The real estate market consists of constantly
fluctuating up-and-down cycles, so continual education is necessary
for the savvy investor who wants to know where, or what, to buy next
in order to maximize their investment. The average real estate
investor has considerable difficulty keeping up with the many
changes in lending and market conditions from year to-year and even
month-to-month. In the past decade, many real estate investors made
huge profits from short term investments such as fixing and flipping
houses or as a simple result of the housing boom. When housing
prices increased, fueled by a strong economy and low interest rates
(along with an increase in risky lending practices), many new
investors were able to pull out the equity in their current homes
and purchase new homes. Unfortunately, some of the new homes now
held as investment property were purchased using these risky loans.
With the residential housing market headed towards a downturn, many
of these investors do not have the skill or professional guidance to
know where and how to invest in the future.
Commercial vs. Residential
The commercial
investment market, however, does not reflect this downturn. In fact,
buying by investors interested in long-term income has increased.
Mr. Stephen Blank from Urban Land Institute stated in an recent
article: "I think it’s a clear mandate from people that you’re going
to make money the old fashioned way.” (Commercial Real Estate Cycle
Peaks and Will Pull Back in 2007. October 2006). In other words, the
market will return to normal income producing investments.
Short-term investments will no longer be as lucrative and
appreciation will slow. The huge profits from the short term "flips"
of the past few years will decrease. Investors will no longer be
able to ignore the numbers; each potential investment property will
need to be analyzed for the long term so the investor can know their
return on investment.
Significantly, for the next few years, cap rates are
expected to increase. Cap rate, short for capitalization rate,
describes how the investment property performs against similar
properties in the same area. There is expected to be a surge in the
number of renters due to high foreclosure rates and the fall in
condo construction. From 2005-2006, there was a rise in vacancies in
multifamily properties because of a massive increase of inventory.
This increase was a result of a large number of apartments being
converted to condominiums, along with new condo construction.
Already in 2007, rentals have increased, as the market is moving
towards people waiting to buy homes while prices continue to fall.
Other upcoming trends for commercial real estate are for warehouses,
storage facilities, and office building, which are expected to
perform better than previous years.
The residential outlook is much different because
many buyers felt that a rebound would occur sooner, some speculated
as soon as 2008. Instead, the worst forecast numbers have doubled,
surprising even some market analysts. The inventory of homes for
sale is grossly elevated, leaving far too many homes on the market
unsold and many newly constructed homes vacant. Real estate
investors who expected to turn a quick profit and did not foresee
the market slowdown own much of this new construction. In a recent
article, Chris Isidore, Senior Writer for CNNMoney.com stated “The
pace of new home sales are expected to fall to 860,000 this year
essentially flat from the estimate of a month ago, but down 18% from
2006 sales”.
Lending Industry
In my article, “Lending Trends
2007,” Tricomm alerted our clients to recent changes in the lending
industry. The article focused on how the 100% residential loans were
defeated and the tightening up of lenders' fists with real estate
investors. The consulting branch of our firm, Tricomm Worldwide
Signature, has directed its Research & Development Department to
look for sellers and seller’s agents that are willing to use more
creative seller financing terms as an alternative to our clients
seeking conventional lending.
We are seeing large amounts of properties being
sold, including commercial real estate, using seller financing. In
recent months, we have helped our clients purchase seller financed
apartment complexes with little money out of pocket. This creative
solution will assist the client in growing and establishing a
long-term real estate investment business. The same strategies are
used to help real estate investors who own residential property
unload their property to investors or new homeowners who are unable
to qualify for a traditional loan.
Solutions for the Future
Our primary goal at
Tricomm Worldwide Signature is to be the leading source for our
clients and real estate investors looking for their next investment.
Tricomm's founder, Dr. J.L. Hutchinson Jr., opened up a business
development company Dr. Hutch International in an effort to help
real estate investors who are trying to continue this as their
business and who would like true passive income.
