house they will need to rent somewhere. Remember, wealth is created when you are “fearful when others are greedy, but greedy when others are fearful” as Warren Buffett once said. With that said, I am a strong believer in limiting our downside as much as possible as we acquire deals moving forward.

RESOURCES: 

what a hawkish fed means for CRE investors