There is one factor that could seriously throw a wrench in the plans of many real estate investors if they aren’t paying attention. Over most of the last seven years, there was significant downward pressure on most costs associated with real estate investing, buying, selling and building. That all really started turning around in 2012 when the new housing rebound really found its legs.
Most real estate investors, including most aspiring investors, have read about how property is a great natural protection against inflation. It is, but this is different to the operations of running a real estate investment business and daily management of acquiring, fixing and flipping houses.
Unless real estate investors pay serious attention to inflation and its potential impact, many could find that they are in trouble and their business model is falling apart. Keeping on top of factors like this is critical for success and being able to capitalize on investment opportunities. When you can’t and you stop growing, just surviving can rapidly become a challenge. Real estate investors need liquidity and profitability to be able to be proactive. Without this, it’s all downhill.
So how does inflation play into this? As the housing market and economy improve, so are the costs of many products and services required to invest in real estate. This can mean thinning profit margins or even negative cash flow if investors are not careful and ready to account for it. So what’s going up?
Property taxes certainly will go up. This may take some time and will vary depending on how often counties assess values. For example; on Long Island, some counties have gone from annual assessments to every four years. This may not affect wholesalers too much, but needs to be accounted for by buy and hold landlords.
All types of insurances are likely to keep heading up. This runs the gamut from business insurance to homeowners insurance, storm coverage, and of course health insurance. For some, this may mean a rise of just a few dollars a month. Others that have recently acquired new construction properties may see huge jumps in annual taxes.
Labor is where some of the most significant increasing in costs are happening. Some real estate businesses and even the intermediary agencies they have been using are feeling major sticker shock. The cost of contractor labor will likely rise on demand, especially if there are new disasters. Meanwhile, freelancers are upping their rates as content and online marketing become more important and quality is in need.
Building on the above, the hottest marketing mediums will see new products and services rolled out and an increase in costs. Don’t sweat it, other mediums will return and emerge that will be more cost effective.
Borrowing fees have already increased. With fewer banks offering free checking and finding new ways to charge clients, we may see more, at least until it becomes more competitive and trends are driven the other direction. In the meantime, look for alternative banking options and work on building relationships that can reduce these costs.
Home prices are certainly headed up and are expected to keep rising for the foreseeable future. For most, including investors, this is an awesome thing. However, it appears to be ironically ticking some real estate investors off after being spoiled with dirt cheap bargains for years. On the bright side, institutional investors like Blackstone have decreased their competition in the market by as much as 70% or have even completely iced acquisitions in 2014 in favor of lending to small investors and landlords. Just build in these increases, factor them into spreads and enjoy the big boost to wealth.