What is An Investors' Market
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What is An Investors' Market

Make your money on the way in: In todayÂ’s real estate market this mantra is very important.

When a buyer makes a real estate purchase there are a number of investment strategies to choose from:

1. Positive Cash Flow

2. Make your money on the way in

3. Selection based on potential future equity

These are not the only techniques but conceptually are among the simplest to adopt. Also, the above topics can be used singularly to develop an approach to maximize return on investment. However, the shrewd buyers will combine the strategies to improve the chances of reaching the most desired outcome. As an investor the idea is to make money, “The Order of Importance”.

Positive Cash Flow: The best CD rate offered by a Hawaiian bank is about 2.09%. When looking for cash flow the idea is to way the risk. The simplest is Cash Flow Return on Investment which is CFROI. Where CFROI=Gross Cash Flow/Gross Investment. Here depreciation has been omitted adding it would no longer make the example simple. So determine what rate of return would make putting a certain amount of money, Gross Investment at risk worth it. For the sake of the example let’s say 7% return is a good number. This means for every $100,000.00 invested there is a minimum of $7,000.00 in positive cash flow. Or Gross Cash Flow which means income derived from your investment minus all expenses equals $7,000.00. A neat little guide for maximizing cash flow in the Hawaiian condo market is. Studios will cash flow better than a one bedroom and a one bedroom will cash flow better than two bedrooms. The idea is while maximizing rents, expenses are generally less for studios than a one bedroom and a one bedroom is less than a two bedrooms. Same logic applies for Gross Investment, less for studios and so forth.

Make your money on the way in: In today’s real estate market this mantra is very important. The idea is to combine it with the ideas of maximizing cash flow. For all intent and purposes Oahu is still a buyers’ market. Even though inventory is low buyers are pressing hard to get the best deal. However, the quality of the inventory can complicate the matter. Regardless if the property in question is considered distressed, short sale, bank owned or traditional sale the question is should the buyer pay above asking price, asking price or below asking price. In order to make your money on the way in the buyer needs to focus on market value. The sales price has to stand a strong chance of not being subjected to downward pressures that would adversely influence the value of the property at the time of purchase or any time in the immediate future. So how is the “judgment call” made? First if you are unsure, find yourself a good realtor to partner up with. On average it is normal to get an accepted purchase agreement from a seller who is willing to move forward with the transaction around 95% of the asking price. Whether this satisfies the criteria for “making your money on the way in” is another thing. Generally speaking the rule is to do your “Homework”. Find out what “like kind” properties have sold for in the last six months. Look at these properties with an eye for determining upward or downward trends. Make sure the offer is based on maximizing your return if you had to sell within the next six months. Keep in mind your purchase price will impact the market value of other “like kind” properties. Do not be the person who spends the most for their home in the neighborhood.

Selection based on potential future equity: If all three strategies can be successfully employed together that’s what is called a “Homerun”! The question how can you tell the future? Every trade, even real estate has rules; or better said common sense approaches. Again regardless, you need to find a good realtor. The idea here is to go back to the basics, location, location, location! Desirability is key, find a property the majority of the population can afford and would “LOVE” to have; yes emotions in this case are very important. The bottom line if you have a residence 70% of us want and can “Afford”. Then the laws of “supply and demand” will kick in. Assuming you used the concept of “Making your money on the way in”, that is, you didn’t overpay. Then chances you will be in a good equity position now and into the future.

An Investors’ Market: Interest rates at all time low; sale prices low, inventory low, the impact of distressed property is high, and most importantly the predominance of tighten qualification required to obtain a loan permeate the financial system.

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Comments (1)

;-) Those are good market conditions.