The Ultimate Guide to Real Estate Investment Strategies for 2018

You have this goal for 2018: Find a compelling way to increase your income and grow your assets. You’re not unlike most ambitious investors. The wheels constantly turn and the search presses on for a hot stock, a small business opportunity or a winning lottery ticket. Stocks might scare you a bit and the odds of hitting the Powerball… well, no explanation necessary.

You do have some friends who seem to do pretty well as landlords. They take a few nice vacations, drive new vehicles and haven’t ripped out their hair. You’re a homeowner and a do-it-yourselfer. And you ask yourself:  “How hard could the real estate investing business be?” One solid bit of advice: Believe half of what you read and an even smaller percentage of what you hear from others.

You need to dive into the pond yourself to find the truth.

A second gargantuan piece of advice: Don’t go in headfirst until you know how cold and deep the water is. As with other money-making opportunities, real estate investing requires commitment and knowledge on your part. For every success story you hear, there are likely many more episodes of failure.

The difference between winning and losing hinges on a well-executed real estate investing business plan, and keeping abreast of industry happenings can fuel that strategy. In what follows, we present a detailed guide to emerging trends as you set out to fulfill your real estate investment strategies for 2018.

Factors That Will Affect Your Real Estate Investment Strategies in 2018

It’s not as easy as simply buying, renovating, and selling homes. If it were, ALL of your friends and family members would be doing it. However, you must keep your finger on the pulse of the market to increase your odds of success. Get a feel for these 2018 trends and how they might complement your plan.

The Taxman

The federal government stirred the home-buying pot in 2018 by changing the tax code, and these new laws will undoubtedly have an impact on the real estate market. Homeowners and industry groups such as the National Association of Realtors have a bit to grouse about with the “Tax Cuts and Job Acts” bill that was signed into law on December 22, 2017.

The new tax code eliminates the interest deduction for home equity loans and limits the amount of state income and local property taxes to $10,000 that can be deducted from taxable income. In addition, the number of homeowners who itemize deductions is expected to drop by more than two-thirds.To attempt to balance the equation somewhat, the standard deduction was increased from $6,350 to $12,700 for single homeowners, and from $12,000 to $24,000 for married couples filing jointly. As a result, many economists forecast that prospective homeowners will be dropping out of the market due to the decreased tax incentives. Overall, you can expect to work a little harder on your investment property marketing techniques as competition for homebuyers increases.

The picture looks a little brighter on the business end for maximizing tax deductions on investment property. A new deduction has been created for partnerships, S corporations, and sole proprietorships. In 2018, 20% of qualified business income can now be deducted after adjusted gross income is calculated. This “below the line” deduction can be best illustrated in an example. Say you own a rental property valued at $135,000. Now assume the property generates $8,000 in taxable income after the adjustments for depreciation and amortization. An additional $1,600 (20% of $8,000) can now be deducted from business income. Of course, you should always check with your tax advisor about how this might work out for your particular real estate investments.

An added bonus involves faster depreciation on assets that have useful lives of less than 20 years. How does that work? Say you make improvements to a property or the land it occupies. You might install new countertops or plant some shrubs to beautify the home. Going forward, you may be able to now write off the whole cost of those improvements, whereas before you had to recover those costs gradually over time. If you’ve been putting off making upgrades to an existing property or holding back on the rehab additions, these tax advantages may give you some wiggle room to make that commitment. Those extras might command higher rents on existing income properties or increase the asking price on a renovation project.

A Technology Takeover

Traditionally, obtaining a mortgage might have seemed on par with a root canal. The painstaking acquisition process required a lot of your valuable time and the paperwork felled a few trees. In most cases, the process progresses without a hitch but when something goes wrong, it may have cost you more time and even jeopardize a good deal. These days, technological advances take a lot of the hassle out of the buying experience.

With the advent of the financial technology revolution, or Fintech as it has been coined, a mortgage application can be completed from the convenience of a mobile device. In some instances, these push-button home-buying experiences allow you to take a virtual tour of a dwelling, perform a search of comparable property values, and apply for the loan with the click of a mouse. The automated process isn’t for everybody, but it appeals to Millennials and GenXers who embrace software more tightly than the typical brick-and-mortar customer. You may resist technological advances but, with time at a premium, it would be prudent to investigate how these applications could improve your ability to make an offer on a good investment opportunity as it arises.

Once you’re approved, you will also speed to closing with the help of automated appraisals. Many lenders will allow appraisals generated by algorithms rather than their human counterparts–and for good reason. The number of appraisers shrunk from 120,000 in 2012 to 78,000 in 2017. Industry observers attribute the decrease to both technology and the stricter licensing credentials needed to maintain an appraiser’s good standing. Automation may also help to end fraudulent “straw man” ploys in which an unsuspecting buyer’s good credit is used. Scheming associates then flip a house, pocket the proceeds, and sometimes stick the unsuspecting third party with the mortgage loan. Technological barriers to unethical real estate investing practices will help to bolster the overall industry reputation for those of us who do good work.

