Why Construction Costs Are Fluctuating and How They Impact Real Estate

 
One of the things that seem to concern a lot of investors these days is the rising cost of building materials and new constructions in general. My clients and some of those who attend our seminars often ask me whether they should change where they plan to buy, or even reconsider their plan of investing in real estate altogether. Here’s what I tell them – where you invest doesn’t make a difference. And over the long term, it’s still going to make you money despite the rising costs. There are other factors to consider while choosing where and how to buy real estate.

Construction costs are rising.

Take lumber – the costs have fluctuated greatly in the last couple of years alone. There are a few reasons for this: the wildfires we’ve had in California, Oregon and so on, is one of those reasons. Then there is the fact that prices of lumber coming in from Canada have gone up as well. Canada has had to deal with the bark beetle infestation that has impacted millions of acres of wooded areas. All of these reasons have caused shortages of lumber, which in turn has caused the prices to increase rapidly.  They have come back down to an extent, but are still much higher than they used to be. So yes, construction costs have gone up because of price rises in lumber.
And right now everything is costing more. There’s sheetrock, PVC and other raw materials that now cost more. Plus builders and developers have to deal with permit costs going up. So overall, real estate prices are rising. I’ve also been speaking about rising inflation because of the enormous amounts that the government has been pumping into the economy. So rising prices are almost unavoidable right now. But should that impact your investment decisions?

Rising prices should not change where you’re investing.

A lot of people have asked me recently if they wouldn’t be better off investing where real estate prices are comparatively low right now. And I tell them it doesn’t matter! The fact is that prices are going up across the board – regardless of which geography you decided to invest in. So this is not a relevant criterion.
What is relevant is what you buy and how. At the risk of repeating myself, I have to say that single family homes are still your best choice. Not only do you get great returns over the long term, your real estate investment generates a passive income right away in the form of rent. And again, you cannot go wrong with the 30-year fixed-rate loan. It is this that has the potential to be really life-changing for you.
Check out my latest episode to know more about why higher construction costs right now are not germane to your real estate investing decisions. In this short video, I crunch some numbers and explain why other considerations are much more important when making a decision. 

Is A Recession Coming And Should You Be Worried?

How Can You As An Investor Respond To A Possible Recession?
Among the many questions that I’ve been getting recently at our seminars and from our clients is about recession. “Is a recession coming?” It’s boom time so the apprehension is that a bust will follow. Historically as well, we’ve seen this happen more than once. It happened during the early 90s when there was a downturn in the economy lasting a few years. And, of course, we all remember how the boom times of 2006-07 were followed by the recession of 2008, which lasted several years. So are we looking at yet another recession now?

There are similarities in both periods.

In the late 80s as well as around 2006-07, we saw some great boom times right before the economy experienced significant recessions. The real estate sector really suffered during the 2008 recession as well. We have come to expect this recurring boom-bust kind of cycle in the economy. We are experiencing something of a boom in the real estate sector right now as well.
If you’re someone looking to invest in real estate, you’ve probably been asked to get on a waiting list because the demand is high and supply is comparatively low. The prices of building supplies are also going through the roof. In spite of higher prices though, people are still flocking in to buy real estate. If lots of people are looking to buy, that means it’s boom time now and recession will follow, right? This is the general understanding of the situation, but it isn’t necessarily the case.

There are also significant differences between both periods.

Things are actually different right now in 2021 than they were in 2008. Though property prices are high and building materials prices – lumber for instance – are also high and rising, there is no real cause for worry. Right now, there has been no precipitating factor such as the subprime crisis that we saw around 2008. At the time, lending was indiscriminate. Practically anyone could get loans and often they would receive 100% of the purchase price or even more as the loan amount. There were other reasons that accelerated the crash at the time, as I explain in this podcast.
However, things are different today. With the moratorium on mortgage payments during the pandemic now coming to an end, people are afraid of foreclosures. However, most lenders are willing to tack on the forbearance amount to the end of the loan for no extra charge. There is no crisis of the sort we’ve seen in the past. We have rebounded from the pandemic lockdown pretty well! Also, the regulatory oversight is better and loans are much more difficult to get. For one, we now have in place the Frank Dodd Rules. 
So I doubt we’re going to repeat a crisis like we had in 2008. Yes, the craziness, the boom, will subside, but I don’t think it will go into a recession. For a more detailed analysis, check out this episode.

