- Don’t try to time the real estate market, advises an investor who owns 137 rental units.
- Instead, use his “best use of capital” method to find the smartest way to invest your money.
- The best use of your capital might be to buy a new property or improve the one you already own.
The age-old advice not to time the market doesn’t just apply to stock market investing.
It’s the same with real estate, a New Hampshire-based investor who owns 137 rental units told Insider: “At the end of the day, the time in the market will always beat the timing of the market.”
Matt, who calls himself “The Lumberjack Landlord” for privacy reasons, has been building his rental portfolio since the early 2000s. After two decades of following his buy-and-hold real estate investment strategy, his portfolio is paying off now over six figures in rental income every month. The insider reviewed copies of his tax cards and payments from tenants who verified those details.
“I would love to buy at the perfect time,” he said, “but over the past decade there has never really been a perfect time to buy.”
Rather than focusing on buying at the “ideal time,” investors should focus on what Matt calls the “best use of capital,” or BUC, method.
The concept is as it sounds: use your money in the best way possible, based on your personal situation as well as what is happening more broadly in the housing market.
For example, with mortgage rates still above 6%, owning a home is much more expensive if you finance now than in 2021, when rates hit a record low of 2.65%. Higher interest rates mean a higher monthly mortgage payment. That’s not to say it’s impossible to find a lot on a property right now — it’s just harder, Matt said.
If you can’t find a great deal in your specific market right now, maybe you should invest your capital elsewhere, he explained: “Your best bet might be to upgrade the unit or units you you already have, because then you could become stronger. the rents.”
The opposite could be true, he added. Maybe you’d be better off postponing repairs and renovations since inflation has dramatically increased the cost of materials. Instead, take the money you intended to use for renovation projects and set it aside for future investment properties.
If it doesn’t make sense to buy a property now Where upgrade the units you already own, you can’t go wrong boosting your emergency fund. It’s more important than ever to have a strong cash cushion, said Matt, who expects to see a high number of delinquencies in 2023 as the United States could enter a recession. If you own rental units, he recommends setting aside six to eight months of operating expenses (including the mortgage) in case your tenants lose their jobs and can’t pay their rent.
“Everything must be financially assessed through the BUC method,” he stressed. “What is my best use of capital if I have X amount of capital?”
If you think your best use of capital is investing in rental property, here are Matt’s three tips for buying in today’s market.
1. Understand what an “average deal” is in your market so you can get a “good deal”
Matt is always on the lookout for deals that make sense to him, regardless of the economic climate or what’s happening in the housing market.
He doesn’t necessarily care about rising mortgage rates, which hit 7% in October, as long as his return on capital – the profit he could potentially make from his real estate holdings after accounting for expenses – is what he considers himself “great,” he said.
“To understand what a good deal is, you have to understand what all the other deals are,” he explained. If the duplexes in his market bring in an average of 7% per year, he looks for offers that will bring him at least 10%, he explained. “It doesn’t matter if the mortgage rate is 6% or 16%. All that matters is my return on that money.”
He recently financed a property with an interest rate of 7.25%, he said: “I’ve done some high rate deals. They just have to produce great returns.”
2. Be up to date on rental prices in your area
The key to getting a great return on capital is understanding the rental prices in your market.
“I think where a lot of people make mistakes in real estate transactions, they’re not looking at the income side. They’re assuming what the rents are,” he said. “I’m very aware of the amount of rent. There are products like Rentometer, but they’re usually up to three to six months behind schedule, and that’s a problem when rents are going up as quickly as they are. are. .”
Knowing what he can rent a unit for is critical to his success, he pointed out: “Some deals seem to have a marginal return depending on what you’re thinking, but maybe you’re under the market.”
It helps that he invests exclusively in New Hampshire and has his own portfolio of over 100 units to figure out rental rates, but he also reaches out to other landlords in the area and asks what they are renting their properties for.
3. Do your due diligence before renting your property
When it comes time to list your property and rent it out, you need to carefully assess potential tenants.
Matt looks at three specific criteria when selecting tenants: their credit score, their income, and whether or not they’ve been evicted in the past. An earlier expulsion is a red flag, he said.
As for income, his golden rule is that the tenant earns at least three times the monthly rent. For example, if rent costs $1,000 per month, his tenant’s net monthly income is at least $3,000.
Looking only at income is not enough. After all, someone can make a lot of money but be irresponsible when it comes to making monthly payments.
“Often, credit score is directly or closely correlated with whether people are able to pay their rent,” he said. “It shows they care about their credit and pay their bills on time.”
Ultimately, he wants to avoid evictions, which can be costly and time-consuming. He acknowledges that in tough economic times, tenants could lose their jobs and not be able to pay their rent. He tries to anticipate this possibility by staying in communication with his current tenants.
“I’d rather a tenant say, ‘Hey, I lost my job,'” he said. “That doesn’t mean I’m going to rush the process to get them out. It means I’m going to try to work with them.”