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Master the right investing mindsets and develop powerful habits to become a successful Passionate Investor.

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Invest in stocks, bonds, ETFs and mutual funds for a diversified portfolio and hedge against risks.

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Invest in different types of real estate and learn about real estate investing strategies that work for you.

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Invest in cryptocurrency, fine art, and other alternative assets in which you can combine your interests and creative investing strategy.

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Invest in Yourself First

Then invest in assets

The most important investment you should make in your life is yourself – your mindset, health, character and relationships. As you are working towards a whole soul, you will have the confidence and the grit to tackle challenges in life and work.

A diversified portfolio of different assets including stocks, real estate and other alternative investments is key to build your freedom. Everyone’s investment portfolio mix is different and the best one is the one that fits your dream lifestyle.

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  • 7 Best Creative Financing Stratgies for Real Estate Investors

    Innovative investors often leverage creative financing techniques to expand their opportunities. Here are the 7 best creative financing strategies for real estate investors:

    1. Seller financing and lease options
    2. Subject to deals
    3. Real estate partnerships and joint ventures
    4. Creative use of home equity and HELOCs
    5. Crowdfunding and real estate syndication
    6. Self-directed IRAs and retirement funds
    7. Peer-to-peer lending platforms

    In this article, we’ll delve into seller financing, lease and subject to options, which can provide flexibility and unique advantages. Additionally, real estate partnerships and joint ventures enable investors to pool resources, knowledge, and experience to achieve remarkable outcomes. We also explore how tapping into home equity and utilizing home equity lines of credit (HELOCs) can be strategic approaches to finance your real estate endeavors.

    There are more alternative financing sources has opened new doors for real estate investors. Crowdfunding and real estate syndication platforms offer opportunities to invest in properties collectively, diversifying risk and potentially accessing larger-scale projects. Self-directed IRAs and retirement funds provide avenues for investing in real estate tax-efficiently. Moreover, peer-to-peer lending platforms present alternative funding options for those seeking more unconventional paths.

    Photo by Pixabay on Pexels.com

    1. Seller financing and lease options

    First, seller financing and lease options are two powerful creative financing techniques that real estate investors can leverage to achieve their investment goals. Seller financing involves the property owner acting as the lender, allowing the buyer to make payments directly to them instead of securing a traditional mortgage. This arrangement can be advantageous for both parties, as it eliminates the need for a bank or financial institution and allows for more flexible terms and negotiation.

    On the other hand, lease options provide investors with the opportunity to control a property without necessarily owning it. In a lease option, the investor leases the property from the owner with the option to purchase it at a predetermined price and time in the future. This approach allows investors to generate cash flow from the property while having the potential to acquire it at a later date. Seller financing and lease options offer creative ways to structure real estate transactions, providing investors with greater flexibility and opportunities for profitability.

    2. Subject to deals

    Second, subject to deals are a creative financing technique that can offer real estate investors unique opportunities to acquire properties without assuming the existing mortgage. In a subject to deal, the investor purchases the property “subject to” the existing mortgage, meaning they take over the mortgage payments and responsibilities while the loan remains in the seller’s name. This arrangement allows investors to bypass the need for traditional financing and potentially acquire properties with little to no money down.

    However, it’s crucial to thoroughly analyze the terms of the existing mortgage and assess the risks involved. Subject to deals can be a win-win for both parties, as sellers are relieved of the burden of their mortgage while investors gain control of a property with favorable terms. By understanding the intricacies of subject to deals and conducting proper due diligence, investors can leverage this creative financing technique to expand their real estate portfolio and maximize their returns.

    3. Real estate partnerships and joint ventures

    Real estate partnerships and joint ventures are powerful creative financing techniques that allow investors to pool resources, knowledge, and experience to achieve remarkable results. By partnering with others in the real estate industry, investors can tap into a wider range of expertise and capital, enabling them to pursue larger and more lucrative investment opportunities.

    In a real estate partnership, two or more parties come together to jointly invest in a property or a series of properties. Each partner contributes funds, skills, or other resources in proportion to their agreement.

    Joint ventures, on the other hand, involve collaborating with other investors or entities to undertake a specific real estate project. These collaborative arrangements not only distribute financial risks but also provide access to a broader network and shared responsibilities.

