Investing in Real Estate: Strategy Overview

Basic Real Estate Strategy Overview

There are many ways to invest in Real Estate.  But the profitable ways (for the little guys) are different, depending on where we are in the real estate cycle.  To help identify the cycles, I've broken them down with the following nomenclature.

 

Residential Real Estate Rebound:

Characterized by risk aversion by the average home buyer, this it a point in the real estate cycle where property perceived as risky sells below its intrinsic value.  Buyers begin to chase safe property with few flaws, and offering multiple bids for homes in good condition, appropriately priced, in desirable locations.  This is a good market for "fix and flippers," but location needs to be scrutinized carefully.

 

Steady Real Estate Market

Characterized by reduction in risk aversion by the average home buyer; sales at most price ranges happen with in 180 days, supply and demand are equal, and prices have been in positive territory year-over-year.  Developers are willing to build on spec in developments that exceed 5 houses on a more regular basis.  This is a good market for spec housing, potentially fix and flipping, but the margins in flipping will be smaller.  It may, or may not, in certain locations, be a good market for mulit-family to condo conversion flipping.

 

Frothy Real Estate Market

Often Characterized by median sales prices jumping at more than 5% a year, with inventory not keeping pace with supply. Buyers risk aversion decreases, as they focus on housing fitting their needs, and the lack of availability drives decision making.  This is a good market for mulit-family to condo conversion flipping.  It can be a good market for spec housing, but at this point land prices are jumping smartly, and caution needs to be maintained.  Interest rate risk must be watched closely. Although banks should be restricting credit in this market, often, the reverse is true - lending increases.

 

Falling Real Estate Market

Smart investors in falling markets raise cash, for two reasons:  Prices in 6 months will be cheaper than they are now, and cash on hand allows the sidestepping of credit issues for purchases, which is important because credit quickly dries up in a falling market, as banks restrict lending.  Investors do well at foreclosure auctions, short-sales, (both in a fix-or-flip mentality). but must be careful to build in extra margin to account for increase days on market and falling prices.  Generally, condo conversions will not do well as the first-time buyers run for cover, and inventory in this market increases.

 

We'll look at each of the market in coming weeks to talk about the options in more detail.

 

 

 

 

 

 

Do Good Things Today! Matt Heisler