The Upcoming Opportunity in Real Estate

By Scott A. Stanfield

To wrap up the market series, the last two articles have been a case study from my portfolio to show how you can implement some of the theory and analytics discussed. In Why I Paused My Property Purchases in 2022: A Case Study, I explained why I paused purchasing rental properties in 2022. In the article When Will I Start Buying Properties Again, I outlined the key indicators and criteria I’m watching to determine when to re-enter the market. In this article, I want to share my strategy for taking advantage of the upcoming opportunities in investing in single-family rentals and how you can prepare yourself to do the same—whether you have an existing portfolio or are just starting.

Understanding the Upcoming Opportunity

The real estate market is cyclical, with distinct phases: recovery, expansion, hyper-supply, and recession. If the current slowdown truly represents a recession, we could soon be heading into a recovery phase, followed by expansion. I believe there are still a lot of potential risks that could give way to a much more serious recession. Regardless, the next expansion phase could present a rare investment opportunity.

The average historical appreciation rates for single family homes within the United States is 3.5 – 3.8% annually, during this expansion, we may see higher-than-average appreciation rates. Since appreciation is an annual increase in property value and an illiquid increase in equity, it allows for a major opportunity for investors. This opportunity arises due to a rapid increase in equity gains by leveraging a mortgage. The concept of leverage, the enhanced return on investment (ROI) achieved from an investment purchased with borrowed money, is best understood with an example. 

The ROI represents the return in dollars an investor receives for every dollar spent and is calculated by:

ROI(%) = Annual Return/Invested Funds x 100

If you purchase a property for $100,000 using a mortgage with an 80% loan-to-value ratio, the borrowed balance will be $80,000, making it a $20,000 down payment. Using the historical appreciation rate of 3.5% means the value of this property increases to $103,500 in a year. Thanks to appreciation you had an increase in equity (illiquid annual return on investment) of $3,500. In order to see why this is such a big deal we need to calculate the ROI for a cash purchase VS a mortgage purchase. 

Cash Purchase ROI= $3,500/$100,000x100=3.5%

Mortgage Purchase ROI = $3,500/$20,000x100=17.5%

The property purchased with a mortgage gave a ROI of 17.5% which means a larger return for you the investor, hence a leveraged return. This concept of leverage can be utilized with the speculated increase of appreciation. Let’s say through this next expansion period appreciation rates increase to 5%, the value of that $100,000 property then becomes $105,000 and your ROI changes to 25%. This gain in equity can then be utilized by either selling or utilizing various lender products such as a cash-out-refinance.  Accessing this return from the rapid equity gains can then enable the swift expansion of your portfolio. However, timing and preparation are crucial to capitalizing on this opportunity.

How I Plan to Leverage the Expansion Phase

Here’s how I am preparing my portfolio to take advantage of the potential expansion:

1. Maximizing Equity Utilization
The key to capturing maximum gains during an expansion phase is increasing the total asset value of your portfolio as early as possible. For me, with an asset value currently over $3M and a loan-to-value (LTV) ratio near 50%, I have nearly $750,000 in accessible equity.

If I use this equity to purchase properties at a 75% LTV, I could acquire $3M in new property assets, effectively doubling my portfolio’s value to $6M. At an appreciation rate of 5%, this could result in $300,000 in equity gains. The expansion phase will likely last for multiple years which presents a unique opportunity. However, this strategy involves using significant leverage, which carries risks.

2. Strategic Use of Leverage
While leveraging can amplify gains during an expansion, it also introduces risks. To mitigate these risks, I am evaluating financing options carefully. I will likely prioritize fixed-rate mortgages to protect against rising interest rates and maintain a sufficient cash reserve to cover unexpected costs.

I also plan to diversify my investments across different geographic locations to reduce risk exposure. By focusing on properties in markets with strong demand fundamentals and economic growth, I aim to maximize returns while managing downside risk.

3. Timing the Market Entry
Timing is critical when expanding a portfolio. My plan is to monitor different economic indicators such as interest rates, supply-demand balance, and trends in commercial real estate—closely. Recognizing early signs of recovery or expansion will allow me to act quickly and secure properties before prices begin to rise sharply.

I will also stay agile and prepared to adapt my strategy if market conditions change unexpectedly. Flexibility and readiness to act will be essential to capitalizing on this potential market shift.

How New Investors Can Benefit

If you don’t currently own properties, there are still significant opportunities to benefit from the upcoming expansion phase. Here’s how I recommend positioning yourself, especially if you are a busy professional:

1. Start with a Primary Residence
For new investors, purchasing a primary residence is often the best first step. The down payment requirements are typically lower—around 5% instead of the 20-25% required for investment properties. This allows you to leverage a high loan-to-value ratio, maximizing your return on investment (ROI). At an appreciation rate of 5%, a primary residence with a 95% LTV would yield an ROI of 100%. The key here is to purchase as much house in a desirable location as your finances will allow without taking unnecessary risk. By coupling your housing expenses with your investment, you lower your risk.

    2. Leverage Equity with a Strategic Refinance
    Once you’ve established equity in your primary residence, you can consider a cash-out refinance. This involves replacing your existing mortgage with a new mortgage on your home for more than you owe, allowing you to pocket the difference. You can then convert the property to a rental, generating cash flow while using the refinanced funds to purchase another primary residence with a low-down payment.

    3. Repeat the Process During Expansion
    Continue this cycle during the expansion phase. For planning purposes, the most recent expansion phase lasted from approximately 2012 to 2023 and, depending on how the market responds to rate drops, could still continue longer. The next expansion will likely persist for a long time too. Use the equity from each property to fund additional purchases, building a portfolio over time. Ensure you maintain a focus on properties with strong cash flow and appreciation potential, and always keep an eye on market indicators to avoid overexposure to risk. Excess equity can be used to purchase turnkey rental properties using the plan I outline in my book Passive Profits: The Turnkey Rental Investor’s Guide. You can find my book on Amazon or on my website.

    4. Stay Informed and Adaptable
    Markets are dynamic, and strategies need to be adaptable. Stay informed about broader economic trends, local market conditions, and policy changes that could affect your investments. Building a network of real estate professionals, such as agents, mortgage brokers, and property managers, can provide valuable insights and support.

    Managing Risks: Key Considerations

    Regardless of experience level, it’s vital to manage risks carefully when planning to invest during a market expansion. Here are some key considerations:

    • Leverage Risks: Understand that while leverage can amplify returns, it also increases exposure to market volatility. Ensure you have a clear exit strategy and sufficient reserves to cover potential downturns.
    • Market Volatility: Real estate markets can change quickly, particularly in uncertain economic times. Stay prepared to pivot your strategy if necessary.
    • Cash Flow Management: Focus on maintaining positive cash flow across your properties, even if appreciation slows. This will provide financial stability and enable you to ride out any market fluctuations.
    • Property Diversification: Avoid concentrating too much of your portfolio in a single market or property type. Diversification can help protect against localized downturns or unexpected market shifts.

    Conclusion: Preparing for Action

    The potential upcoming expansion in the real estate market presents an exciting opportunity, but it requires strategic preparation and risk management. Whether you’re looking to expand an existing portfolio or start your investment journey, the steps you take now will set the stage for future success.

    For those with existing portfolios, consider maximizing your equity and strategically leveraging it to expand quickly. For new investors, starting with a primary residence and using strategic refinancing can offer a pathway to building wealth over time.

    As always, remain flexible, informed, and prepared to act when the right opportunities arise.

    Thanks for reading,

    -Scott