    Successful real estate partnerships and joint ventures require clear communication, well-defined roles, and a mutually beneficial agreement. By harnessing the power of collaboration, investors can unlock the potential for greater success and profitability in their real estate endeavors.

    Photo by Timur Saglambilek on Pexels.com

    4. Home equity and HELOCs

    Home equity and Home Equity Lines of Credit (HELOCs) are valuable tools within the realm of creative financing for real estate investment. Home equity refers to the portion of a homeowner’s property value that exceeds the outstanding mortgage balance. By tapping into their home equity, investors can access funds for real estate investment purposes.

    One popular method is through a HELOC, which functions as a revolving line of credit secured by the equity in one’s home. Investors can borrow against their home equity as needed, making it a flexible financing option. Home equity and HELOCs enable investors to leverage their existing property assets without needing to secure additional mortgages or loans.

    However, it’s important to carefully assess the risks and obligations associated with using home equity, as defaulting on HELOC payments can result in foreclosure. By understanding the potential benefits and risks, real estate investors can utilize home equity and HELOCs strategically to fund their ventures and unlock new investment opportunities.

    5. Crowdfunding and real estate syndication

    Crowdfunding and real estate syndication are innovative financing techniques that have gained popularity in the real estate investment landscape. Crowdfunding platforms allow multiple investors to pool their funds and collectively invest in real estate projects.

    Real estate syndication, on the other hand, involves forming a group of investors who collectively invest in larger-scale properties or development projects. These strategies are ideal for real estate investors who want to diversify their portfolios, access larger and more lucrative projects, and mitigate individual risk.

    Crowdfunding and real estate syndication provide opportunities for passive investors to participate in real estate without the need for extensive knowledge or direct involvement in property management. Additionally, these financing techniques are suitable for ambitious development projects that require substantial capital beyond what a single investor can provide. By embracing crowdfunding and real estate syndication, investors can access a wider range of opportunities and potentially benefit from professional management and shared risk.

    6. Self-directed IRAs and retirement funds

    Self-directed IRAs and retirement funds offer investors a unique avenue for financing real estate investments. With a self-directed IRA, investors have the freedom to direct their retirement funds into a wide range of investment options, including real estate. By utilizing these funds, investors can access tax advantages and potentially grow their retirement savings through real estate appreciation, rental income, or property development. This creative financing technique allows investors to diversify their retirement portfolios while gaining exposure to the lucrative world of real estate.

    However, it’s important to adhere to IRS regulations and work with a custodian experienced in self-directed IRAs. Self-directed IRAs and retirement funds are ideal for investors seeking long-term growth and a tax-efficient way to invest in real estate. By leveraging these funds, investors can combine the benefits of real estate investments with the potential for retirement savings growth, making it a compelling option within the realm of creative financing techniques for real estate investment.

    Photo by Monstera on Pexels.com

    7. Peer-to-peer lending platforms

    last but not least, peer-to-peer lending platforms have emerged as a dynamic and accessible creative financing technique for real estate investment. These platforms connect borrowers, typically real estate investors, directly with individual lenders, cutting out traditional financial institutions.

    Through peer-to-peer lending, real estate investors can secure funding for their projects quickly and efficiently. This strategy is particularly suitable for investors who may face challenges in obtaining financing through conventional channels, such as strict credit requirements or limited borrowing options. Peer-to-peer lending offers a streamlined and flexible alternative, providing opportunities for investors with various credit profiles or unconventional real estate projects.

    Additionally, this financing technique is beneficial for investors seeking more control over loan terms and interest rates, as it allows for negotiation and customized agreements. By leveraging peer-to-peer lending platforms, real estate investors can access capital, seize investment opportunities, and diversify their funding sources, making it an attractive option within the realm of creative financing techniques for real estate investment.

    Summary

    Mastering the best real estate investment financing tactics is a game-changer for investors. When choosing the best creative financing strategy, real estate investors should consider factors such as their investment goals, risk tolerance, financial capabilities, property type, market conditions, and time horizon. Evaluating these factors helps investors align their creative financing strategy with their specific needs and preferences.

    Additionally, conducting thorough research, analyzing the costs and benefits of each strategy, and seeking professional advice can aid investors in making informed decisions. By carefully considering these factors and selecting the most suitable financing strategy, real estate investors can optimize their investment opportunities, manage risks effectively, and maximize their returns.

    Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational and entertainment purposes only. Read our full disclaimer here.

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    Your Credit Score Simply Explained

    Credit score is an essential part of everyone’s financial life. By definition, it refers to “a numerical rating representing the perceived ability of a person or organization to fulfill their financial commitments, based on an analysis of their credit history and current financial circumstances.” 

    Credit score represents the responsibility for your financial life and the discipline to fulfill financial commitments. In this article, we will get to the root of credit score and understand this important notion.

    Why You Should Care about Credit Score

    So why should you vex yourself with the nitty-gritty of credit scores? To put it simply, you should care about your credit score because it influences various aspects of your daily life and financial future. 

    With a decent credit score, you can leverage people’s trust in your ability to pay back the money you owe in time on many things in life – different types of loans, mortgages, insurance premiums, credit cards, house/apartment rents and cell phone plans etc. The higher your credit score, the better deal you can possibly get from all the matters mentioned above.

    For example, if you have a higher credit score when applying for real estate loans, you’d likely be approved for a lower interest rate than otherwise, possibly saving fix to six figures.

    Based on data from Informa Research Services, a person with FICO scores in the 620 range would pay $65,000 more on a $200,000 mortgage than someone with FICOs over 760. Your credit score makes a big difference.

    What is a Good or Bad Credit Score

    Photo by Pixabay on Pexels.com

    Now you understand that a good credit score will put you in a beneficial financial position. But what is a good or bad credit score?

    First, there are two companies that dominate credit scoring – FICO score and VantageScore. Both companies score credit from 300 to 850. The higher the score, the better your credit is. 

    Next, let’s take a look at what are considered “good or poor credit scores” for both companies based on Experian:

    FICO Score: 

    • Exceptional: 800-850
    • Very Good: 740-799
    • Good: 670-739
    • Fair: 580-669
    • Very Poor: 300-579

    VantageScore:

    • Excellent: 781-850
    • Good: 661-780
    • Fair: 601-660
    • Poor: 500-600
    • Very Poor: 300-499

    If you are applying for a mortgage, for example, most lenders require a minimum credit score of 620 or higher, although some government-backed mortgages such as FHA loans typically have lower credit requirements. 

    Of course, the higher the credit score, the lower the interest rates you are likely to get – a big incentive to maintain and boost your credit score.

    Generally speaking, a “good credit score” is 670 and above for FICO score, 660 and above for VantageScore;“A bad credit score” is 580 and below for FICO score, 600 and below for Vantage Score. 

    Factors Impacting Your Credit Score

    Photo by energepic.com on Pexels.com

    There are typically 5 factors that play a role in impacting your credit score. Here are the big five and their weight in influencing the magic number:

    • Payment history (35%)
    • Amounts owed (30%)
    • Length of credit history (15%)
    • Credit mix (10%)
    • New credit (10%)

    How these factors will exactly influence your credit score will depend on your unique credit report, so it is always a good idea to do a regular credit report check by yourself or hire credit monitoring services such as Experian and Credit Karma.

    Whether you are planning to buy homes or taking out business loans, an excellent credit score is conducive to your financial health and your ability to leverage. In the next article, we will talk about how to build and boost your credit score in 2023. 

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  • How to Actually Achieve Your New Year Resolutions

    The first day of a new year symbolizes the beginning of a new chapter. It gives us hope and excitement about what we can forge in the next 365 days. Even though our life is a continuous river, we still fancy the idea of a new beginning. 

    That’s why we often make our resolutions at the beginning of a year. It’s not hard to make them – to be honest, everyone can dream. But based on research, 43% of new year resolutions fail before February and only 9% of them are achieved in the end. 

    As disappointing as it might seem, there are some secrets on how to make and actually achieve your new year resolutions like the 9%. Keep reading.

    Secrets for Making New Year Resolutions

    Photo by Antoni Shkraba on Pexels.com

    1. Have deep motivation for it (aka have a strong “why”)

    Make sure you want this goal to happen really bad. And you have deep, healthy, sustainable motivation for it. Maybe this is something you’ve always wanted to achieve for a long time – not a sudden, whimsical thought that would disappear in a week. 

    When you have deep, burning desires for something, you are more likely to take all the right actions that would bring you closer to your goal.