Inflation Forecast & Its Impact on Real Estate Investing

Why Real Estate Investors Need Not Be Afraid of Inflation
A lot of people think of inflation as a dirty word – after all it means that your dollar is less valuable. When inflation goes up, prices go up too, and you can buy less with the same amount of money. This sounds terrible to most of us. However, I have spent decades creating wealth for myself and for ICG investors, and over the years, my experience with inflation has been different. I can tell you that inflation, if it is indeed coming, could actually be a good thing.

Inflation on the horizon?

Look at the news headlines over the past year or so, and it is easy to see why people are predicting higher rates of inflation in times to come. The government has been pumping trillions of dollars into the economy after the pandemic wreaked havoc on factories, industries and businesses. It is expected that trillions of dollars more have been printed; perhaps are still being printed.
So basically there is a lot more cash in circulation and the same amount of goods and services available to buy. This is a classic situation for inflation. So yes, inflation is probably around the corner for us all. Yes, your dollar and mine will not go as far as it used to. But guess what? This isn’t a bad thing. In fact, this could actually be a good thing, as I have found over the many years of experience I have had in the real estate investment space.

Why inflation is not a bad thing.

Over the decades I have seen some really high rates of inflation. I have seen high rates of interest and difficult mortgage terms. However, even as things cost more at the supermarket and the raw materials for building homes such as lumber goes up, there is a silver lining to the cloud. Think about it – when prices go up overall, this means that your property value goes up too. 
Inflation also means higher rents. With everything costing more, this rise in rents is a natural consequence. This means that the passive income that your real estate investment generates also goes up. However, while everything around you is going up and becoming more costly, one thing remains the same – the amount you repay as and by way of your loan repayment. While the repayment amount might seem like a lot now, by the time you’ve repaid your loan, it’s going to seem about the same as a fancy meal out somewhere!
When you’ve opted for the 30-year fixed-rate loan, you’re paying the same amount over the years, regardless of inflation! And that is why I always tell people that the 30-year loan is a gift they cannot refuse; a gift that keeps giving over the decades. This is the reason I tell people that this loan is life changing for investors. Join me as I explain why inflation is not your enemy. 

Which is The Best Real Estate Market for Investment Right Now?

Why My Favorite Real Estate Market Is Subject to Change
You know we have a lot of lively and informative discussions during our quarterly expo events. If you like, you can check out one of these here or here. I also get a lot of questions about investing, markets, future returns and so on. People also want to know – which is my favorite market to invest in right now. Well over the years, I would recommend investing in one or another market, but it’s not as if I have one clear favorite. I’ll explain.

How to choose a property market to invest in.

There are different parameters to consider before you invest in real estate. An important consideration for investors is, of course, the price. You will want to invest where prices are still reasonable; where they are likely to rise, and give you good returns in times to come. Otherwise your investment makes no sense. Another important consideration for a lot of investors is whether the price-to-rent ratio makes sense. You want to start generating that passive income for yourself and make your investment start to pay for itself. Then there are property taxes to keep in mind as well.
So right now, Oklahoma City is a market that makes sense because the numbers are good. Tulsa also makes sense for many of the same reasons. On the other hand, Central Florida makes less sense because the numbers aren’t all that favorable and Atlanta makes even less sense because availability itself is a big issue. And then there are other areas such as Raleigh-Durham and the Research Triangle. These are also popular with investors though the numbers don’t make as much sense, as I explain in my podcast.

Why inflation is the real estate investor’s friend.

However the numbers aren’t the only important aspect to look at when you’re investing in real estate. More important than where you’re buying is what you’re buying and how you’re buying. So, like I always say, it is a consistently good idea to invest in brand new, single family homes. Those will give you the best returns. And I recommend large metropolitan areas in the Sunbelt states right now.
Most important in my book is how you buy. If you’re not opting for the 30-year fixed rate loan, you’re rejecting a gift! That 30-year fixed loan is life changing and is going to be even more so in times to come. You probably know how the government has been pumping trillions into the economy and is planning to print trillions of dollars more. And what happens when there is more cash in the system? Inflation! And in the context of the 30-year loan scenario, inflation is your best friend. You’re going to be repaying the same amount over the next few decades, and that amount is going to seem like less and less as the years go by.
So if you have a favorite market but you feel the numbers are not so good there, it could well be that we can make it work for you. Check out this episode to know more about how to invest in real estate and what to do after you’ve made your purchase.