We previously introduced you to the downtrend in the luxury real estate market in this blog post. But what are the implications? And should real estate investors be rethinking their portfolios?
Touchstone Group’s Managing Partner Courtland Townsley shares his expertise on what investors need to consider today, tomorrow, and into the future.
Should investors be worried? What changes should they make to their strategy in the short term?
No, not at all. But they should make some adjustments and reset their expectations. Four key items that come to mind:
- Flip-and-fix investors need to be very conscientious at a micro-level of what’s going on in the neighborhoods they’re purchasing in. They need to ensure they’re not overpaying for properties to account for potential sales times.
- If you’re an investor that typically purchases higher end properties, I strongly urge you to consider diversifying. Don’t put all of your eggs in one basket. Hire a good broker that will help you find properties in neighborhoods that are out of your comfort zone.
- Along the same lines, work with reliable designers and construction companies to make sure you’re maximizing resale value on luxury properties and moving them as quickly as possible.
- Keep deals small to minimize the risk. Target small developments (4-6 units) — don’t overextend on larger developments.
If investors have existing high-end flips in progress, what should they do?
Adjusting their value expectations. They must understand that they may need to be more flexible in their negotiations in a softer market. They could also provide something, in the form of amenities, etc., that their competition doesn’t have to better differentiate their property.
What should investors be considering for the long term?
Investors need to very acutely track what’s going on in these luxury markets. If trends continue, investors should opt for small scale cash-flow opportunities (2-4 units, condos, etc.), as I previously mentioned. These multifamilies could be a great hedge.
Because right now, it appears that people are going to continue to rent. At some point, yes, millennials will have to realize that renting forever is a waste. However, high student loan debt and underemployment are big factors in this economy, and [Millennials] don’t feel comforted that the jobs that they have will support the long term contract of buying a home.
Is there anything coming up on the horizon that we should be looking out for?
When it comes to specific properties, we’re actually seeing more opportunity for condo deconversions. Many of our investment clients have found value in this climate by purchasing a building with multiple condos and turning it into rentals.
In general, investors should be aware that the potential softening of the economy or an overcorrection will create a negative ripple in an already soft sales market.
We’ve talked a lot about investors in this market. Should brokers also be changing their game plan?
Definitely. With the lack of inventory, there are depleted opportunities for sales. And with lack of demand, there are fewer buyers looking for homes to purchase. So brokers should cater heavily to what clients are looking for today in their market, whether it’s working with investors, focusing on urban leasing, or refocusing on specific, growing neighborhoods.
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