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Maybe I have a weird since of humor but I have
really been amused at some of the absurd real estate market comments
showing up in the media and via my email. In one day, I saw the two
extremes below which I have paraphrased to avoid copyright issues.
From Financial Press
Quite frankly, I believe the real estate
market is dead. Anybody who invests in real estate going forward
will likely have a difficult time in this interest rate
environment. The prudent investor will switch a majority of their
assets over to the stock market which has been doing quite well
lately…….
From Real Estate Person
The real estate market in the area has
simply been taking a breather. With our emerald waters and sugar
white beaches, EVERYBODY knows the prices are going to be going back
up, probably starting this summer. The best thing is that since
things have cooled off, you can really get a good pick of a beach
unit since there are several on the market. Also, the really nice
thing is that people always know that real estate goes up so the
risk is very low…..
ARGH!!! What an extremely naïve view from
both sides. I would be willing to bet neither one of these
individuals has ever owned investment real estate. Unfortunately,
many people will adopt one of the two above views and then base
their investment decisions accordingly.
In my opinion, thinking in extremes like the
above is counterproductive and comes from a very commonly held
belief:
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Common Belief: Money is made in markets
only when they are rising sharply.
The Truth: Money is made in rising,
flat, and declining market conditions by savvy investors and
traders. Their approach changes depending on the market condition
but they never skip a beat.
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As an example, most people believe the stock
market was pretty bad between 2000 and 2004. For the average
investor, that is true. However, I know people who did extremely
well during all aspects of this period from when the market was
declining sharply to the long, extended period when prices
essentially stayed flat. How? They adjusted their approach.
Since I also still work (to a limited degree)
with stock/future traders from the Van Tharp Institute, I think it
might be very helpful for the real estate crowd to get an idea of
how investors/traders in both the stock market, and the real estate
market, make profits in any market condition. If you can adopt that
type of logic, then it is a simple matter of deciding which approach
to apply. Shown in the table below is 5 different market
conditions and how “Stock Traders” and “Real Estate Traders” might
profit.
|
Market Type |
Stock Trading Approach |
Real Estate Approach |
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Sharply Rising |
-
Throw a dart and pick a stock. Its all
going up;
-
Find the strongest sector and buy
-
Great money can be made by trading
rapidly
|
-
Throw a dart and buy almost anything;
-
Find the most “in demand” type and buy
to hold or flip rapidly.
-
Great money can be made by flipping
properties rapidly
|
|
Slowly Rising |
-
Find the strongest sector and hold for
extended periods;
-
Look for undervalued stocks
|
-
Find the most in demand property and
rent out and hold for 1-5 Yrs;
-
Look for undervalued properties
|
|
Flat |
-
All profits made by buying “right”.
Only buy when value is good.
|
-
All profits made by “buying right” Only
buy when value is good.
|
|
Slowing Declining |
-
Aggressive search for value and only
buying when extreme value is present
|
-
Aggressive search for motivated sellers
offering great prices or attractive terms like owner
financing.
|
|
Sharply Declining |
-
Short stock (more advanced);
-
Wait for panic selling and buy over
reactions.
|
-
Short Real Estate related stocks;
-
Wait for panic selling and buy over
reactions
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A common question then is when do you invest in
real estate? My thinking is that you invest anytime that “the deal
makes sense”, regardless of market condition.
The next question would be what kind of real
estate market are we in? The funny thing about the real estate
markets is that they greatly vary by
1) Location;
and
2) Type Of
Real Estate Product (Land, condo, SFR, commercial, etc).
Clearly, over the last few years, we have
experienced a SHARPLY RISING market in most aspects of residential
real estate. Housing prices have doubled or tripled in some areas,
resort condos have gone through the roof, land prices have exploded,
etc. Simply put, throw a dart during that time and you made great
money.
All explosive, SHARPLY RISING markets have
limited life cycles and personally, I believe this one has run its
course in most markets. What this will do, in my opinion, is create
multiple market types; each of which can be profitable for you. In
some real estate products, like affordable housing, this run up has
created a true demand that only gets worse with time in areas like
Florida where the population is expected to explode. It is our
thinking that most of the affordable housing in such areas will
experience long term, STEADILY RISING markets.
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In our opinion, the explosive run up
will create some opportunities in declining markets. In
some areas of the country, in some types of real estate, it
is my belief that too many people jumped in too fast, with
too little money behind them. Like the Nasdaq run up, they
got caught up in the “everybody is making money” process and
some have invested in some products that may cause them
difficulty. At the right point, in some markets, I believe
that we will see some panic selling in higher end real
estate. For savvy investors, this simply creates more
opportunity at the right time.
The last point I will make on this
topic is take a look at the real estate investment approach
for each market type. Realize that in any market condition,
the best investments occur by getting the seller (or
developer) to doing something that they don’t want to do.
In exploding markets, the seller has the upper hand so the
whole trick is getting a fair price. In flat or declining
markets, the seller is going to have to sell below market
value to make this good for you.
So why will the seller do that? If you
can immediately solve their need for a sale or money that
they can’t get some other way, then they will be inclined to
work with you. At GetPreconstructionDeals.com, we believe
that individual investors can do well, in any market
condition, by simply participating as part of a large buying
group. Our belief in this is so strong that we have
recently formed a relationship with another group that over
doubles our investor base to 40,000+. As we go forward, we
will greatly enhance our purchasing power thus putting our
investors in a position to profit in any market.
About The Author
Dr. Chris Anderson is the founder of
http://www.GetPreconstructionDeals.com and is referenced
in many venues including the New York Times and USA Today.
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