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When to Jump Into Real Estate

When it comes to real estate investing, if you are out of the game, when is the best time to get back in?

By: By: Glen Mather

IRA Insights

April 2008

As a guy, it provides no shame to admit that I was horrific in jumping rope. I saw my sister effortlessly enter and exit the empty gap provided by the long swinging rope held by two of her childhood friends. Yet, each time I tried to enter the game, the rope would hit either my head or my feet. I soon tired of the effort and went back to other more destructive games often preferred by adolescent boys...

After attending a recent presentation on the state of the real estate market in Central Florida from a panel of "experts", I couldn't help but think of my inabilities to properly sense when to jump into the game. From the sense of the discussion, neither could many of the panelists.

When it comes to real estate investing, if you are out of the game, when is the best time to get back in? Many real estate agents are screaming that now is the best time to buy, bargains abound - but of course, this only echoes the refrain heard from this group in 2006 at the market peak, once again in 2007 and now at the beginning of 2008.

Indeed, in November 2005, the following excerpt was published on the Orlando Realtor Magazine Website: "NAR's (National Association of Realtors) analysis predicts homes in the Orlando market are likely to appreciate at an above normal rate because of strong job growth and the rising number of retirees and foreign homebuyers expected to purchase area homes in the future." Clearly, taking a cue from someone with a vested interest in the outcome of your decision may not provide the best unbiased perspective for decision making.

What's gotten lost in the downward cycle of the real estate rollercoaster ride is the concept of investment fundamentals. When I first started looking at buying a rental property in Orlando five years ago, I was able to find several attractive rentals that, with 20% down, together with a traditional 30 year mortgage - would provide cash flow, break-even financials. But, I did not buy then, waiting for a better opportunity. Prices started to creep upward, and soon, the only properties that would cash flow were damaged fixer-uppers requiring large amounts of work and increased risk.

So, I started looking for new properties that could be purchased at a discount and delivered much later (so called pre-construction). I had every intention to close the property and hold it for rental, which I did. But, instead of putting 20% down, I decided to reduce my risk by decreasing my down payment to 10% and living with a larger payment.

Now, two years later, taxes have adjusted upward, insurance has increased, and each month's rental payment from the tenants does not cover the costs of ownership - making my investment officially "underwater". Did this "investment" meet the criteria of a solid fundamental investment? Probably not, as I assumed, (as most of us had), when I purchased the contract that the meteoric rise in real estate was not going to end anytime soon. What seemed to be a sure winner has turned into a property that must appreciate significantly simply to recapture the monthly losses of holding the house.

So what are some fundamentals of investing that are ignored at your own risk?

Assume that current market trends are not forever, good or bad.

• Never embrace negative cash flows with the thought that future appreciation will take care of everything.
• Develop several exit strategies for each investment.
• Buy below market, and have the ability to hold on through market downturns.
• Cut your losses when the monthly negatives are likely to continue long term
• Avoid creative financing if it increases your risk. Thirty year, fixed rate mortgages look a bit more alluring now than ever before.
• Reduce risk through partnerships or other joint investment strategies.
  

So, is now the time to jump in? If the fundamentals are strong, there may be no better time. If short sales fit within your personal fundamentals filter - then go ahead. If pre-foreclosure deals provide the right cash flow, move forward. If that long-term rental provides the cash flow necessary to carry the property - and a high likelihood that future vacancies will be low, put the property under contract. Although the Federal Reserve continues to reduce the short term rates, many experts predict a further tightening of credit, which may make tomorrow's deals more expensive or impossible to finance.

It takes a strong swimmer to fight the tide of today's declining real estate market, but the opportunities do exist for the fundamentalist. I've learned that the best way to get into the game is to slow down, think twice, do your homework, and have good advisors twirling the rope before you jump.

Glen Mather is President of Entrust Administration Services, Inc. a self-directed IRA administrator who provides services to many IRC investors. He can be reached at (407) ENTRUST.

 

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