Like every other investment, real estate has its pros and cons. The pros include steady cash flow, building equity, unique task benefits, property appreciation, hedge against inflation, leverage, etc. The cons of real estate investment are unique risks, capital intensive, long-term investment, time-consuming, legal issues, losses.
As an investor, you do not want to deal in properties that are not lucrative. For this reason, most investors aim for a seller’s market.
What is a Seller’s Market?
In real estate, a seller’s market is where there is a shortage of property amid high demand. Such may be the case if the seller has a house in an area with a decent school system and amenities.
Here, the seller will have control when setting the price of the property. Such houses attract multiple bids even to the extent where the offers will exceed the seller’s asking price. But this is not the case in a buyer’s market. A buyer’s market is a situation where the available homes exceed the demand.
Presently, there is a surge in the seller’s market. Sellers are noticing that buyers easily meet and surpass their asking price. That is because buyers are taking advantage of the record low mortgage rates.
In January 2021, the rate on a 30-year fixed mortgage is as low as 2.65%. This low rate is because the Federal Reserve aims at supporting the economy because of COVID 19 pandemic.
As an investor, this is the right time to invest. But what type of property will be favorable in a seller’s market? Amateur investors often try to figure out which deal is the best for them. They have difficulties because they do not possess a strong network and knowledge. If you’re starting in property investing, you might want to consult with a knowledgeable and skillful property manager.
On the contrary, experienced investors acquire deals from the reach of amateurs. Initially, these deals have under-market rents and appear to be undervalued. However, they come with value add opportunities. As a wise investor, you need to be patient and also stick to the standards. Doing so will prevent you from investing in bad deals.
It is good to crowd invest in more stable or larger assets. But when you do, always choose operators that have your interest at heart. Even when there is stagnation of rental and high vacancy rates, you will be steadfast if you invest in capitalized projects.
Such projects have an appropriate budget, cash reserve, and adequate capital expenditure. To invest in a seller’s market, you also need to understand the different property classes and their dynamics.
Classes of Properties
There are four different classes of properties:
Class A
Class A properties are the ones that are less than ten years old, located in desirable environments, and have modern amenities. In other words, class A properties are luxury properties for white-collar tenants. These apartments often have poor cash flow and a vacancy rate of 5.5%.
Class B
Class B homes are for both blue- and white-collar tenants. These properties have the potential to appreciate quickly and also require little maintenance. Their vacancy rate is 5.0%.
Class C
Class C apartments are homes for blue-collar tenants and Section 8. The buildings are over 30 years old and also offer enormous cash flow. Here, the vacancy rate is 4.5%.
Class D
Properties here are over 35 years old. In this environment, investors find it hard to collect rent, and the crime rate is high. However, it is reasonable for repositioning.
The population is indeed increasing, and people need houses. But as a wise investor, it would be best to note that people lose their jobs and move away to other locations. Also worthy of note is the fact that recessions do occur. These can increase vacancy rates.
Class A properties experience the most impact. During recessions or job losses, Class A workers will vacate the properties and seek affordable homes elsewhere. They often choose Class B and C apartments.
The effect is that there will be low demand for Class A homes. At this point, Class A property owners will reduce their rents to make the deal attractive for renters.
Class B and C renters also experience job losses and recessions. Like Class A renters, they will also downgrade.
From the vacancy rates of the different categories of apartments, you will notice a high demand for lower classes of properties than the supply. That shows that they are among the seller’s market.
Note that investors who chose Class B and C properties do not think of building new properties. New apartments are for Class A properties. If you spend money to build a new property for a Class B or C home, it will not be beneficial.
Bottomline
Class B and C homes are for the seller’s market. Over the long term, they perform better than other properties. Also, Class B and C properties have good cash flow and value adds components that can offer investors support if they experience tough times.
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