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Real Estate Investing in a Down Market

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Real estate has certainly seen some ups and downs over the past ten years. Anyone who purchased property five years ago knows the painful lessons of investing in an up market. However, investing in real estate when prices are low can be very rewarding for the patient investor.

Here are a few tips to keep in mind when purchasing real estate in a down market:

  1. Be patient: Patience is certainly a virtue when you are buying while everyone else is selling. Remember, you have the upper hand. Look at many properties in order to get a good sense of exactly what you are looking for and exactly what price you would like to pay for it. You have no pressure to buy anything. You are in the driver’s seat and should use that advantage to wait for the perfect deal for you.

  2. Negotiate aggressively: In this economic environment, the buyer has the upper hand; don’t be afraid to use it. Negotiate in an aggressive manner. Realize that the seller almost certainly needs to sell their property far more than you need to buy it. This could save you tens of thousands of dollars on the purchase price.

  3. Look for profitable rentals: The key to real estate investing in any market is strong positive cash flow and profitability. Understand what you will be laying out monthly to not only finance, but also maintain the property. Make sure your income from the property will be sufficient to cover these costs.

    During a slow real estate market, you should be looking for positive cash flow as your No. 1 rule. If real estate prices pick up, you will benefit from higher rents.

  4. Don’t overspend on repairs: Although granite countertops and wet bars may have been a big seller in 2005, the name of the game today is practicality. Pick inexpensive yet quality materials that will be aesthetically pleasing and functional. Forget the WOW factor. Keep your costs low and you will attract the right renters or buyers.

  5. Keep your leverage in check: A tremendous problem that leads to real estate troubles is overleveraging. A mortgage that is too large cannot be sustained by rental income.

    Keeping your leverage to no more than 80% of the property’s value will help provide you with the financial latitude to weather a period of vacancy or declining rents. Keep your costs low and your profit will grow.

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