Does that mean you can’t invest in real estate?

Should you just wait the market out?

No.  There are still opportunities in declining markets.  You just need to modify your real estate investing strategy.  When a market is in decline probably the single most important thing to do in real estate investing is not to own property.  If you own it, you are going to be stuck watching the value go down.   But just because you don’t want to own doesn’t mean you can’t be in the game.

Here are four great choices for real estate investing in declining markets.

1. Wholesaling – flip the deals without ever closing on them.  Get a great deal under contract and then flip it to an end buyer.  The best way to do this is to assign the contract and take an assignment fee.  Your other option is a simultaneous closing.  This way you are making a profit without having to hold the property.  Very safe.

2. Short Sales – let’s face it, the foreclosure rate is higher right now than it has ever been in history.  It’s higher now than it even was last year or the year before.  There are tons of short sale opportunities out there.  But to do this safely you’ll be best off finding an end buyer BEFORE you have to close on the deal.  If you are closing and hoping to make a big profit by reselling you’ll end up with a much higher level of risk because you are holding in a declining market.

3. Lease Options – Wendy Patton, the nation’s leading trainer on lease options, talks all the time about “control without ownership.”  That’s what lease options are.  By doing a sandwich lease option you place yourself in the middle of the deal without having to own the property.  If you are in a declining market you need to take into account some depreciation as you set up your deals.  If the market declines too much you can always try to renegotiate with the seller.  But no matter what because it’s an option you aren’t obligated to purchase, you aren’t obligated to close on the deal.

4. Real Estate Timing – If your market is declining then find another market to invest in that is about to go up.  The above 3 options are great ways to invest in declining markets, but they can be a whole lot of work!  And you really don’t need to invest in your own backyard.  Spread your wings and find markets that aren’t declining.  Buy property in markets that are going up so you don’t have to do all of that hard work for each and every deal.  This national approach to real estate investing allows you to get out of the highly competitive grind of hustling to find deals in your own market and then hustling to find buyers.

You can use real estate timing to determine what is going on in your own market as well so you can determine your real estate investing strategy.  For example, if your market is in decline you are going to have a different investing strategy than if your market is going up.  Different real estate investing strategies have different levels of success based on the conditions of the market.  For example, it’s a lot harder to buy and flip rehab properties in a declining market.  So let’s say that you look at the real estate timing market indicator charts and determine that your market is in decline.  What is a good real estate investing strategy for that kind of market?

How about lease options?

Lease options are an excellent choice for declining real estate markets because you are not obligated to complete the purchase if the market changes too much, or you can always renegotiate the terms to still close on the deal.  The other thing that is great about lease options is that you don’t need money out of your own pocket.  They can be truly no money down investing deals.

Investing in Real Estate with Lease Options and Subject To Deals

If you are interested in learning about lease options, I recommend Wendy Patton’s book, “Investing in Real Estate with Lease Options and Subject To Deals.”  It is a detailed hands-on guide to learning how to do lease option investing.  Wendy Patton takes you through the whole process, giving examples as she goes.  Wendy is one of those who teaches by doing, as she has done over 650 lease options in her real estate investing career.  I actually know this book very well because I held my real estate license with Wendy Patton’s real estate brokerage for many years before I relocated.  If you are interested in learning about lease option investing this book is definitely where you want to get started.  Take a look at “Investing in Real Estate with Lease Options and Subject To Deals.”

historical home rehab - before

This means you have certain criteria you have to meet when making changes to the home.  The historical society wants to preserve the character and nature of the home.  As a novice real estate investor what this meant to me was that I didn’t really know what I was getting myself into.  Here is a before shot of the living room.  Man, that wall paper makes my eyes hurt

The reason I bought the home was because I saw all of the potential it had.  I knew it could be restored to glory.  And just as importantly I knew it wasn’t going to take a lot of investment in materials to do it, just tons and tons of elbow grease.  This was good because I was doing this real estate investment rehab on a shoe-string budget.

This was back in the day when I do doing the work myself.  It was my first project and the time table wasn’t nearly as important as keeping the costs down.

The first mistake I made was to live in the home at the same time I was renovating it.  As I said I needed to keep costs down and that helped.  The problem with this was that it required living in a home that was in a constant state of renovation.  For example, it’s a real pain in the butt trying to use a kitchen when you are rebuilding the cabinets and dust and construction debris keeps getting all over your food.

