Homereal estate investingShould an investor swim or reach for a life preserver?

Should an investor swim or reach for a life
preserver?

 

Just a few years ago,
the number of real estate investors was growing by leaps and bounds; however,
today many investors that were attracted to real estate in the early part of
this decade due to skyrocketing property values have retreated to the
sidelines.  The market has been cooling
nationwide, and so it seems has the appetite of many investors.  The million dollar question is, are they
right?  Should other investors follow
their lead?

 

To help answer this
question, let’s look at a similar occurrence that happened in the late 1990s in
the stock market.  Stocks began to
appreciate rapidly in the mid 1990s. In response, stock investment clubs popped
up all over the country. The increased interest in the stock market drew more
attention to stocks from previously inactive and novice investors. This brought
more money into the stock market, which in turn drove prices even higher. The
bubble burst on the stock market in the early 2000s. Stock investment clubs
closed and interest in the stock market waned in response to the declining
values.

 

The end of the bull
market and start of a bear market in the early 2000s sent many of these new
stock investors to the sidelines, just as real estate investors attracted to
skyrocketing property values earlier this decade have also just recently
retreated to the sidelines. As we asked above, are the retreating investors
right? The answer is a resounding NO.

 

An astute stock market
investor makes good money in both a bull market and a bear market. The same
occurs in the real estate market. There is a GREAT opportunity for today’s real
estate investor. Today’s investor is unlikely to find and profit from
skyrocketing prices that dominated many real estate markets just a short time
ago. Therefore, investors who plan only to profit from property appreciation
are right to retreat if that is their primary means to profit. But today’s
market provides an even greater opportunity to real estate investors than years
past. It is just a DIFFERENT, and very special, investing opportunity.  Large profits will not come from property
appreciation but from other sources.

 

We refer to the special
opportunity that is just starting to develop in Today’s real estate market as a
“Perfect Storm.” The Perfect Storm is the name of a movie staring George
Clooney and Mark Wahlberg that depicted the most violent storm of our
generation. This once-in-a-generation storm occurred in the mid-1990s and was
caused by three separate and distinct weather patterns that occurred
simultaneously.  One happened a lot, two
every couple decades, and all three together was something seen once in a
lifetime.  This created what was
nicknamed “The Storm of the Century” or “The Perfect Storm”.

 

So what in the world
does that have to do with today’s real estate market?

 

Like the Perfect Storm,
today we find three things happening in this real estate market that is the
start of what is potentially a once-in-a-generation investing opportunity.
Three market developments that have never occurred all at the same time:

 

1.    
Record Foreclosures —
With foreclosures today at record numbers and going even higher, this in short
means that the pool of properties available for investors to purchase at a
discount is INCREASING. Also, because many communities across the United States
are seeing added foreclosures coming onto the market, this is forcing the
average homeowner to also discount their home in order to attract a buyer.
Foreclosures are up all across the United States, with annual increases of 100%
in many parts of the country.  In short,
it is easier today to get a discount on investment property that it has been in
years.

 

2.    
Rising Rents — With loan
standards tightening up the past 12 months, fewer people can qualify for home
loans and therefore demand for rental property is increasing.  In response to this rising demand, landlords
are able to raise rental
rates. So
investors who like to rent, lease/purchase, or are unable to flip a property,
can take advantage of a rapidly strengthening rental market.

 

3.    
Less Competition — Without
the attraction of profits from skyrocketing property values, fewer investors
are active today.

 

How is today’s investor
able to take advantage of this Perfect “Real Estate Investor’s” Storm?

 

Simple, on the
purchasing end, an investor today will be able to use the increased supply of
properties at a discount, and the lack of competition, to achieve investor
discounts that were very hard to achieve before.  Where two to three years ago an investor may
have secured a discount of 15 percent on a given property, that same property
can be purchased in a softening market 30 percent or more below market. 

 

On the marketing end,
investors who rent or lease/purchase will be able to achieve greater profits
from rising rents. Also, an investor cannot count on being able to flip a
property as easily as a couple of years ago. No worries, an investor can try to
flip, and if he or she purchased with a good discount the investor has an extra
5 to 10 percent margin that can be used to discount the property and still attract
an immediate buyer.  However, if a buyer
does not come by, the investor can simply fall back on a rapidly strengthening
rental market and attract a quality tenant, and over time the property values
will eventually head up again.

 

How is this playing out
today all across the USA? I have been investing for just under 20 years
now.  In the early part of this decade, I
admittedly paid a bit more for properties than I would have liked, mainly due
to the intense competition due to so many new investors competing for discount
properties. Today, there are more good opportunities to buy than I could have
ever imagined just a few years ago. My world is a microcosm of the overall real
estate investing market today. I can sum this up in 3 words:

 

Deals, Deals, Deals!

 

Throw away the life
preserver, dive in, and enjoy the best swimming an investor has had in decades.

 

Sidebar:

 

Some suggestions of how you can maximize your
profits in Today’s Perfect Storm

 

·         
Invest TODAY in
establishing your network of realty contacts and property sources.

·         
Seek a greater investor
discount upon acquisition than you would have accepted a couple of years ago.

·         
Secure an exit strategy
that allows you to acquire cash out every now and then (such as a
lease/purchase)

·         
Do frequent rental
analysis wherever you have rental property (i.e., don’t be so quick to ask for
$1500 when today you might be able to get $1700).

·         
Consider locking in
tenants to two- and even three-year leases (our shortest is three years).  This gives you a chance to get rents up with
annual increases, and hold onto enough properties in anticipation of property
values going up again (which they eventually will).

·         
Seek out educational
products (books, seminars, home study courses) that teach investing strategies
where the investor’s profits are not dependent solely upon property
appreciation.

 

 

 

 

Andy Heller

and his investing partner Scott Frank have been
investing in real estate for more than 40 years combined


Comments

Should an investor swim or reach for a life preserver? — 4 Comments

  1. Stock investors face the same dilemma. It really depends on how severe dips are going to go. A small dip might be worth hanging on for, but a big dip could mean a longer recovery. You also have to consider how much you stand to lose. A dip in my latest stock pick, which you can read about at http://www.breastcancerinvesting.com , wouldn’t hurt as much since the shares are only at $2.65, but someone with more to lose per share might want to think harder about whether to stick around or vacate the investment. The same concepts apply to real estate.

  2. Pingback: Tweets that mention Should an investor swim or reach for a life preserver? -- Topsy.com

Leave a Reply

Your email address will not be published. Required fields are marked *