Why You Should Be Funding A 5 Year Real Estate Investment Plan
The buy and flip craze has made its way through the market, stranding many "Donald Trump Wanna-bes" with property that they should not have purchased. [Note: You can make money buying and flipping real estate, just don't think you will do it passively].
There will always be some new "get rich quick" scheme making the rounds in real estate, but the simple, sensible solution still makes the most sense. Of course, I'm referring to the time-honored "buy low, sell high" solution that most long-term real estate investors choose.
The secret to this strategy is knowing the difference between "low" and "high," and in real estate, it is not that hard to figure out.
The concept of buy low and sell high is so common that you might not realize that smart investors are doing this (still) today.
In 2005, an investor friend of mine contacted me and said he wanted to add to his portfolio of single family homes.
I told him that it wasn't realistic, that homes were selling at crazy high prices and that he should wait. I really didn't think I could find anything that would be priced right and be a safe investment.
But like all things cyclic, the real estate market has changed and there are now homes to be found that make sense for a five year real estate investment plan.
People who follow a long-term approach to real estate investing should buy when the market moves to a buyer's market, and sell when the market returns to a seller's market. (Simple, remember!)
The following real estate FAQ video demonstrates how we use market cycles in real estate investing.
Using The "Cost Approach" For Safety
By understanding that "cost matters" only when supply and demand are either in balance, or when existing supply is not sufficient for the current rate of demand, an investor who can withstand the test of time has a built-in safety margin.
Recently, an investor friend of mine asked about liquidating a home he purchased (below cost) at market value in 2007. He wanted to know if he should list it for sale, even as a short sale so that he could get rid of it. Here is how I responded:
If it is cash flowing, why not hold on? Here's why: The replacement cost for that home is roughly $90 psft x 1100 sqft + $40K land = $139K. The cost of construction is rising too. So once we run low on inventory like this (which we have on the East side of town), newly built ones will have to start above $150K. Wait until then and sell for $140K ... and you'll get a good ROI, right?
To clarify, he has a home that will sell for roughly $60,000 right now, but the current rents do cover his monthly costs. If he were to try to build another home like it though, it would cost very close to $140,000.
This is why it is a buyer's market, not a seller's market. Too much supply of investment homes (specifically on the West side of Tallahassee) has created opportunities for investors who can purchase, hold, and then sell when the glut of lower priced properties is extinguished over the next five or so years.
The cost approach provides a safety net, knowing that future growth will occur at prices that are subject to the future cost of construction and land values that will be higher.
Investing Today With A Five Year Plan
It is likely that the glut of single family homes that are valued below median home prices in Tallahassee will be extinguished within the next five years. [Important note: this is not necessarily true for homes at the higher end of the market]
Investors with some cash and good credit can acquire a decent portfolio of homes and own them as rental properties until the market for each home reverses. Remember, if you buy below today's replacement cost and hold them until you can sell them above the future replacement cost, your investment will be a buy low - sell high success story.
There are some parts of town that will recover sooner and stronger than others, so I would suggest working with a real estate agent who has an excellent grasp of what is going on in the Tallahassee real estate market.
If you would like to interview Joe Manausa Real Estate for the job of helping you assemble a five year real estate investment plan, just drop me a note and we can schedule a time to meet and review your goals and objectives, we are here and ready to help.