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THE REAL ESTATE ROLLER COASTER

Your grandfather always told you, “Location, location, location.” I am here to tell you that it is all about timing in specific locations. Investors have always given a lot of weight to the location of real estate, and this strategy has worked well in the past.  However, to maximize rate of return investors in today’s highly competitive market need to understand that, even though location is a very important part of the puzzle, timing in specific locations is even more important.

I like to compare real estate to a roller coaster. “How so?” you ask. Let’s take the example of the California market over the last seven years. If you listened very carefully seven years ago, you could hear the tic – tic – tic of the roller coaster of real estate as the appreciation rates climbed and demand grew. As long as that soothing tic – tic – tic sound was heard, the market continued to grow at a fantastic rate. About a year and a half ago that sound stopped. There was only the silence at the top of the roller coaster.  That slight pause in action—you know the one—right at the point at the top of the roller coaster, where the cars have almost stopped but still moving forward ever so slowly, then BANG! the big drop! And now, if you listen, you can hear some of the riders screaming on their way to the bottom, “I should have sold!”

Here’s the bad news: A lot of people got on that car right before it plummeted to the bottom, and they will have to wait until the roller coaster comes to the next hill to recoup their losses. They are now locked into an investment that, at best, is only marginally appreciating and, at worst, has negative cash flow that will severely impact their rate of return when they do sell. What if the riders had known that they were at the top and that it was not a good time to buy? This question brings us to the good news: There are ways to track the market much more closely so that you can get off that roller coaster, or not even get on, BEFORE the bottom drops out and more importantly, so that you can identify where you are and once again hear that soothing “tic – tic – tic” as both appreciation rates and demand grow.  I will say it again, “It’s all about timing in specific locations.”

Every market has a strategy—a strategy for making money, not losing money!

Most floppers (flippers who don’t make it) get caught up in the media frenzy and the trap of believing the conventional wisdom to buy when the market is hot. The best market to buy in is a down market! Not an up market!  Buy when that proverbial roller coaster is at or near a dip, not when it is about to peak on a hill. If you buy on a dip, your appreciation has much farther to go than if you buy at the top. Buying at the top is a dangerous place because, when the market dips again (and it will), the dip may exceed the point at which you bought the property, leaving you “upside down” in the investment. This is not a fun place to be, and it limits you on your exit strategy. If you buy the property at the dip, you can lower rents to current market conditions without triggering negative cash flow or sell the home without bringing money to the table.

Many clients ask, “What about other real estate markets around the nation that are in trouble, markets like Detroit and Cleveland? Why not buy there, where 1 out of every 20 homes is in foreclosure?”  Here’s my response to them:  We must remember it is all about JOBS, JOBS, JOBS.  Austin, Texas, has great market fundamentals right now. We have low unemployment, high job growth, affordable housing, a super HOT rental market, and people in great numbers are moving to Central Texas,  we were not caught in the last real estate bubble. What we don’t have (along with the rest of the nation) are mortgage products for a majority of the potential homebuyers out there. The mortgage meltdown has diminished our buyer pool by two-thirds, and home builders and resellers are feeling the pinch. A lower buyer pool leads to low demand in home sales.

So, how does this help you as a potential real estate investor? If you still qualify for a mortgage on an investment property, now is the time to jump in!  Since there has been a drop-off in demand and an increase in supply, you can pick the homes that truly fit your investment needs, resting assured that plenty of motivated sellers are out there who are more than willing to negotiate. Everything is cyclical—mortgage lending, like real estate, has its ups and downs. In the next few years you will see a loosening of the tight mortgage-qualifying standards of today. As soon as this happens, demand will once again surge as renters pour back into the home- buying market.  Wouldn’t it be nice to have a couple of investment homes—homes that you bought when the market was down—that you could put up for sale?  Or will you once again wait for the market to take off and then look back and wish you had bought?

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{ 1 comment… add one }
  • khoerner March 30, 2010, 12:35 PM

    Great article!

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