Technology has reached new heights. We get to do things today that people couldn’t dream of 20 years ago. On today’s episode, Lauren Hardy details the process to start investing in real estate, even in the places where you don’t live. You can learn more about investing outside of your hometown.
- Interest rates caused housing prices to skyrocket.
- The economy’s growth has impacted the housing market.
- Working from home is having an impact on interest rates.
- Several houses are pending and still on the market.
- Lauren only invests out of state.
- Start preparing for the bubble to burst.
Buyers are still making purchases.
Virtual Wholesale Strategies With Lauren Hardy
I see it all the time. You want to build wealth by investing in real estate, but the problem is what you want to do might not match where you live or your lifestyle. The truth is that not all real estate investing strategies work in every market. For most people, it’s only natural that you think you have to invest in your backyard because real estate is such a tangible object. You think you need to be able to touch it.
For that reason, most real estate investors settle on the problems and limitations that their hometown market brings. I am here to show you that you do not need to live where you invest. You can have location and time freedom as a real estate investor, and my goal is to dispel those myths and inspire you to think differently about how you invest in real estate by taking a virtual perspective. My motto is, “Live anywhere and invest where you want.” Let’s get started.
First and foremost, I am not an economist and I’m not making any predictions. I am going to share with you some cold, hard facts that we cannot ignore that are happening right now, and are very important if you are a real estate investor buying rentals, you are house flipping, or you are wholesaling. I am going to lay out the facts that we can’t ignore that could lead us to a bubble burst, and I’m also going to share with you what I am personally doing as a cautious real estate investor to make sure that I do not get hosed.
First, I want to go into what has caused us to be in the real estate environment that we are in right now. What has caused house prices to go up so much? It’s important to understand what got us to this place so we can understand what is a possibility that may happen in the future and come up with a plan to protect ourselves.
Let’s talk about what has caused house prices to go up so much in the first place. Number one would be interest rates. The artificial suppression of interest rates has caused house prices to go up. Who’s responsible for that? The federal reserve. Number two, the economy has been doing well. After the Great Recession, there was a time where Millennials like me could not afford to even move out of their parents’ house, to be quite honest.
I remember graduating college and there were no jobs because we were deep in a recession. In the last several years, the economy has been doing much better. Millennials have good jobs now and they have got some money saved up so they are ready to get into the housing market. Number three, working from home has become a thing.
After the pandemic, a lot of companies have moved to a more virtual model and employees have been working from home. Since employees have been spending so much time at home, their place of living and work has become very important to them. They have been expanding, buying bigger houses, and moving out of the dense cities into the suburbs. All of those things have driven up the demand for housing.
Those are the causes that got us here but what are the effects? What are the effects of low interest rates? A booming economy and an increased demand for housing. Inflation is a disaster. Inflation is at 8%. That is the highest it has been since the ‘80s. If you want to learn about how inflation can destroy an economy, do some research on what happened in the ‘70s.
If the government does not get inflation under control, we could have some serious problems with our economy. Number two, pending home sales are down. What that means is less houses are being put under contract as opposed to how many are listed on the market. Why are less houses getting contracted right now? Because people can’t afford them.
The crazy thing is, supply is still down. Supply is not meeting demand. There are still enough people that want to buy houses and we do not have enough in supply for them. People can’t sell their home because they have no other house to go to. It is a quagmire of a situation. Another crazy thing that’s going on is the building material prices are through the roof.
It would be a great time right now to build more houses so we have more in supply and that would steady out the pricing of homes. If we add it to the supply, it would meet the demand. Things would calm down. The problem is, builders are having a hard time building because building materials have gone up so much because of the supply chain constraints.
Adding to the inventory of housing is nearly impossible. We are in a strange time unprecedented where all these factors are coming in at once and we don’t have a time in history where we have had this combination of issues. It’s hard to predict what’s going to happen, but as an investor, I have to prepare for the worst. I need to set myself up so if we do have a bubble burst, I don’t get killed, but I also don’t want to try to time the market and miss out on opportunities.
Not all real estate investing strategies work in every market for most people. It’s only natural that you think you have to invest in your backyard because real estate is such a tangible object.
I’m going to keep going and share with you what I am going to do, but personally, it’s important that you understand a few things. It’s important that you understand what interest rates do to affordability. The big thing is that interest rates have gone up. My personal opinion is that the overinflated areas like the one I live in, Orange County, could possibly have an adjustment.
Let’s take Orange County, California for an example because that’s where I live. In Orange County, the affordability rate is 17%. That’s compared to a national affordability rate of 55%. Another way to say that is how affordable is the average house if you made an average income. Affordability is calculated by income, house prices, and the availability and cost of financing, meaning mortgage rates.
With interest rates rising, which they have this year of 2022, let me demonstrate what that does to house prices in my hometown. To support my opinion that hyperinflated markets are going to feel some adjustment. Orange County, California has an average house price of around $900,000. Let’s use $900,000 as the price point for this calculation.
