Grant Cardone says these two main US cities are a few of ‘the worst markets to be in proper now’ for actual property traders — here is why

Prolific actual property investor Grant Cardone has singled out two U.S. property markets he wouldn’t contact with a 10-foot pole: Austin and Seattle.

Cardone shared this scorching take — and lots of others — in an interview with Moneywise after he prompted an AI chatbot to reply the query: “What are the ten greatest markets for investing in rental actual property in America?”

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The AI Smith response began with: “One of the best markets for investing in actual property in America can range relying on components resembling inhabitants development, job alternatives, rental demand, affordability and potential rental earnings.”

Up till that time, Cardone — who carried out the duty reside on digital camera — was fairly proud of the response. However when the AI listed Austin, Texas, as the perfect marketplace for investing in actual property, the funding guru blew up.

“Austin, Texas is among the worst markets to be in proper now,” he exclaimed. “Of all of the markets in America, it’s most likely probably the most overbuilt.”

Right here’s why an overbuilt property market is unhealthy for actual property traders — and how one can nonetheless invest without taking on all the risk yourself.

Overbuilt property markets

The highest 10 American cities for investing in actual property AI Smith listed for Cardone are: Austin (TX), Dallas (TX), Nashville (TN), Atlanta (GA), Raleigh (NC), Phoenix (AZ), Tampa (FLA), Denver (CO), Charlotte (NC), Seattle (WA).

However he wasn’t proud of that response.

“These [top] 4 markets are all on the highest 5 record of probably the most overbuilt markets,” he mentioned, suggesting that AI chatbots typically give out-of-date data and require fact-checking.

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“Actual property is a really fluid factor.”

Cardone didn’t give a supply for his “most overbuilt markets” declare however a report earlier this yr by Redfin additionally listed Austin, Seattle and Denver among the many quickest cooling property markets.

That being mentioned, it is essential to at all times take recommendation from such monetary consultants with a grain of salt. Cardone has been the topic of litigation in recent times over allegations of deceptive traders.

He has denied the allegations, writing on LinkedIn it is a “tragedy our system is so litigious and individuals are inspired to sue others in an effort to maintain an organization doing nice issues hostage.”

This is a deeper dive on these “overbuilt markets” and what this development imply for aspiring traders.

Learn extra: Because of Jeff Bezos, now you can use $100 to cash in on prime real estate — with out the headache of being a landlord. This is how

What’s incorrect with Austin and Seattle?

Austin was one of many boomtowns of the pandemic. It soared in reputation in 2021 and early 2022, with out-of-town distant employees shifting there to make the most of the traditionally low mortgage charges.

Nonetheless, the capital of the Lone Star State is now experiencing the quiet after the storm. Whereas it has remained “resilient” within the face of challenges like rising rates of interest, dwelling gross sales and the median worth of a house each fell within the first half of 2023. And, in response to Norada Real Estate Investments, researchers contemplate Austin to be among the many most overvalued markets in the USA, with dwelling consumers paying virtually 51% greater than what’s anticipated for properties.

Redfin has described Austin as “a sufferer of its personal reputation.” The surge of prosperous dwelling consumers through the pandemic pushed up property costs, after which the fast rise in mortgage charges priced folks out of the market, resulting in a drop in demand.

In the meantime, Cardone mentioned he “wouldn’t contact Seattle with anyone’s cash.”

The Emerald Metropolis has suffered a serious blow to its job market. An enormous surge in tech layoffs within the wake of the pandemic — just like that skilled in San Francisco — has shaken the Seattle economic system and has resulted in a drop off in dwelling shopping for demand and competitors.

As of September, the variety of properties bought in Seattle fell 17.2% year-over-year, in response to Redfin, and residential costs had been down 4.6%. And houses are lingering available on the market for longer, too, for a mean of 29 days — a 9.5% enhance year-over-year, in response to Rocket Homes.

What this implies for actual property traders

When a property market is overbuilt — whether or not housing or business properties — this could result in an extra provide, which might drive down property values.

As an actual property investor, this provide and demand imbalance can cut back your rental earnings (and probably make it more durable to seek out appropriate tenants) and it may even result in diminished revenue margins.

Overbuilt markets additionally are inclined to see an uptick in emptiness charges — like we’ve seen within the workplace sector in saturated markets like New York City — which might trigger monetary difficulties for traders, who should sustain with mortgage funds, upkeep charges and different prices.

If the hassles related to selecting the correct market, shopping for a property and changing into a landlord don’t attraction to you, however you’re nonetheless all in favour of actual property investments, there are different choices.

You possibly can spend money on a residential real estate investment trust (REIT), that are publicly-traded firms that gather lease from tenants and cross that lease to shareholders within the type of common dividend funds.

You may additionally contemplate crowdfunding platforms that allow everyday investors to pool their money to buy property (or a share of property) as a gaggle.

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This text offers data solely and shouldn’t be construed as recommendation. It’s offered with out guarantee of any form.