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If there was ever doubt about the profitability of real estate, a look at recent appreciation figures should put the argument to rest. According to a report by the S&P CoreLogic Case-Shiller U.S. National Home Price Index, U.S. national home prices have surged a meteoric 47% since 2020.

However, just as home values can surge, they can also stagnate. The interest rate roller coaster we are now experiencing and the possibility of vacancies and repairs have made real estate too much of a white-knuckle ride for many looking for a stress-free investment. 

For those willing to hold their nerve and play the long game, real estate can be an amazing vehicle for passive income, retirement, and generational wealth—provided you minimize your risks by avoiding common mistakes.

Why Real Estate Is Such a Good Long-Term Investment

Before delving into the dos and don’ts of investing, here are a few facts about the current market that recently highlight some of the benefits of buy-and-hold investing.

A 20% increase in 12 months after COVID

Low inventory has caused home prices to increase at an unprecedented clip, rising 20% in 12 months nationwide as of 2022, immediately after the pandemic, adding hundreds of thousands, if not millions, of dollars to personal home values and investment portfolios. 

Home prices have risen by more than double the inflation rate since 1960 

“If home prices had merely kept pace with inflation, the median home would cost only $177,500 today—compared to the $431,000 it actually costs,” said Matt Brannon, who authored a study for Clever Real Estate.

Buyers need to earn far more than they once did to be able to buy a home

A Zillow survey found that homeowners need to earn 80% more to comfortably afford a home than they did just four years ago. This means that there will be an increasing rental pool for landlords.

Buying with a high interest rate is better than waiting for rates to fall

Buying a home in recent years was like jumping onto the side of a runaway train and holding on for dear life. Though the speed of growth has finally slowed down, getting some skin in the game before rates drop and prices increase is a prudent move—provided you can afford it. Yes, renting in the short term might be cheaper, but if you buy for the long term, you will do better financially.

“Buyers who can afford to may want to get serious about their home search now, as housing costs are unlikely to fall anytime soon. The uptick in listings should be another motivator for buyers,” Redfin economic research lead Chen Zhao said in a recent report.

How to Play the Long Game

Buyers today need to invest with a long-term strategy in mind. Expecting to find a turnkey home that cash flows from day one—unless you are assuming a mortgage or find a desperate seller and a great deal—is not feasible. Here are some fail-safe tips for investing in real estate in today’s turbulent market.

Buy an investment property first

Homeownership is the American dream, but there are multiple advantages to owning an investment property ahead of a primary residence, namely tax (depreciation) and—when interest rates eventually come down—cash flow, not to mention appreciation (which all real estate enjoys), mortgage paydown (courtesy of your tenants), and the opportunity to trade up with a 1031 exchange and defer capital gains taxes.

As it is cheaper to rent now than pay a personal mortgage in the short term, there is no financial advantage to putting money into a personal residence. Also, it’s worth keeping your debt-to-income ratio low if you plan to keep investing and financing your deals.

Don’t accrue more properties than you can afford if things go bad

One of the golden rules of real estate investing is to “expect things to go wrong, because they usually do.” Investors often need help when they have multiple vacancies or repairs at once. That’s why maximizing your income through full-time employment or liquidating assets will help you prepare for a rainy day should uncertainties arise (and they always do).

House flipping can be a huge help

Finding a below-market deal in the current low-inventory market is tough, but they are still out there. With prices rising rapidly, a well-renovated home in the right neighborhood will sell quickly. Augmenting your income with a few flips will allow you to build your rental portfolio. 

According to the Wall Street Journal, Auction.com, an online marketplace for distressed properties, estimated that between 2021 and 2023, some 654,000 U.S. homeowners were far behind on their mortgages when selling, usually to investors. High interest rates will likely push that number up this year, creating an opportunity for flippers.

Sacrifice “paper” cash flow to invest in solid neighborhoods

This is a mistake many new investors make: They calculate cash flow based on the cost of the property, expenses, and the rent it can generate. On paper, the homes that cash flow the most will always be in lower-end neighborhoods because they cost the least. However, these investments will always bring you the most headaches through nonpayment of rent, repairs, and tenant turnover. They will always appreciate the least, too. 

If you want to be in real estate for the long game, invest in B- and above neighborhoods. What you don’t realize in cash flow in the early years, you will more than make up for in appreciation.

Think big

The residential market might be gasping for inventory, but the commercial market is having a fire sale. 

Buying commercial real estate in distress doesn’t have to mean buying a skyscraper in a big city. There are plenty of small office spaces that are in trouble, too. Look on commercial real estate listing sites like LoopNet and CoStar to help you identify deals in your price range. Forming a syndication could help you pool resources. Buying and repurposing the building for residential use or alternative in-demand businesses such as data centers, vertical farming, and hospitality and leisure will help you attain lender funding for a cash-flowing adaptive reuse project.

Final Thoughts

The current real estate market is all about surviving now to thrive later. For the average investor who does not have a pile of cash, that means living low to the ground, with discretionary spending kept to a minimum to keep buying investments, calculating for a down payment and repairs. 

With high prices and interest rates, cash flow will inevitably take a back seat. It’s essential to calculate a metric that works for you so you are not overleveraged and won’t be unduly stressed if you have a vacant apartment for a month or two. The greater the difference between your living expenses and income, the more you can dedicate to real estate. 

The important thing is if you can afford it, get in the game now and don’t wait for rates to come down. You can always refinance when they do.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.