Knowing the right time to invest in real estate is a skill set that is not taught in even the top colleges in America. Most people still believe that real estate investment will always pay off if kept for a long time, but that is far from the truth.
Knowing when to buy and sell is the key to becoming very rich investing in residential or commercial real estate. If you bought properties during the financial meltdown of 2008 and 2009 you’re probably seating on a good equity if you decide to cash out.
Before we determine if this is the right time to buy real estate, let’s look at the type of properties you can purchase in today’s market.
Types of Real Estate
While there are two main types of real estate, each can also be divided into sub-types.
Residential properties come in different sizes but the true classification is one-family, two-family, three-family, and four-family. Most lenders regard any property with more than four units as commercial real estate.
A single family is the most popular type of real estate and it is also the most foreclosed type of real estate. Your income is used as the qualifying criteria when purchasing a single family home.
When recessions hit most homeowners are not able to pay the mortgage, which is why it the most popular foreclosed property. A two to four family home will have additional units you can rent out and collect rent.
The more units within the property the higher the chance of having enough monthly income to cover the mortgage and other expenses. From my experience purchasing real estate in the past, it is far easier to qualify for a mortgage for a multiple unit dwelling building as compared to one family house.
The potential income from the extra units will be added to the income of the purchaser, which helps to increase the qualifying criteria. If you have a frugal nature and can evict a family that did not pay your rent, you might be ready to manage a building containing extra units.
To make it as a landlord you have to be mean, tough, and fair-minded, but not a sucker. A sucker is one that becomes friends with people paying you rent. Renting to relatives is just not a good idea because when hard times come, their financial woes might make you lose the property.
You see the banks could care less if you lost your job as long as you pay your rent. Your city expects you to pay the property tax on your property regardless if your tenant did not pay their rent. The water company expects the bill to be paid on time.
You see what I am getting at, other entities depend on your monthly payment and most will take you to court if you miss a couple of payments. So, treat your tenants like a business.
People tend to pay friends last, so I would not advise you to be friendly with your tenants. Do repairs on time, but also expect your rent when it is due or commence eviction proceedings as soon as possible.
Commercial Real Estate
Commercial real estate is probably more diverse than residential properties. A residential building containing five units or more will be considered commercial real estate by most lenders. Then you also have shopping malls, stand-alone commercial stores, mixed-use buildings, industrial buildings, office buildings, raw land, farm, etc.
The dominant players in commercial real estate eat amateurs for breakfast on a daily basis. Before you get into commercial real estate not only should you be well funded, but you have to be ready to hold the property for a very long time because it is the most difficult type of real estate to get rid of both in good times or bad.
The value of any real estate is based on the location, but for commercial real estate, it is the key to making a profitable return or losing it all. Unless you know what you’re doing leave commercial real estate including raw land to the experts with the know-how to create value.
Real Estate Investing Key Points
You can use the following tips to determine if it is a good time to invest in any type of real estate in your local area. Several of the steps must be in your favor before you can push the button to buy any type of property.
Mortgage Interest Rates
The interest rate on your mortgage will determine your monthly payments. It is far better to invest in real estate when interest rates are low. During very low rates you should go for fixed rate mortgages with no prepayment penalty.
Always ask for absolute transfer rights with your mortgage, for your banker might grant your request if your credit is good enough, and if it is a good deal for the banker. Bankers are conservative by nature, but I can assure you every part of your mortgage loan is negotiable.
All those fees that the banker pretends it’s set in stone are all negotiable based on your borrowing power. The best time to complain about not wanting to pay all those fees is when you’re filling out the application form.
The Economic Condition
Do not judge the economic condition based on the stock market numbers, for it is carefully manipulated as far as I am concerned. Take a look at your neighbors and see how they’re doing economically.
Do people you know have well-paying jobs? Please do not base your real estate investment decision based on this theory for this is just to get you ready to understand the next most important criteria that can make you a multimillionaire if done right.
Buy when others are selling and Sell When Others are Buying
One thing I have learned over the years is never to do what other people are doing. In fact, I would urge you to go the opposite direction as far as real estate investment is concerned. I want you to ingrain this proverb by Warren Buffett into your subconscious; “Be greedy when others are fearful, and be fearful when others are greedy”.
Timing is everything when it comes to real estate investment and the best time to buy is when most of the people want to sell. Right now, in some parts of the country, there are now bidding wars for who can pay the highest amount for highly desirable properties.
Unless you’re truly blessed with unlimited funds buying when others are buying will not make you rich. I have been through the real estate boom and bust cycle before, and I know the warning signs. If you’re looking to invest and rent out a property, buy based on the price rather than on the monthly payments.
At present, real estate is going through a boom and people are overpaying in some cities. If you just adopt the attitude of doing the opposite of what your friends are doing when it comes to real estate investing, you will come out richer in the end.
Most humans by nature are followers rather leaders. The same trends that led to the economic meltdown of 2008 are slowly becoming obvious to those with eyes to see. The talking heads on television shows are paid pundits and most will say anything to keep their jobs.
This is the time to start putting away some cash, for when the bust cycle comes cash will be king and you can pick up valuable properties for much less. Nice does not always translate into profitable, so take your emotions out of your desire to own real estate properties.
Do not buy because your real estate buddy said it is a good deal, neither should you buy to keep up with what you neighbors are doing. Some of you have the wrong view of capitalism, for there must be a correction before the whole process of economic growth can repeat itself.
In some cities in America, it is real estate boom time, but I can assure you the bust is just around the corner if you have the patience and resources to profit when it arrives. You can act like the masses or follow the quiet actions of the true real estate savvy investors that sell when people are buying and buy when the boom comes crashing down.