When is the Right Time to Invest In Real Estate?

Update: August 22nd, 2015

You know what I’m going to say, right? I bet you think I’m going to say that it’s always a good time to invest in real estate.

Well, I’m not.

There are rare occasions when you should not be buying property…or selling for that matter. Simply put, you should not buy or sell property if you are in an area, or encomonic times are such that property is loosing value.

Granted, this isn’t very often and is usually very localized…the Southern California market crash of a few years back comes to mind.

If that happens in your area, just hold what you’ve got. Don’t buy or sell until things improve. The rebound can often be quite profitable!

Now, the flipside of that is, if property IS going up in value, maintain your steady approach to building your wealth by increasing your real estate inventory.

This applies even if the housing market is tight, slow, a buyers or a sellers market or even if it’s considered booming. All that doesn’t matter. Just maintain your investment criteria and keep your hooks in the water looking for property.

When the economy slows, typically housing appreciation slows, but doesn’t stop or go in reverse. So, real estate remains a great investment vehicle through good times and bad. Here’s a very simple example comparing real estate investing to a really good stock/mutual fund/401K investment.

Let’s say I have $100,000 invested in a security such as a stock, bonds, 401K.

If I make 10% on that money…a GREAT return these days…then I make $10,000 off that investment per year.

To make that same $10,000 with real estate, it takes much less, or none of my own money. That makes real estate investment a much smarter play.

Let’s say I am going to buy a property that, once repaired, will be worth $100,000. I typically buy property at around 55% of the as-repaired value (a rough average). So, in our example, I am buy this property for $55,000. My 70% loan-to-value loan gets me $70,000 which covers my closing and some or all of the rehab…usually all.

Once the rehab is completed and a renter in, I refinance this property at a 90% loan-to-value level and pocket around $8-10,000.

If I go this route (keeping the property and renting it), I retain the tax benefits year after year, and not only have I made $8-10,000K from it already on the refinance, it continues going up in value. Given a 5% appreciation rate, which is conservative for most areas, I stand to make around $5-6000 per year. This means if I sell this property 4 years down the road, I stand to make another $20-30,000 or more.

So, in our example, the house I had very little or none of my own money in, now stands to make me around $30,000 NOT including the tax break I enjoy from it.

This is one property, I have more than one, so apply this rough formula to the values in your area, and do it for the number of properties you want to hold in your inventory. The numbers get pretty good, don’t they?

Let’s take our example another way. Let’s say I have $100,000 to invest like our original example. Instead of putting that into the markets, you decide to control as much property with it as possible.

Let’s say I decide I can live with putting $5,000 into the purchase of each property. So, I buy and rehab 20 properties with that $100,000. Let’s just assume each property is worth $100,000 when repaired. So, that $100,000 controls you $2,000,000 worth of property. (Note that it may take a couple of years to find, buy and rehab 20 properties that fit your criteria!)

Let’s assume you re-fi these from your hard money and can only pull out $5000 per property (remember I put in $5000 of my own money in these for the purposes of the example).

From the re-financing, you’ll put $100,000 in your pocket recouping your original investment ($5,000 per property). The rest is gravy, and here it is.

IF you average your 5% appreciation, you are making, you are making $100,000 per year. Not bad!

If you are making just $100 per property as positive cash flow (rent minus mortgage + taxes + insurance), then you are making $2000 additional per month.

I’m not including what you’ll save with taxes.

Sure, you have to be a landlord for a few years, or pay someone to be. Sure, there will be headaches along the way.

But, let’s say you decide to sell off all 20 properties 4 years later and you average a $25,000 profit from each…

You will have made $96,000 from the positive cash flow

You will have made $500,000 from the 5% appreciation

You will have saved thousands on your taxes annually

I’ll take real estate investment any day!

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