An Interest in Mortgage Rates

You can roll up your sleeves and do a lot to foster your successes as a real estate investor. Carefully perform your research and you’ll find undervalued properties. Grab your tools and sweat equity can save you thousands of dollars when you don’t need to hire contractors for every phase of the renovation. These are the variables you can control–and then there are the market forces you can’t impact.

About ten years removed from the financial meltdown of 2008, home loan rates have begun to creep up from all-time lows driven by the subprime mortgage crisis. Don’t sweat it too much. Most serious investors who turn multiple properties each year acquire their financing from hard-money lenders who set their own interest rates and design specific terms for the deal. But you would still do well to monitor interest rate trends as 2018 moves on if you are a new investor hoping to leverage a traditional source of funding, like an FHA 203(k) loan, for the first deal or two. Depending on the size of your home purchase, a small movement in rates can cost you money that might be better used for marketing or rehab efforts. Take a look at the following example to see how a one-point percentage increase in rates can affect your cash flow.

You target a house for $165,000. For simplicity’s sake, let’s forget about taxes and insurance–they’re more variables you can’t control. You have 10% or $15,000 for a down payment and consequently, finance $150,000. A 4% rate for a 15-year mortgage term puts your principal and interest payments at about $1,109 per month. All systems say go but you get gun shy and decide to wait before you pull the trigger. In the meantime, the Federal Reserve decides to hike the federal funds rate by a half-point. Mortgage rates typically don’t move in lock-step with the Fed’s recommendations but a quick move to 4.5% isn’t outside the realm of possibility. CoreLogic, which offers data to the real estate industry, predicts the 30-year mortgage rate will rise from about 4% to 4.7% from November 2017 to December 2018. A 15-year product will follow suit, so don’t discount the possibility that in six months, while you stand on the sidelines, another half-point increase take could shape. The cost of waiting then becomes about $177 monthly or nearly $14,000 over the life of the loan.

Rising Low- and Mid-range Home Values

Since those fateful days in 2008, the appreciation of home values has been on a tear. In 2016, home prices increased 6.3%, 6% in 2017, and forecasts call for a 4.1% hike in 2018. A continued increase in median home prices could be a boon for investors who buy, renovate, and sell foreclosed or blighted properties, When the finished product hits the market, rising prices may enhance ROI.

What factors drove, and will continue to drive, the astounding growth in home prices?

The subprime crisis created a bottom. While lending standards tightened, buyers who had the resources and credit standing rushed in and purchased homes, shrinking supply and boosting values that had nowhere to go but up.

The same lenders who made it difficult to borrow following the market upheaval are now making it easier for prospective homeowners to buy. Potential borrowers who may not have been qualified 7-10 years ago now see banks actively soliciting business from a larger pool of now-creditworthy applicants.

A broader range of mortgage products has become available. Lenders have come to market with mortgage options for those folks who suffered financial hardships. Some banks now promote mortgages with looser proof of income requirements, and other financial institutions have designed interest-only offerings.

A new class of buyers is coming to the forefront. Once thought to be ambivalent toward home ownership, Millennials, or those individuals between 25 and 34, now account for the largest segment of home buyers across the nation.

If the idea of real estate investing appeals to you, this upward movement in home prices might be the spark that sets your plan in motion. Should the positive trend continue throughout 2018, you’ll have ample time to research, find an undervalued property, and reap the rewards of a higher sales price as home values gradually ascend. At the project’s end, your projected ROI may look a bit healthier than when you began.

Luxury Markets on the Downswing

All signs point toward continued strength in the real estate market but you would be wise to consider a contrary view–especially when it comes to investing in the luxury sector. Mark Zandi of Moody’s Analytics projects that median luxury home prices may drop as much as 10% in high-end markets such as New York City and San Diego. Prior to the new tax legislation, luxury buyers could deduct interest on indebtedness up to $1 million in value. Currently, that cap has been reduced to $750,000 and the new limitation may turn away buyers who count on the mortgage interest deduction to help offset the cost of upscale properties. With that in mind, you may want to target lower-end properties if your goal is a quick turnaround. Investing in upscale properties may see you holding the asset for longer than you’d expected, trimming your bottom line.  

A Proven Strategy for Any Market Tides

The U.S. economy continues to roar as the Dow Jones Industrial Average tops record levels, unemployment remains tame, and inflation stays mostly in check. What you must understand, however, is that economies are cyclical. An unforeseen global event could stop the domestic stock market in its tracks and even lead to a major pullback. Often, economic woes or political unrest in other countries could spill over into the United States, crimping production and keeping interest rates steady. You get it–the best laid plans of mice and men, and all that conjecture.

With real estate investing, there certainly is a lot to digest. Why go it alone? Independently owned and operated HomeVestors® franchisees have the benefit of a sophisticated network of professional real estate investing franchisees and dedicated Development Agents who bring years of experience to the table. Becoming a franchisee puts you in the seat next to some of the most knowledgeable folks in the industry. And, HomeVestors®’ real estate investment strategy has proven to weather all the ups and downs of the market; together, HomeVestors® franchisees have bought and sold 100,000 houses since 1996.

Contact HomeVestors today to find out more about the real estate investing strategy that can help grow your business in 2018, and beyond.

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