This is the second part in our series on REAL ESTATE purchasing and investing. Read Part I here.
What is an exit strategy?
An exit strategy is an understanding of how to go about selling a property or getting out of an investment. Investments like a business, art, jewelry, or real estate are less liquid than assets like stocks or bonds. Meaning, a specialized marketplace is needed in order to sell them, and this marketplace can dictate the return of the investment. In a very active marketplace, like for stocks or bonds, assets can be sold in a short time frame, as quickly as same-day. Real estate, however, could take years.
An exit strategy requires an understanding of the market in which the property is embedded. For instance, it was a lot easier for me to sell a property in New York City than in Barbados. Another important factor is how liquidity transitions over time.
An exit strategy takes into account, could you rent out that property? Are there property managers around that could care for it? If you had to move away, could you make enough money out of renting it to cover your expenses?
Is a property purchase high risk?
Absolutely any investment involves risk. Real estate, though less risky than a lot of other assets, has the risk that it won't be salable. I always tell people that a well-lived life is going to take some risk, and you have to decide what's right for you.
One of the biggest things you should consider is: what stage of life are you staring down? This is not an age thing. For a hypothetical 20 year old, who wants to travel, a fixer upper isn't going to make sense. A condo in an apartment building that could be rented out simply- now, that's a great way of entering the real estate market. The 70 year old who wants to go travel, should they be buying a fixer upper? The answer is probably the same, probably not.
In addition to stage of life, other good questions to consider are: Do you like managing a property? Do you like designing a property? The more you enjoy owning a property, the more you want to use it, or the more you can make use of that property to earn you income all decrease the risk of ownership.
Do you consider real estate to be a fun kind of investment?
I would, someone else may not. A friend who is an interior designer has made a side hustle out of buying properties, fixing them up, renting them out and then selling them to somebody else. To me, this sounds like hell. It's so personal.
It is nice. You can you can touch it. You can visit it. You should buy it in a location, and (especially if it's an investment) that you'd like to visit because you are likely going to have to check in on that property. If you don't want to travel to that property to check in on it and ask questions, then it's going to wind up being a stress point. So, yes, it's fun, and it's sexy, but you have to check in on: where are you? Where are you in your life? Are you going to want to check in on this property? Are you going to be okay with the potentiality of it not being able to be sold right away like you can with a stock. So I like a blend. I like to invest in stocks, because I like to research companies and invest in what other people are doing. I also like real estate because I like the creative part of it. So again, it's understanding your own personality and the stage of life that you're in.
How do you negotiate?
Well, I had a very smart person once tell me, you make your money on your purchase price. His point was that if you overpay at the beginning, it establishes a habit: you're very likely to then have to overpay for your contract, overplay for all your design- so I'm very picky on the purchase price.
The Ackermann system of negotiation is well explained in a masterclass run by Chris Voss, an FBI hostage negotiator. He relates it to your everyday life (including negotiating with your teenager): the Ackermann system says you would offer 65% of what you want to pay. So if you wanted to pay $100,000, you would offer $65,000. That's quite extreme. I'm doubtful that in most marketplaces that you can get away with only offering 65% of what you want to pay, but I'm just giving you the spirit of his negotiation. And then talk about it, make them feel good about what they're selling you. But give them 65%, and let them come back and say something to you, because you're gonna get a lot of information back. His point is to say something, and then see what they say and take on what they say. And then you get information back. And then he will say, increase your offer to 85% of what you want to pay. Again, get information back from them, then increase it to 95% of what you want to pay. And then you should finally start to lock into a deal. If the markets are hot, that is not going to work because someone's going to be willing to negotiate to be at at a price of 110% of the asking price. So it's not always possible to use this system in real estate, but potentially if you're in a typical market that is not steaming. He's just saying, pull back your offer, get information, offer a bit more get information and then get closer to your to your price. It's hard to do that when you really want something, but like my friend said, if you overpay at the beginning, you're likely to overpay and overpay, and you're gonna get very outside your budget. Sometimes you just have to wait and and wait for markets to turn as they have recently with interest rates going up.
What global factors affect real estate prices?
One of the biggest things that affects real estate prices is interest rates. And we've seen recently, we've had a lot of inflation, which has pushed up interest rates, the interest the inflation has come from outside influences. Russia invades the Ukraine makes a mess out of the precious metals and the oil markets globally. And that has shifted down. And then of course, we were coming out of COVID. So we had supply chain issues that all pushed inflation, FED comes in and says we don't want inflation, so we're going to increase interest rates. And when you raise interest rates, all of a sudden, there're less buyers around and market prices start to fall. So that is like that is like the perfect scenario of how something happening on one side of the world will land on your doorstep.
Another thing to watch is commodity prices. Those have big influences in what we have to pay for our goods, and if you have to pay more for food, it means you have less money to pay for your mortgage.
Watching the real estate market overall is also important. How much has it moved? If prices are up 50%, 25%, you're probably going to run out of steam soon because people's salaries have not kept up. That's another useful thing to look at: salary. How much can your neighbour afford before they're going to be completely tapped out of being able to afford their mortgage? Salaries are more of a community thing, but certainly a very, very big influence on what we are able to pay. What is the stock market doing? If the stock market has cracked, people have less gains on their investments, their pensions have gone down. So they're, again, they're going to have less money to pay for houses. So I would say those are the three biggest things I would watch if I wanted to kind of get an indication of what real estate prices in my area may do.
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