Making Money in a Down Real Estate Market
When the real estate market is booming, the price of property gets higher each month. Making money in this type of market is easy. In fact, you can hardly avoid making money in a hot real estate market. Just buy property at the going price with, preferably, a no points mortgage, hang on for a couple months, then put it back on the market and ask 10 percent more than you paid for it. If there are no offers at first, hang on, in a truly hot market, you'll get your price in no time.
This crude form of flipping, along with other popular forms of "Getting Rich in Real Estate," work as long as the market allows it to work. Buying fixer uppers, rental properties, subdividing, even just being a common homeowner are all lucrative strategies in a booming real estate market. In this type of market, if you own real estate, you will make money.
What about when the price of realty is going down? How can we make money in real estate then? Obviously, if someone buys a home at $300,000 and sells it at $200,000 he will lose money. So, buying and selling real estate in a down market won't work.
In other types of commodities, we can short a futures contract in order to make money when the market prices are falling. Shorting is done by selling something you don't own and buying it later. This is done all the time in stocks and commodities futures. When you short something you make money when the price of the shorted commodity falls and you lose money when its price increases.
Unfortunately, there is no practical way to short real estate because when you sell real estate, a deed must exchange hands. One could argue that a contractor could sell a house and lock in a high price, then build the house sometime later as the price for labor and supplies are declining because of a slowing real estate market. This, though it might have some validity, is not the same as shorting the market.
In real estate we have to learn to use the slow market cycles to accumulate properties and to use the hot market cycles as a time to cash in these properties by selling or refinancing them.
For people just starting out in real estate investing, a down market is the best time to enter. One great method for buying properties, for someone with little working capital, is the age-old gem known as renting with an option to buy.
In a hot market, you'll never find such a deal. It's too easy for the seller to unload his house at a large profit. But when the house won't sell, you will find people who will do anything to get out from underneath its mortgage.
Realistically, you will have to look around a bit to find someone who will rent a house to you and give you an option to buy, but look hard enough when the market is slow, and you'll find such a seller, for sure.
In some people's situation, they need to sell their house before they can buy a new one. These people won't be able to rent/option their houses. However, there will be people who have moved to another house already and there will be people who have invested in a house whose price is falling. Many times these people will listen to offers that may lead to their disposing of this property.
At first, people will tell you they will only rent to you, but after you ask about a rent with option, many sellers will change their minds. They will like the feeling of knowing for sure; the property will soon be out of their hair. Even if you make offers to rent/option and are denied a few times, you will find such a deal if you keep looking. These deals are made all the time in slow markets.
A great thing about a rent/option is, it is just that, an option. If you change your mind, you have the option of not buying the property, and if the option is good for two or three years, by then the price of the house may have increased and you will have made good money as soon as you exercise your option to buy!
Making money in a down real estate market means knowing how to buy properties creatively. It also means knowing when not to buy, namely, in a hot market. Using both cycles of the real estate market means essentially, you will make money in a down real estate market because you will be accumulating property that will be worth much more in a very short time.