Stock market volatility. Credit market collapse. Tightened lending criteria. Everything in the investment world today smacks of the 2000 dot com-induced market downturn. We really were here eight years ago when investors snapped-up stocks on the rise without regard to the actual value of the assets. Companies with massive market caps flew off brokerage shelves with no regard for annual earnings or P/E ratios. In the textbook sense, we all should have run screaming. Instead, we ran to our broker’s office with every liquid asset we had.
Now, we’re all having the inevitable sense of deja-vu – only this time, it’s with our real estate portfolios. Events leading up to our current predicament sound a lot like dot-com/dot-gone. Let’s look at culprits that got us where we are today.
In the recent market heat, solid buy-and-hold and cash flow principals burned up in the flames. Speculative investors came in and began driving-up prices through flipping practices without substantiating value. The result: artificially high property prices that were unsustainable.
To compound the problem, unscrupulous and predatory lending practices led to loose underwriting, light to no down payment requirements and unsuitable use of various lending strategies. Seduced homeowners used investor-targeted loans like option-ARMs to purchase homes outside their price range with little or no money down. Therefore, less experienced, less financially prepared and lesser-qualified buyers were able to purchase overpriced real estate as an “investment” with the hopes of riding the speculative market tide.
A side effect of the loose credit markets were a higher number of would-be renters becoming homeowners, increasing vacancy rates since the American Dream was more accessible than ever.
When this doomed system imploded, investors and homeowners alike were left upside-down with real estate that reverted back to normal market value and loans adjusting upward. There was no re-fi or sale solution, creating the foreclosure tidal wave and the shipwrecked remains of the mortgage industry.
While this situation is unfortunate for those trapped in its grasp, the current market conditions create an ideal and unprecedented opportunity to enact a calculated buy-an- hold strategy.
Seems a bit like a nightmare when you look at these events from a 12,000 foot view, but we’re inviting you to have a look from 36,000 feet. Former A-paper buyers are now disqualified from mortgages due to a noose on the neck of the lending industry, creating a new and financially favorable pool of renters willing to pay above-market rate rents. Prices have adjusted downward and in some locales like Phoenix, over adjusted, creating favorable pricing scenarios. This means cash for savvy investors who can tap into current market conditions.
As Warren Buffett stated, the time is now to buy on discount. Get your slice of the pie for less than face-value. There truly are cash-flowing bargains to be had in today’s market. While low price doesn’t always equate to a good deal, we can give you some tools to help you avoid the perils of rash purchase decisions.
When you’re ready to evaluate your next buy-and-hold real estate purchase, here are five things for you to consider:
· P/E Ratio: What rent rate will the property’s market bear in relation to the purchase prices?
· Property Location: Is the market slated for retail/community improvements? What’s the demographic? What are current vacancy rates?
· Cash Flow: Does the property meet your cash flow requirements and if the market/mortgage rates decline, can you afford to cash flow negative? Register for free to try InvestorLoft’s PropScoutä search and FinancialDynamixä calculator
· Seller Motivation: Is the seller ready to sell – and NOW? To you have room for negotiation?
· Input from Your Real Estate Professional: From title searches to local market rental data, ask your trusted advisor how they can help you make the best decision possible.
Investors: the ball is back in your court with discounted properties and abundant inventory.
Real estate professionals: you’re primed more than ever to cultivate your buyer base and service investor buyers like never before.
About Walter Charnoff
Mr. Charnoff’s experience with both technology firms and the financial services industry led him to pursue a better model for helping both real estate professionals and investors alike succeed. As the founder of multiple innovative companies in these sectors from conception onward, he has consistently and successfully focused on creating objective-based solutions with appreciable ROI for customers.
Prior to co-founding InvestorLoft, Wally was the Co-Founder of Onit Solutions, LLC. A web development firm catering to the compliance-sensitive customer, they work with clients ranging from Fortune-Rated companies to well-funded startups. It was through the work at Onit that the seed for InvestorLoft took root, ultimately joining his expertise in the financial investment realm with his passion for web-based solutions. Onit remains a profitable entity and provides development support to the focused expansion of InvestorLoft.
Mr. Charnoff is not only an avid real estate investor but has held real estate and securities licensing in several states.
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