How To Adapt Your Property Investing Approach For Uncertain Times
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…
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It’s a tough market right now for both commercial and residential real estate. Obviously the best strategy is to “buy low” and “sell high”; the hard part now is the “selling high” part. Where do you see the market going in the coming months, especially given recent trends? The reason I’m asking is due to the requirement of significant investment for commercial property.
Zoliath, the future is hard to predict at this point. The only thing that looks fairly certain is there’s likely to be lots of volatility. If the Fed continues to print money, property prices may actually start to go back up; however if oil prices begin to get to high, the economy will again stall and the economy and property prices may again fall. My advice if you’re looking at property for investment is to make sure you purchase a property based on the fundamentals of the income it produces. Values don’t matter unless you have to buy or sell. Buy based on cash flow! Hope that helps. – Hans
I really enjoyed your post. I love it when there is focus on studying and learning all the specifics before making a decision, especially such an important decision like investing in real estate.
Making your goal with a real estate investment the generation of cash flow is the best. It sounds like you have learned from Robert Kiyosaki who knows and explains that cash flow is king.
Thanks for sharing such sound investment advice for real estate investing!
(Dave) and Dawn
You will be happy to know How To Adapt Your Property Investing Approach For Uncertain Times
Very interesting Hans – and the map is fascinating. I have a number of friends in Las Vegas and that area definitely deserves the “red” marker. I see Hawaii isn’t included – no surprise there either. Thanks, as always inspirational and thought provoking.
This is nice for someone who wants to be successful someday and earn a lot of money. Thank you for sharing. This will be a fresh start for me.
hans schoff really nice post and valuable piece of information about real estate and property dealing. i just want to know how do i cop with high rates of properties in commercial areas.
The key to success with commercial real estate is cash flow. That way, it doesn’t really matter what direction the market goes in the short term. If it goes up and your property is performing well, you can sell it for a nice price if you like. If the market goes down, you can hold onto it and just collect the cash flow until the market goes up again. It’s all cyclical. Hope that helps!
I haven’t really gotten into the world of property investment just yet, but it is definitely something I have considered dabbling in once I know a little more about it. Thanks to your advice, I think I’m a little closer to getting there!! 🙂
Natasha, glad I could help push you a little closer toward it. Thanks for your comments!
This isn’t something I know much about but I appreciate your expertise in this area, especially in these economic times we live in.
Real Estate investing, like business, is all about cash flow. Finding the environment and conditions that create the most amount of cash flow is key. Thanks for stopping by Melodie
Investing in properties that produce a regular income sounds like the safest and smartest move when it comes to property investment.
All the best,
Hey Emma, flipping properties or buying simply to sell to me is speculation, it’s gambling. You are hoping the market will move in the direction you expect it should. But especially in today’s economy with the government trying to change the rules on a regular basis, I wouldn’t want be stuck in a situation where I had to sell – especially if the market dropped like a rock. If you’re investing for cash flow, it doesn’t matter which way the market goes, you make money either which way. Thanks for the comment!
Once again an enjoyable post. That’s one of the things I like about being a business owner without the brick and mortar headaches that go with it. I can make decisions quickly and changes can take place without a lot of hassle.
You have to have that flexibility when the economy is in such a flux.
Hey Joyce, good point. You really don’t want to put yourself in a situation you can’t control because they have and they appear to continue to change the rules. Investing for cash flow is the key. It’s all about the passive or residual income
Interesting post… are you a property investor yourself?
My husband and I have renovated many properties including our French house. We have bought and sold in several countries but to date our biggest gains have been made when playing the UK property markets, how about you?
Hey Sadie-Michaela, I invest primarily in commercial property like apartment buildings and other multi-family properties for income. I’m all about creating wealth through increasing cash flow, like the net rental income that comes in each month from tenants. We’ll target properties that may need some fixup as well, but primarily we’re interested in maxing out the performance and operations of the properties to generate as much cash flow as possible (which also increases the value), that way we’re never in a position where we’re losing money and have to sell. Especially in today’s volatile and uncertain markets, investing in something like real estate that has a tangible, intrinsic value is a good way to also protect against inflation (or hyper-inflation), especially if the asset is putting money in your pocket each month (versus taking money out of your pocket each month, which you can only do for a short period making it a much riskier investment).
The inherent good news from your post is that there are some areas now where e market is doing better than in years past. While some do believe that we’ll crash again, I have great hopes of a continued recovery and we do have bits of news supporting that. Thanks for showing us where it is once again ‘safe’ to invest.
Hey Linnea, the key really to investing in property in these uncertain and ever-changing times is to ensure the properties you’re buying produce healthy cash flow, that is income that covers all expenses with some profit left over. People who are looking to flip homes or buying based on appreciation – even forced appreciation – I think could get into trouble. I wouldn’t want to bet that house prices will rise again like they had a few years ago. If anything, I think it is likely that with all the foreclosures continuing to increase and several arms still to adjust and other issues, that the housing market in many major markets still has further to go. Good luck and thanks for the comment!