In 2021, the average mortgage rate was 2.65%. That’s very low. If you were buying a $900,000 house, your payment would be $3,627. In 2022, the interest rates are about 4.16%. For a $900,000 house, that means that your mortgage payment would be $4,380. It is predicted that interest rates could go up to 5%. What would that do to a $900,000 house? Your payment would go up to $4,831. Do you see how that could affect affordability? Your payment has now gone up $1,200 because you bought the same price property only a year later. That is what interest rates increasing do. It increases the cost of this house for you.
Think about what that could do to an affordability rate that’s already at 17%, meaning that 17% of the average income earners in Orange County can buy the average house in Orange County. If interest rates go up, that means that affordability is going to get suppressed even lower so less people can afford properties where I live.
If affordability is less than 17%, who is going to be able to buy these houses in Orange County? I will tell you who. NBA players and people with fat trust funds, but the problem is there are more houses than those people like me. I wasn’t given a trust fund. Unfortunately, I was born into the wrong family. What are people like me going to do who can’t afford the average house in this area?
Logic tells me that sellers are going to have to lower their price expectations on the home, and you are going to see that prices are going to have to come down so houses here become more affordable. I’m talking very local to use this as an example, but this is a national problem. As I have a very virtual mindset, I invest out of state. I don’t invest in my home market for this exact reason.
I see what other markets are doing and it’s my opinion. I am not an economist and I do not know, but I’m thinking out loud here that some areas are still very affordable. There are some metros where the affordability is even higher than 55%. My thinking is those metros might not feel the bubble burst quite as dramatically as maybe the hyperinflated metros where house prices have gotten out of hand. Now you’ve got a good idea about what is going on. How do you prepare for a possible bubble burst or a possible recession as a real estate investor?
If you are a wholesaler or house flipper, you are buying properties as rentals. How do you prepare? I’m going to share with you what I’m doing. Number one, do not buy speculatively. Don’t buy properties with the idea that prices are going to keep going up and that is how you are going to profit. Otherwise, if prices don’t go up, you won’t make anything. Don’t buy speculatively.
I never do that, in general, as a personal rule. There are some people that that’s the game they are in and I’m sure there have been millions made in that game, but I’m not for it. Don’t do it right now. Number two, use the lower comparable sale to come up with a value of your subject property. What I mean by that is if you are coming up with an after-repair value of a property, don’t use the highest comp.
We all want to do that, and honestly, in the last several years, you’ve been able to get away with that. Instead, I would use the lower comp. I would see what your numbers are. If you use the lower comp, what I call plan for the best but expect the worst. Plan that your property might not sell quite as high as you think it might. Run your numbers and see what your net profit is if you use the lower priced comp.
Number three, subtract 10% off of your after-repair value. If you are going into properties as a house flipper or even a landlord buyer, take 10% off your after-repair value and see what that does to your investment. Are you in the red so much that it would completely devastate you, or are you in the red a little bit? Chances are if there is a bubble burst, historically prices didn’t drop 20% in one day. It takes some time for prices to come down. Chances are during your whole time, maybe they decrease a little bit, maybe 5% to 10%. In this case, you’ve planned for it and you are not at a loss or if you are at a loss, it’s not too much.
Live anywhere and invest where you want.
Number four is to have multiple exit strategies. Can you keep this property? Let’s say you were planning on flipping. Can you keep it as a rental and can you rent it as an Airbnb, or rent it to a typical tenant and still be profitable? Can you still cover your mortgage payment if you did that? Always make sure that you have exit strategies instead of flipping. If that’s your only exit strategy, you want to make sure that you can possibly sell this property or keep it as a rental.
That way, if the after-repair value ends up being much less than you anticipated, at least you can keep the property as a rental, weather the tough times, and sell it when the market goes back up again. It’s because historically that’s the way real estate values have been in our country.
Number five, wholesale and avoid the risk altogether. There are still a ton of buyers. There are a ton of hedge funds buying properties. I have a ton of buyers on my buyers list. My company personally, we wholesale about 80% and flip about 20%. That mix is perfect for us. We have enough money coming in from the wholesales but we do take some risks. We do flip properties and those flips can be extremely profitable and we don’t want to stop doing them but, again, you can’t time the market and we don’t want to live in fear, so an 80/20 rule has been amazing for my company personally.
Those are the things you can do. I hope that this was educational and insightful. I don’t want to freak anybody out because this is life. Real estate goes up or it goes down. It stays the same. That is being a real estate investor, but it’s important that you understand market cycles so you are not scared and you know how to work with the market cycle and be profitable in all stages of the real estate cycle.
Hopefully, you guys got a ton out of this. Do you think the market is going to head downwards? Is the bubble going to burst? Remember, if you want to learn more about investing in real estate, virtually check out my coaching program at www.VirtualInvestingMastery.com, or I can help you pick a virtual market and completely crush your virtual investing game. Thanks so much for reading and I will see you next time.
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About Lauren Hardy
Lauren Hardy is Virtual Investing expert and Real Estate influencer who owns multiple companies in the real estate industry including real estate investment, coaching, and software companies. She is also a Wholesaling Inc coach and co-host of the Wholesaling Inc Podcast.
Her experience in the last decade has been focused on real estate investing and creating products and services to serve the real estate investing community. If you are interested in investing in real estate virtually, house flipping, or virtual landlording, Lauren’s your girl.