    2. Set attainable and measurable goals

    Set meaningful and challenging goals but also make sure they are attainable and measurable. If they are too difficult or too vague, they will actually deter you from taking actions at all.

    For example, a lot of people hope to exercise more in the new year. Instead of setting the goal as “exercising more”, you could write a more specific, attainable and attainable statement such as “I want to go jogging for 3 miles at least 2 times per week.” 

    You can certainly do more than your goal but the key is to set a goal that is not too hard for you to achieve. Remember, you are in this for the long haul.

    3. Keep the list short

    Your New Year resolution list is not your grocery shopping list or daily to-do list. By only keeping 2-3 priorities on your New Year resolution list, you can focus on what really matters. Too many goals will only dilute your attention and jeopardize your chances of success. 

    Secrets for Actually Achieving New Year Resolutions

    Photo by Andrea Piacquadio on Pexels.com

    4. Break your resolutions into actionable plans

    Now if you have set attainable, measurable goals, this should be relatively easy to do. You could set weekly, monthly and quarterly plans that are actionable. Pick a timeline, frequency and deadline for planning purpose that works best for you. The more detailed your plans are, the easier for you to act and achieve them. 

    At the same time, leave room for creativity when planning – there are different ways to achieve the same goal. Keep it fun!

    5. Turn your goals into habits

    “Habits are the compound interest of self-improvement.”

    Borrowing the wisdom from the book “Atomic Habits” by James Clear, we love this analogy and believe that habits can help set you on an autopilot mode on the journey to achieving your goals. 

    For example, if you want to learn a foreign language this year, you could form a habit of learning through a language app in your morning commute or right before you go to bed. Once you create a habit for your goal, it will become easier overtime. 

    6. Monthly motivation reboost

    Our motivation naturally wanes in the process – that’s why it is important we reflect on why we set the goals in the first place from time to time.

    Set a date every month to review and reflect on our priorities. Reboost our motivation by affirming our intention and actions. Reward ourselves when we fulfill our promises!

    7. Find a community for support

    If you can find a community that helps you achieve your goals, it’s great to have that support system. Surrounding yourself with people with similar goals also pushes you to try harder when you don’t feel like doing much. 

    A great community can provide support and supervision at the same time.

    8. Always come back after a hiccup

    In your journey to realize any long-term goals, there will be obstacles. You might be defeated temporarily or be distracted. But remember to always come back and keep pursuing your goals.

    Just as Winston S. Churchill have said, “Continuous effort — not strength or intelligence — is the key to unlocking our potential.” Resilience is the way. Just keep going.

    Last but not the least, Happy New Year to all the fellow Passionate Investors! Wish you a year of courage, happiness and success!

  • Disney: Fairytale or Nightmare for Investors?

    Photo by Rick Han on Pexels.com

    The Walt Disney Company (NYSE: DIS) has been many investors’ virgin stock pick, because people are told to invest in something they are familiar with. Who doesn’t know about Disney with fond childhood memories from classic Disney movies and family trips to Disneyland? 

    But is Disney stock as enchanting as the company’s brand implies? After all, investors make their decisions on rationality, not rapidity. 

    Is Disney investors’ fairytale or nightmare? Let’s probe the company under a microscope through the lens of the past, the present and the future.

    Past: Disney Stumbled in Market Performing

    Take a look at its historical performance (source: Google Finance) first till late November 2022: 

    Six-Month Performance (10% down):

    One-Year Performance (33% down):

    Five-Year Performance (6% down):

    As we can see, Disney stock has seen negative returns in the past 6-month, 1-year and 5-year time spans (-10%, -33% and -6% respectively). 

    To understand why Disney’s stock has been struggling, we will look at some key events that might trigger these stock price turbulences in recent years. 

    • January 2018 to January 2020: With the acquisition of 21st Century Fox in 2019, rising revenue from its amusement park ticket sales (see the graph below) and the launch of its streaming service Disney+, Disney has been on the upward road. 

    Source: MarketWatch

    • March 20, 2020: The COVID-19 pandemic led to worldwide park & theater shutdowns, causing Disney stock to plummet over 43% from its historical high;
    • March 20, 2020 to March 19, 2021: Over the next year, Disney stock rebounded with a 122% growth when the company’s streaming service Disney+ had gained huge popularity with the rise of home entertainment during the pandemic year;
    • November 2021 to November 2022: For the past year,  Disney stock had been on a downward spiral as Disney+ subscriber growth slowed with fierce competition and broader market sentiments & recession fears also made an impact on the stock.