The big thing about these historical homes is all of the great original woodwork and construction elements.  7 1/2 inch baseboards and window trim.  Fantastic hardwood floors.  All kinds of construction details that really makes these homes great and have a level of character you don’t see in most homes today.  The problem is that since the home was built in 1929, all of those great elements weren’t always in style through the years.  So the fantastic woodworking elements were painted over.  The hardwood floors were carpeted over (and in some cases linoleum was glued directly to them).  To restore these elements to their original glory means stripping off all of the layers to get back down to the original and then refinishing it.  Let me tell you, this is really hard, time consuming work.  If you are looking for rehab projects to buy, fix and flip and have contractors do the work, I definitely don’t recommend historical homes.  The restoration work takes a long time and the labor costs would eat you alive.

historical home rehab - after

I removed every single baseboard from the house, labeled them, and used a very nasty chemical to strip 7 layers of paint, all different colors, off each one.  I want to know who the heck thought olive green was a good color for baseboards???  I did the same thing with all of the window trim pieces, including every little piece of moulding.  I tore out all of the carpets and sanded the floors down.  Then I refinished everything.  Here is the after shot of all of these historical elements restored.

I was very proud of all my hard work.  I thought it looked great.  And by the way, I even made a little bit of money off this house.  Of course, it wasn’t because I bought right.  In this case, I actually paid too much money for the house when I bought it.  It wasn’t because I knew about real estate timing and bought knowing that the market was going up.  It wasn’t that I kept the rehab costs down so I left myself some equity spread, in fact the rehab costs were much higher than I anticipated even though I did all of the work myself.  This was my very first rehab and I really didn’t know what I was doing.  So the reason I made a little money off this one was because I got lucky!

In this case the real estate timing was right.  I bought while the market was going up and the rehab took me so long that the home appreciated in value enough to cover all my costs and even make a little bit.

Certainly this is not how I recommend doing your real estate investing.  Relying on luck is no way to try and make a living as a real estate investor.

At the same time I have to admit that I’m a bit puzzled at how economists can claim that the housing crisis is over.  Because at the same time that I’m seeing all of this news claiming that things have turned around I’m also seeing news like this:

“Mortgage Delinquencies break another record” -According to MarketWatch, the percentage of residential mortgages in foreclosure or at least one payment delinquent has hit an all time high of 13.16% in the second quarter of 2009.  This is the HIGHEST EVER rate recorded by the Mortgage Bankers Association.  (Source MarketWatch, Amy Hoak, 8/20/09)

Either I’m missing something that all of these top economists understand but I don’t or we are clearly not done with the housing crisis yet.  If the foreclosure rate is higher than it has ever been that means that there are going to be more bank owned homes coming onto the market than we already have.

Is this happening everywhere in the US?  No.  Some areas are seeing some signs of recovery.  But just as clearly some areas are not done going down yet.  If you are a real estate investor I would think that you would want to know which.  Because if you buy in one place you may be making a safe real estate investment.  But if you buy in another you may still see home prices drop in that area.

There is a lot of opportunity out there right now for real estate investors, but you’ve got to know where you should be buying.  You want to be buying at the right time in the right markets so you can actually make money with your real estate investments – not see them drop in value shortly after you buy.  This is where real estate timing comes in.  You need to know When to Buy and When to Sell.  With the proper resources, like the real estate market analysis charts at REMarketStats, you can do just that.

Before you start thinking it’s safe to just jump back into the market just because some economists claimed the housing crisis is over I strongly encourage you to find out more about the markets you are interested in.  If the foreclosure rate is higher than it has ever been it means there are some markets out there that are not out of deep water yet.

We are in a time right now where there are some fantastic buying opportunities for real estate investors.  Prices have dropped massively in some areas allowing rentals to cash flow that haven’t been able to for some years now.  But you need to know that those prices aren’t going to drop a whole lot more.  Do your research, find out about real estate timing.

The top 10 cities according to this report where buying is a bargain are as follows:

1. Detroit
2. Pittsburgh
3. Rochester, NY
4. Memphis
5. Tampa
6. Cleveland, TN
7. Dayton, OH
8. Columbia, SC
9. Orlando
10. Dallas-Fort Worth

(source BusinessWeek, Prashant Gopal 8-20-09)

In real estate investing the best time to buy is when the market is flooded with bargains and you can pick up cash flow rentals.  However, we also want to see our purchases increase in value and not decrease in value, which is where real estate timing comes in.  While this list may be great as far as properties that will cash flow, some of these markets are still seeing property values decline.  If you are looking to buy a cash flow rental property doesn’t it make sense to do it in a market that is going to go up instead?

The best way to choose your real estate investments is by picking markets where the market indicators are pointing towards buying, this means the property values are more likely to go up.  While you can make money from a cash flow rental property you are going to make a whole lot more money from a cash flow rental in an appreciating market.

The best way to choose these markets is by using the real estate timing market momentum charts, like the ones available at REMarketStats.

Sometimes though we have trouble getting started, or we have trouble keeping going if we’ve already started.  Sometimes we hit roadblocks or difficult points where we question whether we want to keep going with real estate investing, as pretty much with anything else in life.

We all have different ways to get motivated or if we don’t, we make excuses to not take action.

