Jan

Is Now The Time For Getting Started in Real Estate Investing?

By Emily

The bloom is off the rose. The real estate market is in the tank. Foreclosures are popping up all over, real estate values are down, and you can’t find a house that will cash flow.

So Real Estate Investing Sucks!

Or does it?

If you bought property in the last few years (say 2005 – 2008), you might be thinking that real estate investing is no fun, you got sold a bill of goods by a guru, and you have no idea how you’re going to make money on your properties.

It’s easy to get impatient, especially if the current market downturn has treated your real estate portfolio to a royal trouncing. This might be a good time to bear in mind the adage: Don’t wait to buy real estate, buy real estate and wait!

Of course, it’s no fun to get rolled by a downturn in the market. If you want to avoid that happening again, and use the market to your advantage next time, I suggest you learn to take a look at market cycles and understand how they work.

However, even if you bought at the exact wrong time, don’t give up on real estate investing.

Look at the current disaster of a market as a great opportunity to get started in real estate investing (again!).

A lot of investors make money by being contrarian.

When people are fleeing the markets, they buy in.

That’s exactly what’s happening right now, so this might be a great time for getting started in real estate investing if that’s what’s going on in your neck of the woods.

Even if it’s not going on in your area, it’s going on SOMEWHERE – find out where and invest there!

However, you definitely want to make sure that you can afford to buy property before you invest.

What should you look for in your deals if you’re getting started in real estate investing right now?

1) Appreciation Potential.

Generally speaking, appreciation is your largest profit center when you buy property. It beats out the other 3 profit centers (cash flow, debt reduction, and tax savings) pretty handily in markets where it is utilized. The challenge is that generally speaking high-appreciation market places (like California, Florida, Manhattan, Seattle, etc.) tend to have expensive property and it’s hard to find cash flowing deals there.

However, there are some great markets in Texas and other southern states where property still cash flows and goes up in value all the time. As you explore the markets you want to invest in, consider the potential for property appreciation over the next five years. You don’t want to bank on this appreciation, since it’s not a sure thing, but markets do have cycles, and if you can buy and sell at the right time, you stand to drastically increase your profit.

2) Price or Terms. A good price means 80% of the “market value” of the home or less. The more volatile/flat/falling your market place is, the LOWER I would insist on getting the price in order for the investment to make sense. Good terms are things like buying the property with a lease option or subject to the existing financing so you can get in with little/none of your own money and credit. (For information about investing with your IRA or getting private investors who want to do so, check out my IRA Real Estate Investing Series at www.TheRealWealthBlog.com)

3) Cash Flow. What is cash flow? In many markets around the country, this is an elusive beast. It seems that here in Seattle you have to put 40-50% down on a property in order for it to cash flow. In other areas of the country, you can break even month-to-month even when a building is 100% financed.

Personally, I like for a property to be able to cover all of its own expenses, including vacancies and repairs. This is easier to say, than to actually find these deals, but here’s the situation: What if you are doing well financially right now and want to make an investment? That’s great, even if the property has negative cash flow, you earn enough that you can feed it, right? So, no problem. However, what happens if you lose your job, get sick, or become disabled? You may no longer have the disposable income you need to feed your alligator (alligator is a nickname for property with negative cash flow) each month. If you have equity you could sell your property, but you may not want to do that, especially if the market is depressed when your financially emergency hits, like it is right now.

For those reasons, I like to see a property make a good rate of return from its cash flow without my having to feed it each month. If you live in an area where negative cash flow properties are the norm because property values are so high, you can consider your options.

Use a higher down payment to get your mortgage payments down.
Have a large emergency reserve fund to cover the negative cash flow on the property for several years, so you’ll be safe in the event of a loss of income.
Invest in another part of the country. Personally, this is what I do…

If Your Personal Finances Allow It, Consider This A Great Time To Get Started In Real Estate Investing

Raw beginner or experienced pro, don’t let the current market conditions rattle you. Interest rates are low, buyers are scarce and sellers are motivated. Don’t worry about putting together a “power team” or spending too much time creating your perfect entity. Now’s the time to go out and take action!

Talk to real estate agents (like me!), call FSBO’s and FRBO’s from the newspaper, get a mentor if you need one, and start taking action – a little bit every day – that will move you in the direction of your goals.

Emily

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