The book by Wendy Patton and Justin Ryan supports the concept that “more money has always been made in a down market than in an up market,” and offers five suggestions on how to profit in a slow real estate cycle.
- Timing is everything.
- Understand your expenses.
- Buy and hold.
- Find the deal.
- Have an exit strategy.
- Timing is everything. As billionaire oilman J. Paul Getty stated, “Buy when everyone else is selling and hold until everyone else is buying.” Notice that the media is focused on the subprime fallout and housing slide. You haven’t heard the term ‘record levels of appreciation,’ in months. Savvy investors know this is the time to jump into the market.
- Understand your expenses. Get familiar with your marketplace, and when you find something you’d like to invest in, run the numbers – don’t rely on the Income and Expense Statement that has been supplied to you by the seller’s team, double check profits and losses for yourself. Calculate holding costs, tax implications, cash flow potential, vacancy reserves and maintenance fees. Think Murphy’s Law when you’re buying investment properties – you may have more vacancies than anticipated, or you may find that you have to sit on the market for more than a year before you sell. Position yourself to best ride out the cycle.
Authors Patton and Ryan suggest, “Identify your risk level and what you want: For example, an investor who wants to turn a quick profit with low holding costs would want to sell their new-home property before construction is complete. On the other hand, an investor looking for a bigger return with less capital gains tax would want to hold the property until after construction is complete and keep it as a rental property for at least one year.”
- Buy and hold. This can be a wise move in a struggling market. Statistics show that real estate will definitely appreciate over time – so unless you are forced to sell, your property will appreciate in value. Chart out the property’s price see how it compares to how similar properties have been selling for over a reasonable time period in that community. Calculate how low you think the market will go. Get in at that price. Lease back to help cover expenses.
- Find the deal. In a distressed market, you can get relative bargains — and sometimes extras. Builders overbuilt during the housing boom, resulting in high inventories of unsold properties. Now, many builders report slashing prices, offering free upgrades, absorbing all financing points for their buyers, and paying closing costs or fees. Extras aside, other good investment properties include homes five years old or less and properties in the $200,000-range, which are said to be “particularly be desirable to a large pool of buyers.” Also, look for a property in an emerging market – locally these might be places like Pico Rivera, Santa Paula or Oak View. If you’re researching statistics, notice when sales of existing homes and new construction permits start to trend upward again. Notice when the volume of properties on the market drops, or when mortgage loan defaults begin to fall, days-on-market moves below 90, and low interest rates stabilize before creeping upward.
- Have an exit strategy. Know when you want to sell. What are market conditions you want at the time of sale? Basically, have a plan. If you’re in markets which boast new construction (Mammoth, Tahoe, Big Bear), your selling options are varied, including:
- Assign your purchase contract during the construction period.
- Sell when construction is complete.
- Lease and then sell.
- Exercise a lease option.
Know the tax impact of buying and selling properties. Talk to your accountant about 1031 exchanges and IRA options.
“Know how you will get out before you get in!” the authors advise.