If you are looking for a way to get past a roadblock, or get started or keep going I have a great one for you.  It’s a book by Frank McKinney called, Make it Big! Frank McKinney is a real estate investor who builds ultra luxury homes on spec (meaning he doesn’t have an end buyer lined up while he is building the home).  He sells these ultra luxury homes to the ultra wealthy.  And he is enormously successful doing it.

But what really makes me admire Mr. McKinney is that he doesn’t just pocket all of the profits for himself.  He takes the profits and uses them to build homes for the needy in 3rd world countries.  It’s called the “Caring House Project.”  Frank McKinney is the Robin Hood of the modern age.

Frank McKinney - Make it Big!

Yes, I greatly admire him.  But back to Make it Big! and how that can help you.  This book is about how to develop success principals.  If you want to get some ideas about how to push yourself beyond what you are currently doing in your real estate investing or how to get past those stumbling blocks, or even how to get yourself started this book is a great way to take that step.

One of the hardest things most of us have trouble with is dealing with things that are outside of our comfort zone.  Whether it’s getting started or taking a new step that we haven’t tried before.  Moving out of our comfort zone is usually what holds us back.  I know it certainly impacts me from time to time.  Make it Big! offers very useful and practical advice for a way to help you do just that, without having to take huge steps to achieve success.

Most of us aren’t comfortable taking huge steps towards action or huge steps out of our comfort zone.  If this is you, this book can help.

It’s sad but true.  I’ve since learned my lesson, learned about real estate timing and have become much more conservative.  Instead of trying to pick up as many deals as I possibly can, I’m taking a much more planned approach towards real estate investing for my future.  In fact, this approach has changed my whole life.

Let’s face it, in America we are a debtor society.  We buy things now and leave the paying for it part until later.  It isn’t that way everywhere though.  The Chinese, for example, are great savers.  They save money vigorously and are not big on having debts.  Even during the absolute peak of their real estate frenzy in China, home buyers were still putting significantly large amounts of money down on their home purchases.  Completely the opposite of the 100% financing craze we had here in America.  The result is that China’s real estate market is recovering much more quickly.  You don’t see tons and tons of homeowners upside-down there because they put large amounts down on their property.

There is an absolutely fantastic book that talks about how to save for your future and then build your wealth.  It isn’t really a real estate investing book, per say, but you can easily use the principals the book talks about an implement them as a real estate investor.  The book is called, “The Richest Man in Babylon” by George S. Clason.

The Richest Man in Bablyon

This book was given to me by Robyn Thompson when I was a student of hers.  I’m extremely grateful for that gift because it was the first book that started changing my thinking about how to plan for my future with financially sound principals.

The great thing about this book is that its an extremely easy and quick read.  You can read it in about 2 hours.  The story will capture you and it’s a great way to present a very powerful, but simple concept of how to plan for your future.

The Richest Man in Bablyon is also very cheap.  Do yourself a favor and pick this book up.  It really is worth it.

Today I’d like to share a mistake that I’ve made more than once when it comes to rentals and why I’m a big advocate of property management now.  I’m a huge fan of rentals that cash flow.  They can (and should) be the least work of any type of real estate investing.  When you couple real estate timing with holding properties as rentals it is certainly the best way to make money in real estate.

The biggest drawback with rentals is that you actually have to have tenants in the properties   Now don’t get me wrong, there are a lot of good tenants out there.  But there are also some professional bad tenants out there who have radar for “suckers for a good story,” like myself.  These professional tenants just seem to know what rentals to apply for where the owner is gullible enough to buy their lame excuses about why they can’t pay the rent.

I had one such tenant in a fairly upper end home that managed to come up with story after story after story.  Mostly because I seemed inclined to listen to them!  I didn’t finally evict them until they owed me 6 months of past due rent!  They bounced 2 checks during that time, made numerous promises and delivered on none of them and finally trashed the house.  Then to top it all off, this tenant was arrested for assaulting his wife and he had the unbelievable gall to have his attorney subpoena me to testify on his behalf as a character witness!!!  Needless to say when the attorney heard what I had to say about the character of his client he released me from the summons without testifying.

You know what the worst part of this whole story is?  These were not the first tenants I had to evict.  I’d heard the sob stories before from other tenants.  My wife tells me I’m too softhearted, which is certainly true.  But I think more importantly I’m too gullible to be a property manager.

But real estate investing is about learning lessons.  I’ll tell you this, I still love rentals!  I love real estate timing and cash flowing rentals as my favorite investing strategy.  So what did I learn from all of this?  That I can’t manage tenants!  Oh sure, if I kept doing it over and over and over again I would eventually get better but the simple fact of the matter is that I don’t like dealing with tenants.  It’s too much work, too much headache and simply not worth it.  I will never self-manage a rental property again.  I will always use property management to handle rentals for me.

