You may not have a
Crystal Ball but You Can Always Make a Profit
Although the real estate market cycles, there isn’t a
consistent predictor of what’s going to happen, or more precisely when something
is going to happen. History does repeat it self. But it is always easier to see
things after they have happened. The skill comes in anticipating changes and
being prepared for worst case scenarios so that you always come out ahead.
Because there isn’t a reliable fortune teller at you beckon
call because my crystal ball is broken and I can’t seem to find anyone else
with a working one. You should have some rules that you stick to that keep you
out of trouble.
One very important rule, assuming your selling single family
homes on terms; is that when you buy single family homes you should
absolutely never pay more than 85% of value and ideally you should be
purchasing them around 60% of value. There are times in the market when the 85%
is a good investment depending on where the market is in the cycle, if you have
to pay more- RUN. And then there will be other times you get them for 60% of
value or even lower where you feel like you paid almost nothing.
You don’t want to buy a property if you’re buying single
family homes for resale and just assume the value is always going to go up. In
the long term you’re likely to be correct. However, you have to make it past
the short term and the short term can completely destroy your plans.
You gotta look at reality. There are times home appreciated
3%, 6%, 10%, 20% consistently for years or even explodes up by 100% or more,
but eventually it will cycle. Then there are times the market remains flat,
flat, flat. And even on occasion real estate depreciates. But so do all other
investments, it just depends what is going on in the market.
An example right now is a local home builder over built, the
housing prices are falling slightly, so he has adjusted his prices. Last year
a new build sold quickly, this year that same new build is being sold for
30-40k less to help stimulate selling. The buyer one year ago is now upside
down and could not sell if they had to because there house instantaneously is
worth 40K less- overnight.
This is the same for investors- never ever buy based on
future valuation- this will only be a betting on the greater fool theory. Just
because people have been paying more for homes over the years does not mean
they will continue. And just because you had been able to sell a home in 30 days
does not mean you will do the same next month using the same technique.
Markets change and prices change. Up and down.
Every investor will at some point and time buy a lemon! You
too will look in the mirror after you do it and say to yourself “what was I thinking”.
You will experience having a home that eats away any profit. It can happen in
any market when you do not think the deal through and have some healthy
paranoia to prepare for various shifts in the market.
So, how do you avoid the risky betting theory where you buy
and hope the house will make you a profit? Well, instead you make a wisely
calculated decision that has weighed the optimistic possibilities and the
pessimistic possibilities to ensure that our investment is lucrative no matter
what the market is doing. You won’t have to worry about scrambling or getting
out of a deal because you just can’t stand loosing any more.
And, just when you thought I was going to leave you high and
dry….Here is a simple proven formula that I teach my students to consider on
every single real estate deal that they do:
1. Never,
Ever Buy a single family home for more than 85% of today’s value! This is for
houses you buy with the existing financing staying in place and you plan on
selling on ”terms” and not for “cash”. If you are paying cash or brining in
your own financing you need to stay at 70% of today’s value or lower. You need
to look at
comparables that are typical
for your property.
2. Always
have multiple exit strategies. Never rely only on one way to get of a deal.
Sure, there is always an ideal way you would like to have as the exit strategy
that either pays the most or is the fastest, but don’t rely on that one
technique. Then, you are banking on hope and the bank will not cash hope!
Instead have 3 to 5 exit strategies – for instance maybe retail sale, subject
to sale, assignment of contract, bring in your own financing, hold as a rental
or sell on a lease option The exit strategies will be dictated by the current
market, whether you have a list of buyers and their ability to get financing,
what is happening in the financing arena- what are rates and can people get
loans easily, and one important factor- Do you need funds to survive this month
or can you wait for your money.
3. Don’t
buy a house specifically to “flip”. What happens if you don’t get a cash offer
or there are seasoning issues that delay or kill the deal? You need to set
limits on when to drop to Plan B. If there is no cash offer by a certain date,
maybe refinance out of the short term money and put long term financing in
place to open up the possibilities of how you can sell.
Notice, there is a process to real estate investing that
equates as follows:
Buy + Hold + Sell = Profit
The goal is
to make money at each stage of the process. Each aspect of the formula should
have a profit.
You will
always make a profit when:
· Make Money when You Buy
· Make Money when You Hold
· Make Money when You Sell
Using this
calculation will always serve you well.
Never bank
on only back end profits because they can be eaten away on holding costs
closing costs or appraisals. You want to know even worst case scenarios so you
always are one step ahead and make money.
Mike’s Opinion: Don’t Buy a piece a real estate
just because of what has happened before. Consider everything that can happen
(with in reason).
May Your
Real Estate Investment always + Profit,
Michael Jake
LocalMentor.com