    The past years have been a rollercoaster ride for the Magical Kingdom’s market performing. Macroeconomics sentiments, the pandemic and market competitions all play a factor influencing Disney’s market performance.

    The Passionate Investor

    Present: A Shake of Disney’s Business Mix

    Photo by Bo shou on Pexels.com

    To truly understand Disney and where the company’s heading, we have to look at its business mix first. With the lingering influences from COVID-19, Disney’s business mix has seen some shifts. 

    According to Walt Disney’s 10-K report of fiscal year 2021, the company generates revenues from two main business segments:  DMED (Disney Media and Entertainment Distribution) and DPEP (Disney Parks, Experiences and Products).

    Under these two segments, there are several lines of business:

    DMED (Disney Media and Entertainment Distribution):

    • The Linear Networks Business
    • The Direct-to-Consumer Business
    • The Content Sales/Licensing Business

    DPEP (Disney Parks, Experiences and Products):

    • Parks & Experiences
    • Consumer Products

    Based on the data from Statista, the Linear Networks business has been the top source of income for the company. According to Walt Disney, the Linear Networks business generates revenue from affiliate fees, advertising sales and fees from sublicensing of sports programming to third parties.

    Source: Statista

    In addition, we can see a noticeable recovery in the revenues from Parks & Experiences in 2022, thanks to the easing COVID policies in different countries and reopenings of Disney’s theme parks. 

    In the pre-pandemic days, it was actually the DPEP (Disney Parks, Experiences and Products) segment that brought in the biggest bulk of revenue (about 37.6% of its total revenue in 2019) to the home castle. Linear network business topped the second (about 35.6% of revenue in 2019). 

    For its Direct-to-Consumer line, which generates revenue from subscription fees, advertising sales and pay-per-view and Premier Access fees, we’ve seen steady growth for the past three years as more people opt for home entertainment. 

    Nevertheless, it is not all smooth sailing for its Direct-to-Consumer business.

    With heavy upfront investment and ruthless competition with Netflix and Amazon in the streaming service space, Disney+ is suffering from an operating loss of nearly $1.5 billion according to Los Angeles Times. Despite its impressive 235 million subscribers, Disney+ is bleeding in exchange with growth.

    Overall, Disney’s total revenue grows about 26% from 2020 to 2022 – an optimistic trend so far. Now with Bob Iger on board again, his management and strategy on each Disney’s business segment will also influence how Disney’s future unfolds.

    We can say that the COVID-19 pandemic really makes an impact on Disney’s money making mechanism – its traditional Linear Network business climbs slowly and Direct-to-Consumer business expands yet faces fierce competition in the online streaming space. 

    The Passionate Investor

    Future: The House of Mouse Ventures into Unknown Space

    Photo Source: Adobe Stock

    As one of the world’s favorite storytellers, Disney brings fantasy into people’s lives in both offline and online experiences.

    In addition to Disney’s investment in building and expanding its streaming service Disney+, the House of Mouse is also venturing into Metaverse, dreaming big to bridge real life and virtural reality.

    The company’s previous CEO Chapek once showed his confidence: “If the metaverse is the blending of the physical and the digital in one environment, who can do it better than Disney?” And the company had already taken actions to enter Metaverse with the appointment of its first “metaverse executive”: Mike White.

    Rome is not built in one day – it will take some time for Disney to build its castle in Metaverse. But this might be right direction. The future is digital. So far, Disney has been doing a good job for staying relevant for generations.

    Whether investing in Disney is fairytale or nightmare is subjective and contextual. But the key is to form your judgement and believe in that story.

    The Passionate Investor

    Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational and entertainment purposes only. Read our full disclaimer here.

  • 5 Property Investment Ratios You Should Know

    Photo by Expect Best on Pexels.com

    When investors evaluate potential investment property deals, they get down to the numbers and the ratios to determine their profitability. Oftentimes, besides the qualitative reasons, it is the numbers that back most of their investment decisions.

    In this article, we are gonna talk about 5 top investment ratios every property investor should know. LET’S DIVE IN.

    1. Cap Rate

    Why this ratio: Cap Rate is the rate of return on a property based on the annual income that the property is expected to generate. Investors compare cap rates of different properties to evaluate their potential return and risks. Generally, higher the cap rates, greater the return and the risk. 