Now investors have surged back into that market because the home prices have dropped so far and would you believe that the rate of existing home sales is even HIGHER now than it was in the boom years in the Ft. Myers-Cape Coral market?  It’s almost all investor speculation again.

Now the purpose of this post is not to slam on the Ft. Myers-Cape Coral real estate market.  I’m not telling you to buy there any more than I am telling you not to buy there.  That is for you to decide for yourself as a real estate investor.  I would hope that you would make use of the real estate timing charts at REMarketStats so you can analyze any market before you buy or sell.  It’s a whole lot safer than just buying because that’s what everyone else is doing.

The main reason I’m bringing up this surge in investor speculation in different areas is that I want to encourage you to plan for your exit strategy.  What is the purpose of buying your real estate investment?  Are you buying planning on future appreciation?  Are you buying for cash flow?

In real estate investing it’s crucial to have your exit strategy in mind before you buy.  How will you get paid and make money on the deal?  If you are buying planning on appreciation I strongly urge you to have a look at some real estate timing charts before you buy.  If you are just thinking about buying because everyone else is or you heard it’s a good deal, I hate to break it to you but you might be in for a long, long wait before your investment starts to climb in value.

Are you buying for cash flow?  This is a little safer because if a property cash flows you can pretty much hold it forever, whether the market appreciates or not.  I would still recommend looking at real estate market timing charts before you buy.  I would do this because, in my opinion, if you had to choose between two properties, both cash flow, but one is in a market that is going to start going up and the other is in a market that is still going down I would definitely want to chose the market that is about to go up.  You’ll make a lot more money that way.  The other thing about cash flow that you need to take into consideration is how is the rental market in that real estate market?  No matter how good a deal sounds, if you can’t find tenants for it, or are afraid to collect the rent because the neighborhood is so bad, it really isn’t a deal worth getting into.  Talk to some property managers before you buy.  They should be able to give you some information about the rental market in that area.

The other thing that I strongly encourage you to do in addition of planning for your exit strategy is to have a BACKUP PLAN.  Unfortunately sometimes things don’t go as planned.  Your first exit strategy may not always work out the way you wanted. If you have a backup plan in mind you’ll be a whole lot better off.  It will be much easier for you to deal with whatever problem comes up.  For example, if you are buying in a market that is getting ready to go up and you are buying planning for appreciation, that’s your first exit strategy.  As a backup exit strategy I think it would be good to make sure that the property at least breaks even on cash flow, but preferably cash flows.  That way if it takes longer than you anticipated for the values to go up you can at least hold the property and still have it be a sound investment.

This is one of the reasons I don’t like negative cash flow investments.  It makes it harder to have a strong backup plan when you are bleeding money every month.

Remember, I’m not saying whether you should or should not buy in any particular market you are interested in.  That’s up to you.  I’m urging you to exercise caution.  Don’t just buy because everyone else is buying or it seems like such a good deal.  That’s not smart investing.  Do some research first and then have your exit strategies in place.

JP asked:

“There’s no doubt in my mind that timing emerging real estate markets can be super profitable, and your indicators are great.  The problem I have is this…

To determine the next emerging markets, I would have to study hundreds of charts every month.  Is there some easier way to do this?”

JP asked an excellent question and I wanted to share my answer with everyone.

In fact, there is an easier way to make use of the real estate market timing charts.  Certainly the first couple of months will take a bit longer no matter how many charts you look at because it takes a bit of time to become comfortable with analyzing them.  The training videos on the REMarketStats site certainly will help you to learn how to analyze the real estate markets.  In fact, I can read through the 230 or so charts in about 3 hours now because I’m used to looking at them.  So definitely over time it will get quicker.

But more importantly, it really isn’t necessary to look at every single chart.  It will depend some on your investment criteria but what you’ll probably want to do is to keep a “watch list” of markets you are interested in.  That way each month you can just look at the charts that meet your criteria.  It will go much, much quicker that way.

For example, a market like Flint, Michigan or Dayton, Ohio probably wouldn’t be on your watch list unless you live in that area or you are buying purely for cash flow and not appreciation, because even when the indicator data is up in those markets the appreciation rate isn’t nearly as strong as in other areas.

Also, some markets may have entry price points that are just too high for you to want to invest in, even if the home prices appreciate quite well when the indicators are up.  Markets such as San Francisco or Washington DC are going to be much too expensive to cash flow or even have a low negative.  If having positive cash flow or at least break even cash flow is high on your priority list you can also take those types of markets off your watch list.

Other criteria to consider are markets that are in population decline.  For the most part you probably won’t see these markets having significant appreciation rates any time soon.

Once you establish your criteria and then put together a watch list you can probably review those markets each month in about 1 hour, which really isn’t that much time at all.  If you can spend only 1 hour per month to determine the best real estate markets for you to invest in, isn’t that time well spent?  Especially since it can make you tens of thousands of dollars more in profits per deal.