Headlines scream that foreclosures are up, property values are down, and pundits are talking recession. What’s true? And what does it mean for real estate investors?
By Jacquelyn Lynn
Pick up a newspaper, turn on a news broadcast, or surf the internet for economic news, and you’re likely to come away with the impression that the world as we know it is going to end tomorrow, so what’s the point in doing anything? Let’s just all shop ‘til we drop and eat lots of chocolate.
The flaw in that thinking is twofold: First, the world is probably not going to end tomorrow—it might, of course, but what if it doesn’t? Spending all our money and getting fat is not the best way to prepare for the future. Second, the media love to use negativity and scare tactics to increase ratings, whether or not their frightening twist on the facts is justified.
This does not mean that you should ignore the news. On the contrary, if you are going to stay financially safe, you need to know what’s going on. But don’t rely on any single individual’s interpretation of statistics; figure out for yourself what is happening, and equally important, why it’s happening. You will then be able to make a sound decision on how to respond.
Think locally
When it comes to real estate investing, put national statistics in perspective. These numbers are averages that are not likely to reflect what’s going on in a given market. Remember the adage: the guy with his feet in the fire and his head in a bucket of ice is on average pretty comfortable. It doesn’t matter what the national numbers are for new home sales, existing home sales, foreclosures, commercial vacancies, or any other statistic. What matters is what is happening in the market in which you are going to invest.
“The real estate market is local,” says Russ Whitney, founder of Whitney Information Network, Inc. and author of bestselling books on real estate investing including The Millionaire Real Estate Mindset (Doubleday). “Certainly you should pay attention to national trends, but what really drives your particular real estate investing business is what’s happening in your local market. There will always be opportunities in real estate for investors who know how to use the right strategy in the right place at the right time.”
In an article for the February 2008 issue of Real Estate Insights, a publication of the National Association of Realtors®, NAR Chief Economist Lawrence Yun writes, “Though the national headlines have been pounding out the news of a housing market meltdown, implosion, and collapse, all markets are not equal. In NAR’s latest metro price survey, roughly half of the country experienced a price increase. … [T]here are significant variations across markets. As real estate practitioners know very well, there are further measurable differences across neighborhoods within a metro market.”
Profit on purpose
During the last real estate boom, it was difficult to lose money investing in property. The buy low, sell high strategy worked for just about everybody and people were making money by accident. But when appreciation rates leveled off and property values stabilized and, in many areas, even declined, many of those investors simply didn’t know what to do.
If you buy real estate and depend on the market for appreciation to make your profit, you are making money by accident. Though it can be done that way, you’ll see profits that are far more reliable and consistent if you invest strategically and make money on purpose. Set up investments so that you will profit from positive cash flow, forced appreciation, and equity build-up. Don’t depend on the market to generate your profits.
Are we in a recession?
According to Barron’s Banking Dictionary, a recession is a “downturn in a country’s economy, measured by a decline in aggregate economic activity. Most economic measures of a recession are at least partly subjective, although a widely held definition says a recession occurs when real gross domestic product declines in two consecutive quarters.” Investopedia defines a recession as “a normal (albeit unpleasant) part of the business cycle. A recession generally lasts from six to 18 months. Interest rates usually fall in recessionary times to stimulate the economy by offering cheap rates at which to borrow money.”
As this article was being written, Federal Reserve Chairman Ben Bernanke told the House Financial Services Committee that the “economic situation has become distinctly less favorable” since summer of 2007. Bernanke said, “The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further.” He also promised that the Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks”—probably in the form of interest rate cuts.
We won’t know if we’re actually in a recession until it is well in progress, but the real question is: does it matter to real estate investors? Our economy has always been cyclic. While economic expansions and contractions are not precisely predictable, we can see historical patterns that are reassuring. It’s also important to keep in mind that a recession does not equal an economic collapse. If unemployment hits 5 percent, or even 10 percent, that means that 90 to 95 percent of people are still working.
Even in a recession, people need a place to live and businesses need a place to operate. And with prices and interest rates low, real estate investors can make some great deals.
“The down times in real estate are really the best times if you are a true investor,” says Stacey Roi, a real estate investor in Middleton, Delaware. “There is so much opportunity out there that the only thing that gets me down is not having enough money to buy everything.”
Roi and her husband began investing in real estate in January 2003. She says, “Looking back on 2003, I see that we bought all of our properties at the bottom of a real estate market (a buyer’s market) without even realizing it. We rented our properties and didn’t even think of selling them when they all doubled in value by January 2004. We are now approaching another buying opportunity like we had in the early part of 2003. This should excite everyone from beginners to seasoned investors.”
Cycles can be local, regional, national, and even global, and are also often segmented by industry. “You need to pay attention and prepare for the economic cycles that will affect you,” advises Whitney. “The U.S. economy is like the Titanic—it’s huge, and it changes direction slowly. You’ll have time to watch trends, evaluate them, and adjust your own strategies accordingly.”
Roi believes the market will turn around in a few years and the properties she is buying now will increase in value. “The most important thing to be doing now is positioning yourself for the growth that is coming,” she says. “If you have a plan of action, know where you are going and how you are going to get there, you won’t be riding an emotional roller coaster. You’ll be excited no matter what is going on. Excitement is contagious and if you are an investor, how can you not be pumped with this market?”
Learn and use proven techniques
A key to profitable real estate investing is to learn and apply strategies that have been proven to work in the market conditions you’re experiencing. Get your real estate investing education from people who are actively doing what they teach. Get your financial advice from wealthy people who have made their own fortunes. Most important, don’t take financial or investment advice from someone who is broke.
Once you learn proven strategies, apply them consistently. Don’t get off track or decide that you can do things a little differently than you were taught. When successful people tell you what to do, and more significantly, what not to do, listen to them and follow their advice.
Accept that you won’t close every deal—in fact, most of your offers won’t be accepted. That’s fine, because if you’re making enough offers, you’ll close enough deals—no matter where we are in any business, economic, or real estate cycle.
Jacquelyn Lynn (www.jacquelynlynn.com) is a business writer, speaker, and author of The Entrepreneur’s Almanac (Entrepreneur Media, 2007).