A lot of people ask, “When should I buy? What part of the real estate cycle should I buy in? Should I buy in a down market? Are the values going to keep going down? When should I buy and where is the cycle right now in my area?”
But these are the wrong questions – it’s not “WHEN should I buy?” You should always buy NOW.
I've said this when the market was good and I've said it when the market was down. The real question is “WHERE and WHAT should I buy?”
There is always a place, somewhere in the country that is either appreciating in value or is an undervalued market. And the reasons may be local economics; it may be demographics, or it may be related to its location. Maybe it’s because the population is growing in those areas, or maybe it’s in a town where a large industry is moving in. For example, there are towns and markets where large oil companies are moving into, creating a large number of new jobs which creates a need and demand for more housing (purchase and rentals).
Those are a few things to look for in a good market.
But one of the most important things to look at in an investment property is its income. This is measured by looking at the property's net cash-flow, but a quick way to do that is to look at the Rent-to-Value Ratio (or R/V ratio for short).
You want to find the biggest possible ratio you can find. That means you want to look for areas with lower prices and higher rents. There are areas where you can find low prices and there are areas where you can find high rents, but there are usually only a FEW areas where you can find BOTH low prices and high rents. Those are the areas to take a close look at.
Generally, you'll want an R/V ratio of 1.0% or more. You can still purchase property with a ratio as low as 0.7% and still generate positive cash-flow, but it's best to stick to an R/V ratio of at least 1.0%.
Look for property you can buy either under market value or that will produce the highest cash-flow return on your investment. If I have to choose between cash-flow and equity (when buying passive investments), I recommend going for cash-flow. If you start with good cash-flow, the profits can often outstrip equity build up — and do it in a few short years.
But it’s possible to find property that will give you both if you know where to look. Rather than waiting for the market to be right, find the right market and the right deals to buy.
Sure, I’d like the houses to be five minutes from me, but I’d rather buy in better markets as long as I can solve the problems of being an absentee landlord — which is easily accomplished using a competent full-service property management company. Remember what I always say, “Live where you want. Invest where it makes sense!”
About 3 or 4 years before the real estate crash of 2007, some people would ask me, “Is there a real estate bubble?” I had to emphatically tell them that we were already deep into a bubble with some areas having already “popped”. One of the reasons they would ask was because they wanted to know if a particular area was going to appreciate in value.
Here is the lesson that many investors had to learn the hard way — including myself.
The lesson is this — don’t buy real estate investments with the idea that you are going to make your money through appreciation. It’s a huge mistake and an easy trap to fall into.
Nobody knows the future. Back during the boom, everybody was looking back, using hindsight and saying, “Boy, what if I’d invested in that city and got the 30% annual increase in value on the house I bought – that would have been great.” But that hindsight doesn’t do us much good. It’s like gambling and is usually based on luck.
Guessing on appreciation is called speculative investing, but what I’m talking about is a much more conservative approach to building wealth with a real estate portfolio.
Build it so you know there is going to be cash-flow and equity growth when you're ready to retire. If you’re going to speculate you’ve got to be prepared to lose all of the cash you spent to acquire the property and potentially more.
Good article.