It’s possible to build tremendous wealth by investing in real estate, and it’s also possible to experience tremendous losses. The key to success: knowing how to time the real estate market. Continue reading to learn more.
There are people who will never buy anything unless they get a discount. There are also people who gladly pay full-price because they see the value. And then there are the people who will pay over-asking price because they believe it will pay off in the end.
Believe it or not, ALL of these people can build tremendous wealth from real estate… and all of these people can suffer tremendous losses in real estate. The difference depends on their understanding of market timing.
How to Make Money in Flat Real Estate Markets?
In flat markets, traditional investors have a steadfast rule. They NEVER pay retail price for income property. They expect to get discounts of 10, 20 or even 30 percent on property or they won’t buy it. Some look for even better deals than that. They would consider themselves complete failures – even idiots – if they paid full price, and they simply couldn’t live with themselves if they ever paid OVER asking price!
These bargain shoppers live by the motto, “You make your money on the buy.” What they mean is that they want built-in equity from the outset and why shouldn’t they? In non-appreciating areas, the only way you can build equity in property is by buying it at a discount.
To sell a property, it generally costs 10% of the property’s value in closing costs. That’s why paying full price for property in flat markets can be a loser if investors don’t get at least a 10% discount at purchase.
While these traditional “flat” market investors know how to get discounts in their markets, they can really miss out on opportunities if their market ever turns and suddenly becomes an appreciating market.
How to Make Money in Pre-Boom Real Estate Markets?
The little town of Kannapolis, just outside of Charlotte, North Carolina, was historically a flat market. Local investors made money on cash flow and discounts at purchase.
But they didn’t know how to recognize the changes coming and it hurt them.
People who paid attention to local politics learned of plans for a huge research center that would change the area in the same way that the Research Triangle Park transformed the Raleigh-Durham region. They didn’t mind paying full price for property lining the planned campus, because they knew the values would dramatically increase over time. As others caught on, prices started to rise rapidly. But the original investors didn’t mind paying over asking price for properties nearby and continued to beat out local investors, and made huge profits as a result of their forsight.
Why do I know? Because RealWealth was there, outbidding local investors who couldn’t see what was coming. Those properties have since increased in value 10-fold in just a decade! These same dynamics exist today all over the country. You just have to know how to find the right data.
In Birmingham, AL, RealWealth helped investors buy property near the new expanding airport. Locals had no idea what the future value of those properties would be. In fact, our own real estate agent thought we were nuts. I’m sure he was thinking, “Those crazy Californians – bidding up everything because they just don’t know local value…”
How to Lose Money in Post-Boom Markets?
The key to making money in boom markets is: DON’T be late to the party! Have you ever walked over to a gourmet food display only to find remains of what looked like really, really good food just a few moments earlier? Sure, you’ll settle for scraps because you’re hungry, but wouldn’t it have been nice to be filling your plate when the buffet was full?
Unfortunately when it comes to investing, most people do just that. They take the left-overs. That’s because most investors don’t understand market cycles, and can only see what’s in front of them or right behind them. If a market has been flat, they assume it will stay flat. If a market is booming, they assume it will keep booming. If a market is in decline, they fear it will never stop dipping.
While it’s a bummer to get outbid on good deals, it’s worse to end up with a property that isn’t worth what you paid. California investors are often guilty of just that. They tend to be quick to overpay even AFTER prices have already peaked. They make these mistakes time and time again – never apparently learning the lesson that boom cycles end and turn into DOWN cycles.
How do you know when it’s time to get out of a Boom market?
Historically, California real estate cycles every decade. Real estate crashed in the early 80’s, early 90’s and mid 2000’s. It would have happened in the early 2000’s but banks extended the boom with loose and irresponsible lending, which then led to an even greater crash.
Here we are in 2015 and California home prices are back past 2006 highs in many areas. What do you think might be coming next? Is the boom artificial like it was in 2006? Are low interest rates fueling another bubble? Is affordability out of whack?
This is why savvy investors are selling high-priced, low cash flowing California real estate and exchanging it to tax deferred to areas of the country that are just at the beginning of their boom cycles. And because few investors know about these other areas, they are able to get below market pricing.
In areas that are just being discovered by others, they are happy to pay full price or even over-asking price because they know what’s coming. And once again, RealWealth is training real estate agents in those areas that it’s OK to pay more and not feel guilty… if you’ve done your homework. ?
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