Real Estate Investing: Market Evaluation
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Real Estate Investing: Market Evaluation

While flipping is the fastest way to make money in real estate, buying and holding is the surest. The formula is quite simple, and literally millions of investors have profited from it. You just buy a property and hold (rent it out) for years.
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Questions to ask yourself.

Am I competing with many other investors?

As an investor, you never operate in a vacuum. There are always others out there who are trying to get the same good deal you're going after. Usually, however, it's the early bird that gets the worm. Work diligently on finding properties and you'll get your share of good ones. Keep in mind, however, that sometimes the number of investors increases dramatically as speculators get into the market. This typically happens at the end of a real estate cycle as prices blow out to the high end. Suddenly everyone seems to understand the value of having a rental home or two. And even those who don't normally invest in real estate begin thinking about flipping. Often, it's best to wait on the sidelines when the competition heats up, or else you'll find yourself in bidding wars that may result in your paying too much for a property.

Can I afford to get into the local market?

It's important to know what you can afford. For example, there are some stores in which you may be able to afford any product on the shelf, such as the "99 cent stores." On the other hand, there may be other stores where you can afford only one or two items or perhaps none at all. Real estate markets are similar. In some you'll be able to pick and choose from a host of homes. In others, you'll only be able to afford a starter home, if that. As an investor, it's usually best to get started in a market where you have a choice of homes that you can afford. That way you're not limited to buying only the cheapest house for sale. If the market in which you're living is unaffordable for you, you might want to consider moving to a less expensive one. (The coasts tend to average many times higher in price for homes than the middle of the country.) Because there is so much money to be made in real estate over the long run, it's not unusual for savvy investors to pick up and move to an area where they can more easily afford to start investing.

Are rents high enough to buy and hold?

While flipping is the fastest way to make money in real estate, buying and holding is the surest. The formula is quite simple, and literally millions of investors have profited from it. You just buy a property and hold (rent it out) for years. Over time, the tenants pay off the mortgage and inflation increases its value. Over several decades, your investment can make you wealthy, particularly if you own several such properties. The trick, however, is to find properties whose rental income will cover your basic expenses - at the least, PITI (principal, interest, taxes, and insurance). Although you may still have to take money out of pocket to cover vacancies, clean up, rent up, maintenance, and repairs, tax breaks could help to cover some or all of these costs. The problem is that properties will very often rent for much less than PITI, resulting in a strong "negative cash flow," which means you'll need to take money out of your pocket each month to keep the properties solvent. No investor wants to see this, and very few can sustain it for years. Therefore, it's critical that, unless you're convinced you can flip the property; you make very sure that the rents in the area are high enough to cover your basic costs.

 

This is related to: Real Estate Investing: Evaluate the Market Before Entering

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Comments (1)

You will not compete with them but you will take a risk with real estate investment. Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, water, buildings or housing in general. One of the biggest casualties of the housing meltdown of the past few years has been Fannie Mae and Freddie Mac, the two independent government agencies that act as holding companies and insurers to the bulk of mortgage loans in the whole nation. Fannie Mae and Freddie Mac, the government-backed home loan insurance and brokerage companies, have been in enormous financial trouble for years. Both have received billions in taxpayer-funded loans.

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