    According to CoStar & JP Morgan, here are some examples of cap rates in different areas in the United States: 

    As you can refer to the above data, bigger and metro-level cities such as San Francisco and New York normally see cap rates in the 3.8%-5.5% range for apartments. 

    Good Range: 4%-12% depending on the location & the type of the property. 

    1. Cash on Cash Return (COC)

    Why this ratio: Different from cap rate, COC takes into account the financing method – if you have taken out a loan, you subtract the annual debt service from NOI before arriving at the annual pre-tax cash flow.

    This ratio is especially useful for investors who value cash flow; investors can decide on the best cash-producing property by comparing COCs among different leads. 

    Good Range: 8%-15% depending on investment strategy

    1. Internal Rate of Return (IRR)

    Formula: 

    Why this ratio: IRR measures the profitability of a potential investment taking into account the time value of money; it tells about the annual growth rates of an investment over the holding period. 

    Another similar ratio you might have heard is called ROI (Return on Investment) and it is calculated by:

    ROI = (Current Value – Original Value)/ Original Value)

    But ROI does not consider the time value of money like IRR does, therefore IRR might give a better picture of how the property profits for the given period of time.

    Good Range: 10%-25% depending on the property type & the holding period etc.

    1. Rent to Value 

    Why this ratio: rental income is one of the most common passive income that real estate investors can earn. Therefore, generally speaking, the higher the rent-to-value ratio, the better the deals. 

    If you are a cash flow person, you would be familiar with the 1% (and 2%) Rule, which states the monthly rent of an investment property should be equal to or no less than 1% (and 2%) of the purchase price. 

    Good Range: equal to or more than 1%

    1. Break Even Ratio (BER)

    Why this ratio: BER tells you the minimum occupancy needed to cover all operating expenses and mortgage payments for a rental property.

    By comparing the property’s BER and that of similar properties in the market, one can tell whether it is a good or risky investment opportunity. 

    Good Range: lower than the local market’s average occupancy rate

    Summary

    In addition to the ratios mentioned above, there are also other ratios that can inform investors of their deals: Return on Equity (ROE), Gross Rent Multiplier (GRM) and Equity Multiple (EM) etc. 

    Luckily, there is an easy way to calculate all of these ratios in one place: DealCheck, which I personally use for calculating financial ratios and evaluating potential deals – hands down, one of my favorite deal analysis websites of all time. 

    Use the promo code PASSIONATE for 20% off when you purchase any products on DealCheck! Sign-up link here. 

    With DealCheck, you can view your property analysis and financial ratios in one place: 

    All these investment ratios tell different sides of the property deal. Depending on your investment strategy, you can compare the ratios among different properties and decide on which is your best bet. 

    In addition, remember, these financial ratios can be influenced by various factors including location, property type, interest rates, holding period and market inventory etc.

    When comparing a ratio among different properties, we shall also try to hold the other assumptions the same. That way, we can arrive at a well-supported conclusion that powers our investment decisions. 

    Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational and entertainment purposes only. Read our full disclaimer here.

  • The 4 Stages of Real Estate Cycle & How to Invest

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    What are the 4 Stages of Real Estate Cycle

    In 1933, American economist Homer Hoyt discovered that each real estate cycle on average lasts for 18 years and each cycle consists of 4 stages (and their respective characteristics): 

    (source: via realvantage.co)

    1. Recovery (declining vacancy and no new construction)
    2. Expansion (declining vacancy and some new construction)
    3. Hyper-Supply (increasing vacancy and more completions)
    4. Recession (increasing vacancy and less completions)

    The typical 18-year real estate cycle can be influenced by factors such as overall economy, government regulations and policies etc. The most recent examples are the Fed’s quantitative easing program during the coronavirus pandemic and interest rate hike in 2022, influencing interest rates and people’s willingness to buy properties. 

    How to determine the current stage

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    Just like economic cycles, real estate cycles are shown through several indicators. For real estate, we often look at:

    • Occupancy/Vacancy Rate

    When the real estate market is at the Recovery and Expansion stage, occupancy is growing and vacancy rate is declining; During the Hyper-supply and Recession stage, vice versa. 

