Real estate investment mistakes to avoid when prices are rising
Photo by Binyamin Mellish
The appeal of real estate investment grows stronger when property values are on the rise, as it offers the potential for significant profits. With the value of the real estate market in the U.S. expected to reach a staggering $132 trillion in 2024, this is only natural.
However, the dynamic nature of a rising market presents some distinct challenges that can trip up even seasoned investors. To achieve success in such a market, it is crucial to navigate these challenges strategically, steering clear of costly errors.
Here is a playbook on how to manage real estate investing when the price goes up.
Don’t get carried away by market momentum
When prices are climbing, it’s a tempting belief that this trend will continue indefinitely. We need to remind ourselves that markets are cyclic in nature.
Overpaying for a property based on an assumption that it will appreciate even more in the future, can leave you vulnerable in case the price plummets. According to the IMF, property prices in the U.S. have actually gone down by 11 percent since 2022.
Smart investors take a measured approach by analyzing long-term market fundamentals and avoid decisions based on short-term hype and peer pressure. They check the property market and find areas with a history of consistent demand and steady growth. They do not rush after trendy locations where prices often fluctuate.
Don’t ignore local market dynamics
Real estate is heavily influenced by location, being an immovable asset. Each market responds differently to a price rise. National trends can sometimes overshadow critical local factors that could impact your investment. These may include a booming local industry in the nearby area or new infrastructure developments that may impact the property value.
An urban area that is experiencing a price appreciation could also come under higher taxes or some local law that is out of the radar. For example, the U.S. Census Bureau states that Texas paid 1.46 percent property tax in 2022, almost double what the neighboring states paid.
Don’t skip property inspections
High prices and market conditions often create a sense of artificial urgency. The investor sees that desirable property is being quickly snatched up, and is tempted to rush into a deal.
Due diligence, a crucial step before any property purchase, gets missed. Professional property inspections, zoning reviews, and other checks, if missed, can lead to costly surprises down the line. A seemingly minor issue can quickly escalate into a significant financial burden in case it is left unaddressed.
Failing to review zoning regulations can also pull up surprises down the line, with restrictions on property development. Taking the time to conduct proper due diligence is a crucial part of property investment and protects it from unforeseen expenses in the future.
Don’t ignore smart financing
Navigating a hot real estate market can require quick access to flexible and reliable financing. Having fast and dependable funding can make all the difference in striking a deal. Not having the capital at the right time can lead to canceled deals, as there may be other buyers who would take advantage.
As there is no room for delay in such cases, Source Capital recommends going for lenders prioritizing speed, with a streamlined process that can fund a loan in a matter of days.
Don’t fall for the “hot market” syndrome
Booming markets can often attract the attention of many investors. This approach has significant risks because after a critical mass is reached, the oversaturation backfires on the prices. There is a high chance of market corrections, which can increase your exposure to volatility. If the market fluctuates, it would be an eventual loss even though you made the right investment on paper.
Investors should focus on emerging neighborhoods or places with undervalued properties and long-term growth potential. This also minimizes the risk of over-exposure.
Failing to have an exit strategy
Rising prices often give a false sense of security to investors, as it has them thinking that they now have plenty of time to think and plan their next move. Without a clear exit strategy, you may keep your money parked in properties without any plan to sell, rent, or refinance them.
There is a need to define an exit strategy and then adjust it, if required, based on the market conditions.
Staying ahead of the curve
The key to finding investment success in a rising market is to strike a balance between being optimistic and cautious. Stay clear of the common pitfalls and protect your investments, ensuring they remain profitable even in challenging market conditions.
Staying informed and having a clear strategy will help you navigate these competitive markets with confidence.
