“Give me a one-armed economist!” That’s what Harry Truman said as he grew weary of economic advisors who seemingly could never give a straight-out recommendation without adding, “…but on the other hand….”
I believe serious investors understand that they can succeed in both good economies and in bad. They also know that they may have to adjust their approach to fit the circumstances. Has anyone seen Warren Buffet hiding under a rock?
Income-producing real estate – that is, rental properties – offer investors an excellent opportunity to build wealth over the long term. It’s important to understand that the value of a typical income property doesn’t necessarily rise and fall in step with the home market. Investment properties are bought and sold for their ability to produce net income. So, if you buy a property at a sensible price relative to its income and you manage it well, you should enjoy a good return over the long term.
Everyone expects their investments to succeed in a hot market, but what about now, when the economy is struggling? It’s not uncommon to see apartment properties do well at times like this. When money is tight and it’s difficult for buyers to come up with down payments and to afford mortgage terms, demand for apartments typically rises.
Take a look at the medical office buildings in your market. Health care doesn’t go out of fashion, and with boomers getting older, there’s a good chance that demand will rise. Look also at university towns. The turnover of students and faculty typically translates into high demand.
I’ll say more about these and perhaps some other areas of opportunity in future posts.
And finally, what about that one-armed economist? Is there a, “…but on the other hand?” As much as we would like every decision to be unambiguous, all investments involve risk. Otherwise there would be no reward. So what are the caution flags?
First, remember that all real estate is local. Your local job market, for example, may be atypically strong, with new employers moving in; or especially weak, with important job sources shutting down. View all generalities through the prism of your local market.
Remember that cash is king, especially in a weak economy. It’s all right to try to acquire a property using as little of your own cash as possible (provided, of course, that the deal works on those terms). But there’s a big difference between using very little cash and having very little cash. If you have nothing in reserve to fall back on, the risk of a highly leveraged investment may be greater than you can deal with.
This may not be the time to buy with no cash and flip for a profit tomorrow, but it can be an excellent time to buy for the long term. Do your homework, run the numbers, and prosper.