How to Invest in real estate when prices are high

The real estate market has increased significantly in many areas of the country in the last few years. This has made it very tough to invest in real estate and challenging to buy a house as an owner-occupant as well. While it is tougher to buy real estate when prices are high, it is not impossible and there are many ways to overcome these obstacles. I bought my first rental property in 2010 when prices were much lower. While I bought a lot of properties back then I have continued to buy as prices increased. Many people say they wish they could go back in time and buy at those prices but when I bought that property I had a lot of people telling me I was an idiot for investing during a housing crash. It was also harder to get financing back then and we had no idea that the housing market would recover the way it did. Not to mention, we can’t go back in time so we have to deal with the market as it is now.

Why have real estate prices increased so much?

I bought my first rental property for $97k in 2010 in Greeley, Colorado. I had no idea it would triple in price in the next 10 years but it made money and I got a great deal. I invested in rentals based on the money they made at the time, not hoping they would go up in value. I started this blog in 2013 before prices went crazy and talked about investing for cash flow then as well. I was also a real estate agent who sold foreclosures at the time and many people in the industry told me another crash was coming that would be much worse. I stuck to my guns and I invested anyway. I sold that property for $275,000 in 2019 but it is worth around $350,000 today!

Prices have increased a lot in my area. The median price in 2012 in Greeley was $112k and now it is more than $400k. A lot of people will blame real estate investors for the price increases but here is what happened. After the crash, prices were incredibly low. They were way lower than they ever had been before compared to wages or the cost to build houses. Comparing today’s prices to then doesn’t make sense because that was a depressed market. Over time, the excess inventory was bought, and prices returned to a more normal level that is based mostly on the cost to build like most products. The last few years have seen the cost to build skyrocket with materials costing way more, labor costing more, land costing more, and cities making it harder to build. In a normal market, you will see the cost of housing follow the cost to build very closely. The harder cities make it to build or if they run out of room to build, prices really jump.

How did I continue to buy real estate at higher prices?

I bought 15 single-family rentals from 2010 to 2015 and then I stopped because the higher prices in Colorado made it tougher to cash flow on houses. I took a year off, thought about investing in Florida, then bought commercial real estate instead. Some of the commercial properties I bought were cheaper than houses. I bought a couple of properties for $100,000 when prices for houses were twice that.

Commercial real estate also increased in price and more investors discovered that niche. Maybe, I should not have been writing articles or shooting videos telling people about it… As prices rose and I gained more experience I learned different ways to buy properties. The first rental I bought using a 25% down conventional mortgage and I got the down payment from the refinance of the house I lived in. I was able to save money, complete more refinances and keep buying rentals but it got more and more expensive and harder to do.

Along the way, I realized I could use private money to finance properties with much less down. I could also use hard money and then refinance into longer-term debt. This allowed me to have less cash upfront and if I got good enough deals, I could keep buying properties even when prices kept going up.

How can others invest in real estate when prices are high?

I am fortunate that I was able to buy properties when they were cheaper. Buying properties then helped me be able to buy more later on. I know that does not help those who are new or who are struggling now. However, if you are able to buy now, prices have always gone up over time and those properties you buy now may help you buy more in the future when prices are even higher. I think all of us look back at prices 10, 20, 30, 40, or 50 years ago and say wow I wish I would have bought houses then. We can’t go back in time, but you can buy houses now and in 10 or 20 or 30, or 40 years say wow I am glad I bought those properties back then!

It is harder to buy when being a new investor much of the time but in some circumstances, it actually can be easier as well. Here are some ways to invest in real estate when prices are high.

Buy as an owner-occupant and house hack

This strategy works much better when you are new to investing or younger. Basically, you buy a house or a 2 to 4-unit property and live in the house or one of the units for one year. After that year you can rent out the house or rent out the unit you were living in. If you live in a multi-unit property you can rent out the other units while you live there. The advantage of house hacking is you can use a low-money-down owner-occupant loan to buy the property. That means you can put 3%, 3.5%, 5%, or even 0% down. A typical investor loan will take at least 20% down.

Use different types of financing and BRRR

A typical investor loan will take at least 20% down plus closing costs and reserves. This takes a lot of cash when prices are high. As I did, you can instead use hard money or private money to buy the properties and then use the BRRR strategy to refinance into longer-term debt. BRRR stands for Buy, Repair, Rent, Refinance, and you can add an extra R for repeat if you like. You have to be careful with this strategy to get an awesome deal that you can refinance or have an exit strategy with if the refinance does not work out (usually selling).

Move to another area

If prices are high in your area you can move to another area. I know this is not ideal for many people but I also know many people who have moved out of Colorado or into Colorado. Moving to an area with lower prices can make a huge difference to your finances and make it much easier to invest in real estate.

Invest in different types of properties

While housing prices might be very high in some areas, prices for other types of properties may not be as high. You may be able to invest in commercial real estate or multifamily properties at a lower cost per unit than houses. I was always scared of commercial real estate because I did not know that much about it. But when I learned how it worked, it has many advantages over residential and is not terribly complicated. I even wrote a book on how I invested and how others can as well.

Invest out of your area

Another option if you do not want to move, is to invest in another area from where you live. I thought about doing this and made some trips to Florida before I discovered commercial real estate. It takes some work to invest out of state. You can do it yourself by finding an agent, property manager, lender, and maybe a contractor or you can also use a turn-key rental company. Either way, be very careful as it is easy to be taken advantage of when investing from a long distance.

What not to do when investing in real estate

I listed many ways to invest in real estate when prices are high but many take a different route. They want to wait until prices drop and time the market. It is almost impossible to time the market. Some people have been predicting a crash for the last 10 years! Even if the market does crash, how do you know where the bottom is? Will you really pull the trigger when everyone is telling you prices are going to keep going lower? I sold some rentals in 2018, 2019, and 2020. A lot of people told me I was smart to sell at the top and then prices went even higher. Luckily, when I sold those rentals I used 1031 exchanges to buy more real estate and that real estate went up as well.

If you focus on getting a great deal that makes money (cash flows) you don’t need to time the markets. A great deal that I buy at high prices may still be cheaper than an okay deal that others buy at low prices, assuming they go down significantly, which I don’t think they will. It is hard to invest with prices as high as they are. I wish they were lower too, but wishing them lower won’t change reality.