As with any market in our modern world, the housing market has the ability to fluctuate over time. Investment values can rise or fall in the short-term, based on factors like local market dynamics, societal shifts, and the overall economy.
In general, though, the housing market is known for steady and consistent growth, at least in the long-term. For instance, rent prices have increased more than seven-fold over the last 50 years, according to Federal Reserve data.
Over the last 50 years, property values have also risen at consistent rates. In fact, the median home sales price has increased nearly 16-fold in the last 50 years.
Suffice it to say, real estate is generally a pretty consistent investment option. But of course, no investment is guaranteed… so, what happens if the market trends downward while you own shares of an Arrived property?
What happens to my investment if the market goes down?
Whether you invest in gold, mutual funds, or cryptocurrency, all investments come with risk, and real estate is no different. However, Arrived seeks to make your investment as secure as possible for as long as you hold it.
Arrived investments typically have a five- to seven-year planned investment period, in order to target long-term appreciation of the property for investors and mitigate the risk of a downturn. Whether the housing market trends downward or plateaus temporarily, this investment period is designed to be long enough for the market to recover and for the property to appreciate… even if there’s some short term turbulence.
As you can see from the above charts, the prices and rents for single family properties have appreciated consistently over the long-term. That’s why Arrived encourages investors to approach real estate investing with a long-term focus.
The best part about rental properties is that they earn returns from cash flow and appreciation. Even if the property value drops in the short term, the properties will usually continue to generate consistent income over these periods as well.
Sell or Hold?
As each property nears the end of its 5- to 7-year investment period, Arrived will analyze the potential options to see what makes the most sense for investors. We determine whether it would be better to sell the property and distribute the sales proceeds, or continue holding the property and selling after its value appreciates further.
If the market goes down, we won’t sell the property immediately. Our plan is to continue to hold the property longer, giving the housing market more time to recover. In the meantime, the property would continue to generate rental income.
Investors get hurt when you sell during a downturn! Being forced to sell is why so many people were burned during the Great Recession. If those investors had been able to hold onto their properties, they would have seen incredible appreciation over the last 10 years!
Arrived utilizes 2 main strategies to prevent being forced to sell during a market downturn.
Reasonable Use of Leverage
Arrived uses a conservative amount of debt on each property. Using mortgages of 55% to 70% is much safer than maximizing leverage into the 85-95% range.
Additionally, our properties have repayment terms much longer than seven years, giving us the flexibility to extend the investment period as needed. Most Arrived properties have loans that have full terms of 30 years! That means we aren’t forced to sell at the end of the anticipated investment period, giving additional flexibility depending on the market conditions.
Finally, the loans on the properties are interest-only. This means that the monthly payment is significantly lower than an amortizing loan, and as a result our cash flow is much higher.
The average Arrived property has a debt service coverage ratio of nearly 2.0. This means that the property’s operating income could drop by 50% and there would still be enough income to cover the monthly interest payments.
When we determine how much money each property we need to raise from investors, we factor in a cash reserve balance. This is basically a “rainy day” fund for each property. These funds can be used for unexpected repairs or to pay out dividends if there’s an extended vacancy. If the cash reserves grow too big, they can be used for future property improvements to boost the value of the home.
At the end of each quarter, we analyze every property’s performance. Most of the income is sent out to investors as a dividend, but some of it goes to the cash reserves to continue to build up that rainy day fund.
Arrived is committed to not doing future capital calls – we won’t ask investors for more money after an investment is finalized. In the worst-case scenario, if the cash reserves were depleted, Arrived has the option of taking out a corporate loan or increasing the financing.
So, what does this mean for investors?
Even during a market downturn, Arrived will take care of the stress and worry of owning a rental property. Any cash flow that the property generates will go to investors as usual — even if the actual value of the property is down temporarily. This means that you will still be able to collect dividend payments while waiting for the market to rebound.
When’s the best time to invest?
As with any investment, the goal is to buy low and sell high. But when it comes to real estate, things are a bit more nuanced than that.
In fact, it can be a good idea to invest regularly in real estate whether the market is up or even if the market is down. Since real estate trends show such strong, steady upward growth, the potential for profit is always there. And since real estate investments earn returns from dividends AND appreciation, you’ll be able to continue to collect passive income no matter what the short term value of the property is.
Buying into real estate on a regular basis is the same idea as dollar-cost-averaging (which is popular among stocks). Even if you aren’t always buying the lowest possible dip, your long-term growth and appreciation can still be profound. It can be much worse to leave cash on the sidelines, waiting for a big dip that may never come!
With that said, investing (or investing a bit more) when the market goes down can be great in the short-term. That’s because you can buy properties at bargain prices and enjoy even more appreciation when the market rebounds.
On a month-to-month — or even a year-to-year — basis, the housing market can trend upward or downward. Over the long-term, though, it has tended to see steady increases in both rent growth and overall property value, with no signs of slowing any time soon.
Investing in real estate shares through Arrived allows you to enjoy some of this long-term growth, without having to worry about short-term issues like vacancies or value downturns. With long hold periods, cash reserves, and the option to extend the investment, Arrived has planned ahead for any situation.