3 steps to profit in the real estate bubble
The real estate market has been making a downturn for the past several months after record-breaking prosperity for about five years. Even though many economists are waiting for the market bubble to pop (many believe it already has), there are still opportunities to make a sizeable profit before it is too late.
Chris Anderson’s article, “Want To Be Profitable In This Real Estate Bubble?” posted on reidepot.com, provides three easy steps to follow to ensure a successful real estate venture in the delicate last stages of the “bubble.”
The first thing you have to do is recognize that in order to make money in any market (stocks, commodities, real estate, etc.) you need to have the market in active motion. Basically, home prices or values must be changing, either up or down, before investing anything.
“Did you know that many traders back in the NASDAQ bubble made millions by adopting a style that made perfect sense for the type of bubble market that was being experienced? Of course this was financially devastating to buy and hold investors who bought at the market top. So what is the difference? The answer is a difference in investing/trading style and risk management.”
The second step is to realize that no one can consistently predict the turning points of a rapidly moving market. Professional investors who speculate property value can tell you when a market is over or under valued, but they cannot accurately predict when it will correct itself; by day, week or year.
The final step towards profiting in a real estate bubble is to realize when the market is overvalued. This will prevent you from getting stuck with multiple high-end properties once the bubble pops.
“For example, in the real estate markets, many people are claiming that the price-to-earnings (P/E) ratio is out-of-balance; that is the price you can collect for rents in a year relative to the purchase price. Typically this should be around a ratio of 100 to 150 for a good cash flow investment. In some areas of the country, this ratio is over 400.”
You also have to realize that a busted bubble may only affect increasing rental prices or directly affect mortgage and housing markets, and again, it may burst in 20 years, one year, a week or tomorrow.
“So your choice becomes ‘do I sit on the sidelines’ or ‘do I learn how to invest safely in this fast moving market.’ This is a personal choice that you have to make in regards to your own personal style.”
One more informational tip is that you should always measure your risk against potential gain in the real estate industry.
For example, if you have a chance you invest in individual pockets of land or pieces of a company, for $2,000, to potentially make $50,000, then the risk is worth it because the most you could lose is $2,000. A larger initial investment, however, may warrant more caution.
If you follow these basic steps, you will be able to determine if you have the knowledge and guts to profit in the real estate bubble, even if it bursts!