What is Value Investing?
Value investing in real estate is a strategy that involves acquiring properties that are undervalued in the market with the intention of generating long-term returns through appreciation or rental income. When an investor can purchase a property below replacement cost, it can even further strengthen the property investor’s probability of success. This strategy has become increasingly popular in the current market conditions for several reasons.
With such rapidly increasing interest rates over the last year, rents have had little time to catch up. Locating positive cash flowing properties is becoming more difficult in most markets. The value investing approach is best considered when the underlying asset(s) are undervalued or below replacement cost. One caveat to this approach is that conservative projections are advisable due to the real possibility that that the investor will need to financially support the property for a period to allow for the rents to increase or interest rates to decline. To better arm yourself with knowledge of real estate lifecycles and investment strategies for each part of the cycle, check out my book, “Look Before You Leap, but Leap!”.
Value investing in real estate is a good strategy in rising interest rate market conditions, despite the potential challenges that come with higher borrowing costs. Here are some reasons why:
Long-Term Perspective on Real Estate
Value investing in real estate is a long-term strategy that focuses on acquiring undervalued properties and holding them for several years or even decades. This approach allows investors to ride out short-term fluctuations in interest rates, the ups and downs of the real estate cycle, and ultimately benefit from the long-term appreciation of the property.
Potential for Rental Income
One of the key benefits of real estate investments is the potential for rental income. As interest rates rise, rental demand may also increase, as more people choose to rent instead of buy homes, due to economic uncertainty and changes in lifestyle preferences. The current market conditions have resulted in a rise in demand for rental properties. This can provide a reliable source of income for value investors, regardless of changes in interest rates.
Inflation Hedge with Real Estate
Real estate investments can also act as an inflation hedge, as the value of the property tends to increase over time along with the general level of prices in the economy. This helps to offset the impact of rising interest rates on real estate investments.
The strength and sustainability of the local economy is integral piece of this Real Estate Value Investing strategy. Despite the economic uncertainty caused by the COVID-19 pandemic, the real estate market in general has remained relatively stable and even strong in many areas. This market stability provides a level of security and confidence for value investors, who can be confident that their strategically selected investment properties will generate consistent returns over the long-term.
Shifting Market Trends
Real estate markets are constantly evolving, and the current market conditions have seen a shift towards more affordable housing options and locations. This presents an opportunity for value investors to purchase properties in up-and-coming areas that have the potential for significant appreciation.
Tax Benefits of Real Estate
Real estate investments also provide tax benefits, such as deductions for mortgage interest, property taxes, and depreciation. These tax benefits can significantly reduce the overall cost of ownership, making real estate investments an attractive option for value investors.
Potential for Price Appreciation
Despite rising interest rates, real estate prices can still appreciate, driven by a variety of factors, such as population growth, economic expansion, and shifts in market trends. As a result, value investors can still generate returns through appreciation, even in a rising interest rate market.
Real estate investments can also provide diversification benefits for value investors, as they are not directly correlated with stocks or bonds. This can help to reduce portfolio volatility and provide a source of stability during periods of economic uncertainty.
In conclusion, value investing in real estate is a worthwhile strategy in rising interest rate market conditions, as it offers the potential for rental income because of the increased rental demand, acts as an inflation hedge, provides the opportunity to take advantage of the shifting market conditions, and offers tax and diversification benefits.
While rising interest rates can pose challenges for real estate investors, a long-term perspective and a focus on undervalued properties can help value investors generate returns and weather changes in the market.
Based upon economic and demographic research, I firmly believe the affordable markets such as Edmonton are excellent markets for the value investor. This is one of the main reasons I chose to become a licensed real estate profession in Edmonton. I would be happy to assist you take advantage of the current market conditions in Edmonton and that of other Prairie communities to create or add to your real estate investment portfolio. Call me at 604-889-1760 to discuss the opportunities, or fill out the contact form below.