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Do you know the four keys to invest like a pro?

Larry Arth's real estate investor insightsDuring my last month in Minnesota in 2003 in preparation for my move to Florida, I sold 22 investment properties to investors who were all thrilled at the returns they were getting.

Moving my investing business 1,600 miles south to Florida, I suddenly found a very different market. WOW! It was like night and day.

One month later in Florida

There was no investment to be found in Florida that would generate a return even remotely close to what I was getting for my clients up north. Cap rates at that time were running 10% in Minnesota and 3% to 5% in my new Florida market. With me being the information sponge that I am and interviewing economists and seasoned real estate investors from all over the world, I discovered the reason why: market cycles.

What the market cycles mean

Different real-estate locations and markets were positioned differently within a market cycle.  What that means to an investor buyer may look much different than what it means to a home buyer. There are markets that are doing very well while other markets are not. This was making sense as I was witnessing this first hand. So I dug deeper to understand which markets are in what cycles.

Four basic categories real estate markets go through

  1. Buyer’s market
  2. Wealth market
  3.  Hold market
  4.  Seller’s market

Understanding these markets is the key to capitalizing on the investments.

Buy Low and Sell High

While everybody knows this concept, I learned that very few people actually do it.  They want to. But most simply do not know how. People tend to follow the thundering herd. When everyone else is investing, everyone wants to get in on the action. As this buying frenzy peaks, sooner or later, the pendulum will reach the top and begin the transition in the other direction. Identifying when these pendulum swings will occur may be your number one tool in your investing tool box.

Case in point, look at the thousands of people who bought at the peak of the market only to lose everything.  This demise can be avoided if you understand when is the best time to buy, or to hold or to sell.

A lesson on buy and hold

I grew up in the era of late-night real estate infomercials. The mantra was to buy and hold real estate. The lessons that many people, including me, learned was that real estate values can and do occasionally level off and, or,  fall. When prices fall, so does rent and so does cash flow.  Buy and hold is a great strategy. However, holding property does not necessarily mean you should hold the same property forever; you simply should always hold property.

The better way: Hold onto a property until it no longer makes sense to hold that particular property. This is when your property is positioned in a seller’s market. Then, sell or 1031 exchange that property into a market that is positioned as a buyers’ market. This strategy allows you to continuously ride the wave of economic growth.

The real estate cycle - the sellers market

My discovery was that different markets indeed are positioned differently within the real estate cycles. To get the best investments it is paramount to know which cycle your particular market is in, or to be investing in markets that are positioned for you to ride the economic wave of prosperity, so you can   buy low and sell high.

You may want to note that there is no such thing as a national real estate market. Each market is local in nature and each market has its own attributes that make each different.  Coming out of the recession, many markets were positioned similarly, as they all suffered vast drops in values. The speed at which they recover definitely changes from market to market, and the cycle duration will typically run in an 8- to 12-year period.

Four market cycles and they look like

There are dozens of considerations regarding where a market is positioned.  Let’s look at the distinctions of each market. This may help you determine the positioning of your favored market. Today let’s focus on the markets in the Cycle 1 market. This is the market in which many of my investors from all over the world have purchased, and it is known as the Buyers’ Market. You will be able to watch the progression within the market’s cycle and how many of my investors are riding the wave of economic prosperity.

 

Cycle 1  Buyers’ Market

Real estate cycles - the buyer's market This is the market where real estate is starting to present some great opportunities and the telltale signs are starting to emerge.

Distinctions of the Cycle 1 Buyers Market

• The home market has been overbuilt and oversupplied, and the public is now aware of this.

• Housing inventory levels are higher than  needed.   The absorptions rates are low.

• The demand for housing, along with prices, is falling.

• Homes are now overpriced for the demand.

• The market time increases.

• Employment has peaked.

• Foreclosures are rising.

• Both investment property values and rents are dropping.

• Layoffs are happening in the construction field.

Gathering this information is easy. Much of this information can be found by reading local papers and watching local news, or asking a local real estate agent for the market statistics.  Most real estate agents will have this information however they may not look at it in the same way you as an educated investor will look at it.

People will be standing on the sidelines waiting to see what will happen next. Those who are purposeful and educated can see opportunity coming for investment real estate.

Here is the buying strategy for this buyers’ market cycle

• Cash Flow: The only value proposition that should be considered during this early phase of a buyer’s market is big time  cash flow.

• Home appreciation may likely follow but should not be factored into your buying decision.

Next post is the most exciting cycle (cycle 2 The Wealth Market).Stay tuned and watch how investors are riding this wave of prosperity.

You can visit Larry’s website here.

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