The real estate market has been navigating shifty waters that are ebbing and flowing between waves of supply and demand, and prices are reflecting this ever-changing trend.
The average sale price of homes sold in the US hit a record high of $525,000 during the second quarter of 2022, according to the Federal Reserve Economic Data. At the same time, mortgage rates also hit a 14-year high. The average 30-year fixed-rate mortgage topped out at 5.41% in July, Freddie Mac historical data shows.
In the meantime, inflation and supply chain issues have pushed out builders due to the rising cost of construction and materials. Monthly new residential construction plunged in July, according to the US Census Bureau.
While some investors are waiting on the sidelines looking for any sign of stability, Sam Primm and his business partner have already purchased 53 properties this year, according to closing documents viewed by Insider. Of those, 52 are single-family homes in St. Louis, Missouri. The 53rd property is an apartment complex with 19 units.
Primm has been dabbling in all areas of real estate since 2014. He has wholesaled properties, bought and flipped homes, and has also held on to a number of units, becoming a landlord. He also teaches real estate investing through a mentorship program called Faster Freedom, and hosts a free podcast with his business partner called “Ordinary Guys Extraordinary Wealth: Real Estate Investing and Passive Income Tactics.”
From his perspective, waiting to buy an investment property isn’t a good strategy. It’s all about time in the market, rather than trying to time the market, he said. As long as you know your numbers and understand what you’re getting into, there’s always opportunity in his perspective.
In an interview with Insider, he shared his top five tips for investing in the current real estate market.
While the market is volatile and shifting, don’t attempt to do anything drastic. Instead, stick to the fundamentals, he said.
One thing he’s doing is shying away from higher-end properties with price tags above $1 million because fewer people can afford them, making the buyer pool smaller. The sweet spot is a property that fits the first-time home buyer’s needs and budget, he said. For the St. Louis market, that means single-family homes that sell between $200,000 to $400,000 after rehab. In markets like California, that price range could be substantially higher, he noted.
“You want as normal and ordinary as possible,” Primm said. “You want a three-bed, two-bath rectangular ranch property. Now, you can do two stories, you can do more, you can do less, but the majority of your buyers are going to be for those properties.”
From his experience, he finds that single-level ranches are most in-demand. This is because they’re great for aging buyers who don’t want stairs and good for couples with younger children who don’t want to worry about blocking off the stairs. However, if a house doesn’t have a basement, it’ll need a garage so people can store their stuff, he added.
In addition, since the lockdowns, the demand for properties with pools has skyrocketed, he noted.
“It used to be one of those things where it’s kind of like, ‘Oh, we have a pool to deal with, that’s annoying,'” Primm said “Now it’s, ‘Oh my gosh, this house has a pool. It’s going to sell on the first day because people love pools.'”
If you plan on keeping the property and renting it out, he recommends aiming for a positive cash flow of $300 to $500 a month. To estimate cash flow, take your rent and subtract six main owning expenses from it. This includes the mortgage, home insurance, property taxes, property management, maintenance, and vacancy. The industry standard for calculating the cost of vacancy is about 5% to 10% of the rent, he noted.
Look at comparable houses in the area to determine what the rent rates are for your market.
Consider wholesaling, this is when you enter a contractual agreement to purchase a property at a certain price and then sell that property to another buyer at a higher price before you’re required to execute the contract.
This is a great way to avoid renovations while materials are expensive and shipping times are long, he said. Just be sure that the contract includes contingencies based on inspection or financials. This clause will allow you to exit the contract in the event you can’t find a buyer.
If you want to take on a rehab project, make sure the upgrades are limited to quick fixes that take less than three months, he noted. This means things like painting and replacing floors or countertops. Avoid rehabs that require tearing down walls, redoing the plumbing or electric system, or properties that need foundational fixes. This is because the market could shift relatively quickly. If you’re doing a 10- to 12-month rehab, the property value could drop by the time you’re ready to sell, he said.
Additionally, inflation has driven the cost of materials and supplies up. Primm estimates a 15% increase across the board on materials for his projects over the last year. Supply chain issues have also caused a backlog in delivery times. For example, windows that would normally take two to three weeks to deliverare now taking six to eight weeks, he said.
“If you are doing quick little $20,000 or $30,000 cosmetic rehabs that take you 30 to 45 days, you’re in and out quickly, you’re just minimizing your risk,” Primm said.
It’s worth bringing a structural engineer to check the property before you close on it, he noted. You can also do things such as check the basement for any cracks.
Paying attention to details, such as how old a house is, could save you time and money. For example, if a house was built in the early 1900s, there’s probably knob-and-tube wiring that needs replacement, he said. If it was built before 1970, there could be asbestos and lead paint. On the other end, if it’s less than 50 years old, the electrical system is probably all up to date, he added.
Prioritize developing strong relationships and open lines of communication with contractors, banks, and lenders because they will tighten their strings when the economic environment slows. As the market shifts, borrowing money becomes more difficult. If you have developed a relationship, especially with local banks, you’re more likely to be informed in advance of any changes. You could even increase your chances of continuing to be approved for loans.
If you’re a first-time home buyer, take advantage of an FHA loan, he added. This way, you’ll only need to put a 3.5% down payment on the property rather than 15% or 20%. This is a great option at a time when interest rates are already high.
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