- The Washington Times - Thursday, December 7, 2006

The reports say there’s no reason to buy real estate today because the “bottom’s fallen out” or the “balloon burst.” With the real estate market down in the number of sales and dollar volume, you might as well put your money somewhere else, right? How about the stock market or in bonds?

Following this reasoning, then, whenever any investment drops in value, dump it — stocks, bonds, real estate or mutual funds. It doesn’t matter which vehicle it is. Park it, get out and hitch a ride on the fastest moving investment possible, right?

The real estate investor who does his homework knows money can be made in any market.

You just have to decide on your profit methodology. Will it be cash flow or asset growth? Both are available in today’s market, and the savvy investor must be sure to conduct due diligence on the bottom line.

For those who want to get in on the ground floor, this is the best market in which to buy to plan for future asset growth. Equity growth comes in more sizes than merely buy-low and sell-high.

In the last few years, short-term investors lucked out with the market and bought resales, condos or preconstruction homes at high prices and were able to sell at higher prices in a few short weeks or months. This buy-now, profit-later experience is still available, it just takes more patience.

Most real estate assets grow consistently year after year. The last few years rapidly created what usually takes years — equity growth by leaps and bounds.

The usual way this growth occurs is by using other people’s money (OPM) to grow your equity along with the usual appreciation.

OPM is one of the most powerful investment tools out there. Most people use OPM to purchase real estate — this would be a mortgage. They also use a little bit of their own money by way of a down payment.

Your second use of OPM comes by way of the rent payments you receive from your tenants that you use to pay the mortgage. Now, you’re growing that equity month by month, plus paying the interest and fees.

Your equity also grows through appreciation. This figure is not as controllable by you. What’s really exciting about this part of the profit growth plan is that since you took control of this large asset with a little down payment, the cash-on-cash growth is astronomical.

For instance, let’s say a rental property is purchased for $200,000 with a 10 percent down payment — $20,000. As time goes on, you’re going to make money two different ways.

If the property moves up in value 6 percent, then the house will be worth $212,000 in the next year. That 6 percent growth is equivalent to a 60 percent growth of your cash investment — the $20,000 down payment — in the first year.

Second, if the house rents at $1,500 per month, then you have income of $18,000 per year. If you have a 6 percent mortgage, then you’ll carry about a $2,500 annual profit after expenses.

So your gross income is nearly 100 percent of your down payment, resulting in almost 10 percent net profit based on the investment of your down payment. Over the long term, the profit continues along with the asset growth.

Your next profit choice is the fixer-upper. With a slow market, many sellers are willing to sell their house as-is for a stiff discount just so they don’t have to fix up the property and compete with homes that have upgrades throughout.

Some investors seek this type property with the “We Buy Houses” signs you’ve seen. Some of the sellers are people who are behind on the mortgage and have no resources to fix up the house to sell it at a market rate. The key to success here is having the money already lined up through a lender to acquire the house, fix it up and market it quickly to pull in profit on the sale.

Finally, there’s the method of positive cash flow. This is my method of choice, where you’re creating profit with a renter who is paying for your mortgage payment and expenses, leaving profit in your bank account at the end of each month.

Is it a good time to get in the market? Absolutely. Research the market, analyze your cash flow and equity growth, then move forward.

M. Anthony Carr has written about real estate since 1989. He is the author of “Real Estate Investing Made Simple,” and contributing author to Donald Trump’s “The Best Real Estate Advice I Ever Received.” Post questions and comments at his Web log (http://commonsenserealestate.blogspot.com).

LOAD COMMENTS ()

 

Click to Read More

Click to Hide