This video belongs to KenMcElroy - so please visit his YouTube channel - but it is such a good 101 primer on real estate investing, it deserves a repeat here. Ken markets this video as how to make money in real estate in 2024 and 2025 because of an expected liquidation of multifamily properties by owners who can't afford their interest payments.
But it's really a basic illustration of how to buy real estate successfully. 1. Buy low. In this case Ken says lots of distressed properties will hit the U.S. market in the next 24 months as high interest rates bite. Same goes for Canada. Owners will be forced to sell - or go bankrupt. People bought properties at large premiums during the COVID go-go years when governments were shovelling stimulus money out the door, artificially juicing every kind of market: cars, hard goods, housing, electronics, shipping, labour, construction supplies. Real estate looked like a great bet. Prices were flying, but loans from banks were available for next to nothing, so real estate still seemed 'cheap'. Real estate is a great store of value. But overpaying - for anything - is how you lose money, not make it, because loans must ALWAYS be paid back. 2. Make sure your income exceeds your expenses: Sounds pretty basic, right? Create positive cash flow on your buy-and-hold real estate by getting more rent than you spend on the loan, insurance, utilities, and so on. BUT...when planning an investment property purchase, net cash flow calculations also require a set of what-if scenarios in the form of a sensitivity analysis. A sensitivity analysis creates new financial models in the event X happens. In this case, X is higher interest rates. For example, when modelling out the purchase of a new property in Excel, create five columns with a range of interest rates from best to worst in them, and model out future returns. If you don't build in margins of safety in the event of interest rate increases, you are exposing yourself to errors through ignorance. We all knew interest rates could not stay near zero. We all knew inflation would rise - at least anyone with business sense and a basic understanding of economics did. The law of supply and demand may get suspended during bouts of irrational market exuberance, but foundational market principles never go away. Effectively managed markets always self-correct. Prices rebalance themselves, cheap cash goes away as banks tighten their loan books, and for those still able to refinance, the cost of money rises. Those who bought property wisely will get bruised, but they will survive. Those who didn't include X in their planning will get burned. Then, those with cash who were waiting patiently on the sidelines for naive/inept investors to self-immolate, will scoop up all the discarded housing that the burned investors are forced to sell at bargain basement prices. Such is capitalism.
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Cameron MorrellBusiness Educator Archives
November 2024
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