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Bidding wars and record prices: Investing in competitive markets

Bidding wars and record prices: Investing in competitive markets
by Brad Cartier, posted in Investment Strategy

There’s no doubt, it’s been a crazy housing market. When supply is tight and demand high, it can intimidate new investors, and even downright frustrating for current investors looking at acquisitions. We are currently in one of those market cycles now…

  • Bidding wars at record highs
  • Housing supply at record lows
  • House prices hitting record highs
  • Record material costs pushing prices higher
  • And, low rates encouraging more purchasing and borrowing

So what is an investor to do? Sit back and wait for a slowdown? Maybe. Should you get even more aggressive and purchase as much as possible to lock in lower prices? Likely not. Are there tried and tested strategies that work in this type of heated and competitive market? Absolutely.

Real estate cycles are inevitable, and you need to be prepared for a competitive one with some strategies in your toolbelt.

Strategy #1: Do nothing

Sometimes the best strategy is to do nothing. With rampant bidding wars, you’re competing with so many buyers that you may be overpaying for assets. If this is the case, it may be worth waiting for a more balanced real estate market.

During this waiting period you can continue to analyze deals and keep an eye on prices and supply, but pulling the trigger on an acquisition may not be your top priority unless any opportunistic or off-market deals come to your attention.

Strategy #2: Off-market acquisitions

The best deals I’ve ever made as a real estate investor were from off-market properties. These are ones that may not necessarily be proactively for sale, but the intention may be there.

The best way to find off-market deals is through your network. The brokers, investors, agents, and everyone else in your real estate team need to be aware of the types of properties you’re looking for so they can keep an eye out for you.

Driving for dollars is also a good strategy for finding off-market deals during competitive market cycles.

Make sure you’re proactive with your network to let them know what types of deals you’re interested in. You can also proactively communicate with owners of the types of properties you want to buy either directly or through mailers or text messages.

Strategy #3: Conversions

Investors are snapping up multi-units like hotcakes in competitive markets. If this is a scenario you find yourself in, you can get a little creative. Find properties that are convertible to two or three units. This type of missing middle real estate is in high demand and will be growing in popularity over the coming years.

The best example of a conversion like this is a bungalow home. They’re everywhere, so supply is much higher than multi-unit properties. Find a bungalow with a separate side entrance, usually to the basement. In the lower level, you want to see if it’s convertible to a secondary unit:

  • Are the ceilings high enough and can be fire-rated?
  • Is there already a kitchen, or water hookups?
  • Is there a bathroom?
  • Are the windows big enough to let in enough light?

If you find a bungalow that checks these boxes then you may have a great conversion deal on your hands. Of course, there are other examples of this where you can convert to even three or four units, or add a garden home on the property if it’s a larger lot.

Strategy #4: Land development

Vacant land doesn’t appreciate as much as developed land, nor is it usually in higher demand. This spells opportunity for real estate investors who can implement a development strategy.

This is obviously a bit more complicated than a traditional acquisition, however, the returns could be much bigger if done correctly.

A few things to keep in mind if you’re interested in land development:

  1. Are utilities on the lot line? If not, you’ll need to look at expensive septic and well systems.
  2. Will the municipal setbacks allow for the construction of a rentable real estate asset? Sometimes, lots may be too small for development when you consider the setbacks.
  3. What is the zoning of the lot? You may not be able to even build more than one unit unless you rezone.
  4. Do you have a builder that is reputable and trustworthy to help you out?

Strategy #5: Defensive portfolio management

Real estate is cyclical, and you should be ready for any market cycle. During competitive markets, you should take the time to review your portfolio and make sure you’re in a position to be defensive should the market shift.

Stress testing is one of the most important defensive strategy, yet most investors don’t do it. Use a proforma or software to stress test your portfolio across a number of different scenarios. These include:

  • Vacancy stress: Can your portfolio and properties handle a 10% vacancy? What about 30%?
  • Interest rate stress: What is interest rates jump by 300 basis points? At what point does your cash flow go to zero?
  • CapEx stress: Can you withstand a $30,000 roofing capital expense? Or a flood that causes $50,000 in damage?

Strategy #6: Find markets at different stages in the real estate cycle

Remote real estate investing and laptop landlording has been booming over the past few years as a result of innovative platforms and technology. These new tools enable investors to buy outside of the markets they live in.

Maybe your market is too hot, but there are thousands of secondary and tertiary markets around the country where the numbers may make better sense for your criteria. Branch out, look at markets beyond your current area of operation.

Bottom line

Competitive markets aren’t a bad thing, they’re just different. This real estate cycle can make acquisitions difficult, but not impossible. You just need to deploy different strategies.

These include off-market acquisitions, land development, moving further out to different markets, and more. There’s a strategy for every season, which one are you going to act on?

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