One thing that makes real estate so interesting and profitable is the cyclical nature of it. There are times of boom where everything in sight explodes as cost rise into the stratosphere as everyone, it seems, just jumps in hoping to cash in on the good times while they roll. Then there are times of price stagnation in which there may be price reductions as the markets adjusts to the lack of demand. And then, once in every few decades, there will be areas where property seems to be almost worthless.
We have heard a lot about a coming real estate crash. The doomsayers are predicting a total collapse of real estate prices. Are they right? Anything is possible, but probably not! Too much depends on real estate.
Our ever increasing population will have to live somewhere and the power brokers in Washington D.C. have vested interests in helping maintain some semblance of balance. Real estate investing can be risky business. But if history is a good measure, prices will go up and down - but mostly they will go up.
Professional real estate investors do well regardless of what any given market does. They make adjustments when they identify the tell-tale signs of market changes which allow them to thrive even in a bad market. Here are four real estate investing secrets used by investors that will help you stay ahead of the game.
The Hot Markets
Red Hot Markets don't last forever. There comes a time when all "good things" come to an end. Hot real estate markets are no exception. The true professional will purchase property with an exit strategy that takes into account for the adjusting market by buying in the best locations that will enable them to more easily unload the property when the slow down arrives.
Most pros see the signs of a crumbling market and start looking for up and coming markets and begin the process of getting out of the hot market. This strategy, while no guarantee, will make it possible for the investor to again by in the best areas so they can get out quickly if needed. No one has a crystal ball, they look at things like employment, employment opportunities, real estate demand, rental housing availably and demand, local government, commercial projects, and many other indicators.
As investment opportunities come available they start buying property in other locations that promise appreciation or profit. Many of them purchase in several areas so that they can spread their exposure and gain "safe" returns on their investments. One geographical area might be slow, or slowing, while another may be experiencing 35%, or more, annual appreciation.
The Professional will try to get into an area before the location reaches it's peak and then sell before the market goes down. That enables them to start buying in an area where they can profit from the next upward trend. Then they may wait for the former hot market to experience a rush of foreclosures and they buy properties at a discount and wait for the market to rebound.
The Balance of Supply and Demand
Here's a fundamental fact I want you to remember: When the supply is high, prices go down. When the demand is high, prices go up. There were people in my investment club who believed prices would maintain it's rocket speed. The reality is, if there is too much of any type of real estate prices decline. For me, too. I purchased building lots for $135,000 that I would have a hard time selling for $99,000 today. Obviously, I missed the market and I will pay the price.
There comes a point in every market cycle when investors and new buyers dry up. As the demand falls, excess supply cascades to a more natural price level. There is also a direct correlation between rental prices and prices for homes. If there is too much disparity, home prices shrink because investors won't buy a property they have to feed (add additional income to each month) or have a terrible return on their cash investment.
Study the market and determine when the supply outstrips the demand. Then, when you see new buyers light up the home buying market, you will know when to start buying in that area again.
Put the Breaks on Speculation
Speculation is hoping for a profit - just like when you go to a casino and hope to come out with their money. Can you do it? Sometimes, maybe. But the odds are in the favor of the house.
I teach my protégées to make their money when they buy. In other words, they know how much money they've made on the day the loan closes. Know how much money you made on your transaction the day you close, too. Buy it right, realize your profit when you sell, and you might even get a nice bonus of appreciation or a zone change that increases the value.
Don Loyd's RICH System ? uses a very simple way to evaluate an investment property. If you can't answer the questions below and get good, positive answers, you may not want to invest in a project. Ask yourself:
R - Return? - How much wealth does this property create for me today?
This is not appreciation or how much you can sell it for next year.
I - Investment? - How much money out of my pocket will this investment take?
Normally, I want to put in as little money as necessary.
C - Cash Back? - If I put money in, when do I get it back?
The goal is to get your money back ASAP so you can do more investing.
H - Holding Income? - Does this property have positive cash flow?
You want to avoid negative cash flow. It can put you out of business.
This simple formula can be used when considering any investment made by most investors. It's very telling in that it gets to the heart of the issue. Cash and cash flow are vital to the livelihood of investors.
Equity Preservation
Don't easily give up your equity. Protect it to the best of your ability. If you think you have to borrow from your equity pool, borrow from some of your investment properties. I have lines of credit on almost all my homes. I've never tapped into my investment portfolio, but it's there if I need it.
Use great care to protect your personal home. Don't borrow against the equity. It's too valuable a resource to tap into for anything other than short term money. I you are disciplined enough to resist the urge to use your equity for a vacation, new car and such things, I recommend you get a home equity line of credit (also called a HELOC) for short term loans. Your equity for any other use than short term loans exposes your family to unnecessary risk.
History suggests you'll do fine in real estate if you have an investing plan that includes allowances for the up and downs of markets and sound exit strategies. You can do well in bad markets, too. In fact, you can get rich if you know what you are doing. Spend the money it takes to get good education, information and coaching. It will be money well spent.
Finally, learn to think outside the box of conventional wisdom. Being creative will go a long way toward success as a real estate investor. For additional information, order my new book, "Creating Wealth for Women." It's a source of good, safe real estate investing information for women (men, too). Place your order at www.CreatingWealthForWomen.net Also see www.RealCashFlow.net
Oregon Association of Professional Real Estate Investors
© 2007 by Don Loyd
