The mortgage meltdown can be partially attributed to investors that thought property demand and appreciation would never end. When demand abruptly stopped, values followed. Soon enough, excess demand turned into an abundance of supply. Things can change that fast in the real estate industry and any business in general. Your property and neighborhood can be the rave one year, only to be relegated to collecting dust the next. It is important never to base your business on current demand. Instead, focus on where the market is heading next.
Trends are certainly worth looking into, but they are only trends and not a guarantee of where the market is headed. Market preferences can change in an instant. One year, multifamily properties may be in demand, only to give way to condos in the next. If you put all of your eggs in one basket, you run the risk of being exposed when the market shifts. Diversification is a term often associated with stock market investing, but it certainly applies to real estate as well. The more spread out your holdings are, the less chance you will be impacted by changes in market demand.
We are currently in an extended period of increased demand for rental properties. Renters still feeling the effects of the foreclosure market and an unstable economy are reluctant to look to purchase. This has caused an increased demand for rentals in each of the past four years. This may have changed the way you view your portfolio. Instead of selling, you have probably rented your properties. With each lease cycle, you face the decision whether or not to put the house on the market or continue to rent. Rental demand doesn’t look to be slowing down any time soon, but when it does and those renters turn into buyers, you want to position yourself to take advantage of it.
The same can be applied to any home remodeling projects. Hardwood floors and granite counter tops are currently in demand, but what effect would this have on your property if feelings suddenly changed. Quality work will never go out of style, but if you are constantly looking to capture what the current trends are, you could end up having an outdated property or one that you will have to spend money on in the future.
Think about all of the things in the past year that quickly came and went out of demand. From TV shows to silly bands, the market is very fickle and falls in and out of love with things very quickly. The real estate market is no different. Never ignore the data that is given in a particular area or on a particular property, but never count it as fact either. Demand and trends can stay the same for years and then suddenly do a complete 180 and change everything. What would happen to your portfolio if the market shifted next month? Would you be able to brace for the change and come out the other side? If the answer is no, you need to look at your portfolio and make the appropriate changes. It is always better to change when you want to instead of when you have to.