How to profit from real estate investments in a soft and declining real estate market

house bubble

Three years ago real estate investing was hot. Today, many people act as if the opportunity has passed. I contend that the opposite is true. In the past, as a mortgage banker focused on originating mortgages for investment properties, I started listening to and learning from my real estate investor clients and noticed two categories of real estate investors: real investors and blind investors.

Real Investors have the following in common:

Profiting when they buy. Rather than believing an entire market is hot or cold, a real investor knows that the purchase price is what dictates the return on the investment. You can look in any real estate market to see property values and rental rates. Those are things the investor doesn’t control. The investor does control what he is willing to pay for a property, and that’s how a real investor knows what his return on investment will be before buying the property.
Investing for income. Real investors buy assets because they produce income. What a property is selling for doesn’t even matter if you can achieve a good return on investment from the property’s cash flow. A real investor might pay full asking price for a property, possibly even above the selling prices for comparable properties, if he is able to achieve a good return on investment through rental income.
Taking advantage of market cycles. Rather than expecting to buy low and sell high in a short period of time, a real investor often buys real estate when the entire market is cheap and sells many years later when the entire market is overpriced.

Blind Investors have the following in common:

Focusing on selling for profit. Blind investors will buy any piece of real estate when they believe real estate is hot. If prices are rapidly increasing, a blind investor just hopes that the trend will continue without understanding it. Hope is not a strategy.
Investing primarily for appreciation/gains. Blind investors don’t want to own assets; they want to trade assets. They want to buy low and sell high. Buying low and selling high can be a good thing, but it’s not always easily achievable, especially in short periods of time.
Being on the losing end of market cycles. A real estate market can become overpriced if too many people are buying properties (especially if for the wrong reasons), and this is often the point at which blind investors choose to join the fun and start buying. Then once real estate prices start correcting downward, blind investors will sell in a panic bringing prices even lower, which creates extraordinary buying opportunities for real investors.

[More to come in Part 2 of this post]