    • Property Prices/ Rental Rates

    At the Recovery stage, property prices and rental rates tend to remain low due to the excess supply of housing from the Hyper-Supply stage. 

    As we move to the Expansion stage, prices begin to grow and reach a peak entering the Hyper-Supply stage. Then, prices are gradually increasing at a slower pace and eventually dropping during the Recession stage.

    • Sales Volume

    Sales volume indicates the level of demand and buyer enthusiasm. Normally, sales volume reaches its peak between the Expansion stage and the Hyper-Supply stage.

    As prices skyrocket in the Hyper-Supply stage and intimidate buyers, sales volume decreases and continues to do so in the Recession stage. In the Recovery stage, sales volume slowly climbs. 

    • Unemployment Rate / Income

    Another factor influencing the demand is unemployment rate and income. Real estate is one of the most capital-intensive assets, therefore the real estate market is expanding with a lower unemployment rate and higher income level, vice versa. 

    • New Construction

    When real estate developers see the opportunities in a growing market, they construct new housing to meet the demand. This often is the main indicator on the supply side of the equation. 

    As shown on the graph above, as the market goes from the Recovery to the Recession stage, new construction swells, leading to an oversupply of housing and a surge in vacancy rate.

    So which stage are we at now

    Using some of the indicators discussed above, we can get an impression of which real estate cycle stage we are at now:

    • Property Prices 

    According to FRED, Median Sales Prices of Houses Sold for the United States had been declining during the 2008 global financial crsis and the 2020 COVID-19 pandemic as sales prices tend to fall during economic downturns.

    As of Q3 2022, median sales prices in the US have still been climbing since 2020. But we have seen home prices in many cities across the US declining for the past 3 months (the darkest color represent the most drop in home prices):

    For example, San Francisco has seen a 4.33% drop and Austin has seen a 5.01% drop in home prices for Q3 2022.

    As many economists predict we are entering a recession, this suggests that we are likely at the intersection of the Hyper-Supply and Recession stage of the real estate cycle.

    • Sales Volume

    According to TradingEconomics.com and NAR, sales volume has been declining since January 2022, signaling the cooling of the inflated US real estate market. This downward trend suggests we are entering or already at the Recession stage.

    • New Construction

    Let’s look at the supply side of the equation: new construction. According to FRED, new construction in the U.S. (in this case, we refer to New Privately-Owned Housing Units Completed: Total Units) have been consistently declining during almost all past recessions. 

    And we haven’t seen the downward trend this year just yet – in fact, the macro trend suggests that new construction has been increasing since 2011; perhaps there is a recession looming on the horizon.

    Summary

    Taking into consideration the three factors we mentioned above – high yet recently dropping property prices, shrinking sales volume and increasing new construction, it is reasonable to infer that we are likely at the Hyper-Supply stage now and entering the Recession stage of the real estate cycle. 

    How can we invest in real estate at the current stage

    Photo by Frans van Heerden on Pexels.com

    During the Hyper-Supply stage and the Recession stage, you will see property prices falling, vacancy rate increasing, sales volume shrinking and new construction ramping up, leading to an oversupply of properties. 

    When panic selling starts, property prices begin to fall sharply and it can be more risky for investors to buy properties because they might have to wait for a long period of time before seeing house prices rise again. 

    But this also represents opportunities for investors to buy properties during this stage. Here are some ideas and investment strategies:

    • Buy properties at discounts

    When the Recession stage arrives, high prices drive a lot of buyers and owners out of the market, causing their inability to pay for mortgages and thus foreclosures of homes. 

    Pay attention to these foreclosed properties and you might be able to find bargain deals that are great investment properties. 

    • Adopt a buy-and-hold strategy

    Buy-and-hold strategy refers to a strategy when investors purchase a property and hold it for an extended period in order to reap the benefits of recurring rental cash flows and property value appreciation. 

    In fact, this strategy works well during all stages of the real estate cycle if you are patient.

    • Be flexible in your investment strategy

    Whether you can be a successful investor in real estate throughout the 4 cycle stages also depends on your ability to adapt and react. For example, if you are focusing on investing in short-term rentals and flips in the past, you might consider switching to long-term rentals to avoid rising vacancy rates and low liquidity in the market.

    After all, the best deals and the most agile strategies shine throughout all 4 real estate cycle stages.

    Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational and entertainment purposes only.

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