I ran across a great resource today which helps to illustrate the importance of demographics and trends when property investing. All real estate is local as they say, meaning that all markets have their own internal factors that make them different from another market. That being said, there are certain fundamentals in a real estate market that are CRUCIAL to get right for creating the best profits and returns.
Now, I do not advocate flipping homes as a property investing strategy today. Yes, profits can still be made with this approach today in certain neighborhoods of certain markets but you are taking LARGE risks and are basically gambling that the market will support you (but people do make money in casinos as well - just ask some of my German relatives!).
A Much More Enjoyable, Profitable and Sustainable Approach to Property Investing
Successful property investing today revolves around one thing: positive cash flow. You want to be investing in properties that can put cash in your pocket monthly. That way you are not dependent on what the market does – up, down or sideways you’re still making money.
This is where people get in trouble with property investing. Because real estate had always gone up over the last 30+ years on average (primarily due to inflation), people falsely continued to believe that prices would always continue to go up and that real estate was a safe place to invest, the same beliefs people had about the stock market as well. The buy and hold strategies of the past for price appreciation are no longer a good strategy for creating wealth, for real estate or the stock market for that matter.
Today, those old models – even economic principles in general – must be thrown out. We are definitely getting that change everyone was asking for! The Keynesian economic model we were all taught in our economic classes is no longer relevant. Markets do not react rationally just as governments do not act or react rationally – just look at the economic chaos that has come about since the fall of Lehman Brothers a few years ago.
For this reason and others, it is crucial that you take as many factors into consideration as possible when property investing and evaluating a potential real estate deal. Your number one criteria again, needs to revolve around the yield the investment can produce with a safe margin of error. Because again, when you’re receiving monthly cash flow checks from your investments and aren’t dependent on market conditions to sell, you can then hold on to your investments until market conditions are right for sale because you’ll be making money the whole way along.
Some additional benefits of property investing using this approach:
- Tax advantages: Historically, cash flow is one of the least taxed forms of income you can have. Also, you get to write off many of your expenses, some of which are phantom expenses (like depreciation) which can allow you to actually show a loss and offset some of your other income even though in actuality you did make a profit!
- Paying down the note: Lock in a good 10 year rate if possible – rates will not remain this low for too much longer and we’ve never seen rates this low before. Lock them in low and let your tenants pay off your debt for you. The longer you hold your property (while collecting cash flow from it), the more of the debt your tenants will have paid off.
- Peace of mind – this is obvious. You don’t have to keep such a watchful eye on the market. You’ll know when it’s time to sell. And if things get real bad or the unemployment rate stays high, just profit as you wait
- Extra income – this too is obvious. But this approach will put cash in your pocket each month that you didn’t have before that you don’t have to work for, ie, passive or residual income.
So with the number one criteria of positive cash flow in mind, you want to be property investing in areas where you’re most likely to achieve the best returns. You want to invest primarily for cash flow but if you can achieve capital gains in a short period of time as well to maximize your IRR (internal rate of return), so much the better. But, in case the market doesn’t move in the way you expected, with this approach you can simply hang on to the investment – making money all the while – until the market does cooperate and behave the way you expected.
To do this, you must take into consideration certain market trends and data. I have provided an image below that gives you an idea of some of the data you want to take into consideration when property investing. There are 4 cycles in real estate, which I’ll go into at another time, but suffice to say one of them is decline. This is the bottom of the market and can typically be one good indicator of an entry point into a market (note the image below depicts only some market data, it is not all inclusive, but does provide some important trend data).
Click on the image to go to the website source where you can mouse-over each city on the map to see what this company’s models believe is each city’s likelihood of decline (also notice how Huntsville, AL is not on the map, nor are any of the other markets we have conducted Buying Tours in…).
Enjoy the resource! Until next time…
Originally posted 2010-11-17 04:22:16.