After another weekend get-together where my friends ask me “Should I buy or sell right now?”, I am left feeling that my economics degree and ‘fortune telling’ classes were not quite good enough for me to be giving hard and fast advice on this. I also think a 2000 word blog post saying that both might be true will not be worth your time to read. As someone who is in the market for buying a house, buying an investment property, owning a house that I could sell, and advising family about an owned commercial property to sell, I will tell you what I am doing, planning, and why.
Current Situation
Let’s start with what is currently owned. The properties that were bought by myself and my family are worth multiple times more than what was spent. My parents own a mixed use property in the New Hampshire Lakes Region, which is 100% occupied. I own a single family home on the seacoast that I currently rent out. Both of these properties are currently cash flowing and have been good investments after putting improvements into them. Having used the past 5-10 years to make our units more marketable by updating bathrooms and fixing kitchens and sheds, as well as making the commercial space fit out complete, the increases in rents we have seen over the past 3-5 years have been good to help our investments turn a profit. With the latest assessments and appraisals, we could sell these properties and see gains of over 100%.
Not Selling Today
Our plan is to hold both for two reasons, which may not be the case for you:
- The properties have fixed rate or no debt on them
- The properties significantly cash flow over expenses and have a reserve in place, which can last 6-9 months of expenses
Why is fixed rate debt or no debt important? Well it is because we expect that the current 5-6% interest rates will continue to increase for the rest of this year and into next year. If we were forced to refinance or have an adjustable rate, the increase of interest from 4% to 8% (which is just an estimate, but our feeling is much more likely than being below 4% anytime soon) would likely not cover the increase in rents we saw over the past 3-5 years. Here is some quick math for you to put in perspective what these increased rates do:
Investors who had commercial loans with 5 year adjustable rates and bought in the last 3-5 years or will start seeing the jump from 3-4% to likely 6-7% shortly. This may be a reason to think differently in your long-term hold plan if the cash flow is going to decrease so significantly. And this is where my economics background really brings more questions than answers. But will these property owners sell? Are they going to get sale prices based on current comparable properties or are investors going to need to pay less for the increase in interest expense? Can owners continue to increase their rents? How will the increase in rents affect vacancy?
If I were in a position of adjustable rates, I bet I would think harder about selling my properties that have appreciated 30-100% in value in the past 5 years and take advantage of that gain for future opportunities. I would also calculate the loss in capital gains in order to make sure it is worth selling at this time.
Think About Reserves
The other thing that I think is important right now is having reserves. Investors who are highly leveraged might be in a challenging position based on the upcoming economic factors. Energy costs are skyrocketing, with futures in even worse positions. Expectations on natural gas prices are 100%-300% what they were a year ago. This is very concerning and needs to be taken into consideration. If it costs 3 times as much to heat your space this winter, that will have serious negative effects on the entire economic market. It will mean less money to invest, decreased hiring, and less discretionary income for consumers to spend. We have several signs that economic recession might be here within 6-12 months and based on historical trends, this could be sooner rather than later.
Real Estate is Stable
Now, I am not doom and gloom and like I said I am in the market to buy as well. Real estate is still a stable investment and with inflation where we have seen this year, having money around in cash is not the best place to keep it. But, knowing that maintaining properties might increase this winter should incentivize you not to over leverage yourself to get into the next investment.
I think for selling your investment property versus holding the property, you should hire a professional team to give you advice on what might be best. Financial advisors, accountants, and your local experienced commercial real estate professional can help you in making these decisions.
But, if you are looking to buy a home or investment property, there are some reasons to do so now:
- Construction costs have flatten, but have not come down after the covid bump
- Interest rates are still low enough to make deals work and likely to be going up this year and next
- Basic supply and demand factors still make real estate a strong investment
Personal Beliefs
Without the remaining 500 words being a direct contradiction from the first part of this blog, I will state a few of my beliefs. I believe that there are still not enough homes in areas people want to live and the seacoast region of New England is one of those places. I think that some people (especially in the beginning part of this year) might have paid too much for properties that were not in an ideal condition or location, but for those who needed a place to live, they paid it anyway. I think the inflation increase may have protected many of these people from being underwater on their houses in the next downturn, but we will have to wait and see. I do not believe another 2008 crash is imminent – it would take 10 years of excessive building, deregulating the financial industry, and major shift in population growth to ever see a decline in prices like we saw then. Lastly, 6% interest is not a bad interest rate. If it gets above 10%, then I think our market will be very different.
The last thing I will let you know about is what I am looking as a type of investments I am not searching for a multifamily at this time because that is a market that has become very competitive. I would tick off dozens of my clients if I bought a multifamily because I am supposed to be finding them these opportunities. Retail and office properties are a bit too risky for me at current cap rates. If pricing adjusts, I might relook at those opportunities, but right now I expect the upcoming recession (again my hypothesis from what I am seeing and by no means a foregone conclusion) is these two industry types will have higher vacancy rates than other residential and commercial uses. Hospitalities are much better bought and run by people with that experience, which I am not one of them.
What does that leave? Industrial and Land. I see that industrial spaces, no matter how big or small, seem to always have many tenants interested. I expect that occupancy will stay really high and that new industrial construction is still expensive, so for most businesses I expect that the lack of supply will drive prices higher. And as Mark Twain said so many years ago, “Buy land, they’re not making it anymore.” This is still the case. Whether it is land for residential or commercial properties, there could be end users or buyers for both. It is a longer term investment and buying the right property in the right location is much harder to understand, but it is where the greatest amount of value is in this competitive market.
Final Takeaways
So to those who are buying now I would say, that is fine, but be mindful. Be mindful of how many years you are planning on being at/owning this location. Be mindful of how much of your cash is used for the purchase and how much of a safety net you will have. Also, to the investors, don’t miss out on other investment opportunities in the future by having all your liquidity tied up. It is better to slightly overspend on a higher price, excellent opportunity (great condition and location) than to greatly overspend on a lower price poorer opportunity.
I also want to note that almost no one is building single family homes for less that $500,000 now. The entry level homes don’t make economic sense based on land prices, construction costs, and the number of willing buyers in the $500,000-$1M price point for builders to make anything other than these homes. So seeing they are not making any more right now or potentially any time soon, to buyers at the $500,000 price range and below – note that these types of properties are going to remain in demand as nothing new and better is competing with your listing.
When I am asked, “Should I buy or sell?”, the real question is “What am I going to regret more?” My simplified answer is to those who are selling is that ‘this might be the best time for a while to sell at the highest price because it is unlikely you are going to regret selling in the short term’. To buyers I would say, ‘you can certainly buy in this market, but be careful if you’re not able to hold a property for a few years because a long-term hold may be required for it to end up being a good financial decision for you’.
Also note that rates are going up, but refinancing, when they go down, is a potential option down the road. For any buyers in this market, the longer you wait to make your purchase, the longer you may need to hold onto the property in order to get your desired return.
–Ethan Ash & Viktoria Alkova