Single-family home investment still a smart choice

Single-family home investment still a smart choice

by DeVore Design, August 4, 2016

Orlando’s increasing median home prices and decreasing inventory make it appear that opportunities for residential real estate investment are limited. However, like all investment types, if you seek to find the greatest prospects the economy presents, you’ll see that they indeed exist.

The fundamentals of real estate investment – including buying low and selling high – can be applied to any deal in any market regardless of economic climate. Market fluctuations aren’t permanent and won’t have a big impact on ROI if the economics of the investment are sound. Those successful in flipping follow the principle of finding homes below value replacement costs, thus having built-in equity from the start.

Increasing the possibility of greater ROI can be achieved by flipping the “traditional flip” approach: keeping the home investment for the long-term rather than selling as soon as possible post-renovation. This “hold, accumulate, then flip” investment strategy is ideal in “ripple” markets.

During robust economic seasons, new market trends tend to emerge thanks to early adopters, and these trends generally stick even when the economy peaks or levels off. Typically, these “trend setting” areas are those close to core, densely populated markets where demand is high and supply is low. If the communities on the fringes of the core, dense markets – the ripple markets – are considered early while supply is there, worthwhile investment can be achieved in an area that likely will be the next most desirable submarket to renters and homebuyers, especially the workforce demographic that consider being closer to work an amenity.

As demand gradually increases and spreads beyond the core into surrounding areas, the ripple market investor that uses the “hold, accumulate, then flip” strategy has the opportunity to create consistent and well-performing cash flow by renting the asset, offset debt service and allow for inevitable appreciation to occur until a point that the sale price provides the anticipated ROI.

Central Florida is currently the model market for real estate investment. According to OrlandoRealtors.org, the median price of Orlando homes recently shot up nearly 10 percent compared to the same time last year, while sales increased about 2 percent. Both the rise in values and the sluggish movement in sales continue be influenced by the area’s ever-declining inventory. Ultimately, investors with quality assets have the upper hand.

When scoping out quality ripple market investment opportunities, look along rail routes to and from the core market. Proximity to mass transportation is a key feature for the groups of renters and homebuyers that cause areas to burgeon – particularly those that like easy access to their jobs – and will be an important selling point at the time of negotiations to increase ROI.

Now that we understand why market fluctuations don’t negatively affect the economically sound single-family home investment that provides the desired rate of return on rent when the market the market is low and a worthwhile gain resulting from a long-term flip when the market is improved, how do we deal with interest rate changes? Like market fluctuations, investors cannot control whether interest rates swing high or low. The good news is, when you buy and hold real estate, you have options whether rates are high or low. For example, if rates are low, you can sell because the general public can afford a higher price. Or, you can increase rent at the rate of inflation when rates are high because people can’t buy. Therefore, you win when rates go down by selling and win when rates are up by having tenants able to pay high rent.

It’s also important to note that rising interest rates are actually a positive reflection of a stabilizing economy. As sure as the raise will occur during the next 12 months – albeit mild and incremental – The Federal Reserve has maintained the position that it will pull back if the economy falters in order to mitigate the impact. Furthermore, low interest rates do not and never could solely support the housing market; other factors such as steady job and economic growth make a much larger impact and continue to trend upward.

The first step toward success in single-family home investment is to understand the stage of the economy you’re in. No matter the economic climate, opportunities abound and basic investment rules still apply. By opening our eyes to the big picture geographically and longer-term, greater wealth creation could be on the horizon.