Real Estate Investment Strategies for a Boom Market - dummies

Real Estate Investment Strategies for a Boom Market

By Nicholas Wallwork

Picture a buoyant property market and what that means for real estate investors. Prices are strong, and rising month after month (maybe even, as we saw in the last property bubble, rising steeply month after month). There is an ample supply of buyers. Demand is high, and properties sell fast. This is what’s known as a seller’s market.

These conditions are clearly ideal for strategies that are based on sales and capital growth. That’s not to say these are the only strategies that will work well in a strong market (they’re not), but strategies where the end goal is to sell a property (or sell property information) are particularly well suited to these market conditions.

How to work with the booming market

When the market is especially strong, you gain added uplift from that market and even very short-term strategies can bring capital growth. Before the financial crisis of 2007–2008, plenty of investors were making money by buying properties and quickly reselling them (what’s known as flipping houses) for a profit. Many of these investors did minimal or no work on the property at all, but the rising market still delivered nice returns.

With a sales-based strategy, I always advocate adding value rather than relying on a rising market for profit. Adding value may mean changing the property’s use (for example, from an office block to an apartment block), refurbishing the property, or anything else that helps to increase the property’s value. The important thing is not to gamble solely on the market.

In my opinion, the housing bubbles of the future won’t be as dramatic as the last one — we’re more likely to see slow, steady increases and prices rising at a more sensible rate. My hope is that this will deter inexperienced investors from clamoring to flip properties quickly without adding value.

Even so, there are still lots of reasons to be cautious with a sales-based strategy, particularly if you’re financially reliant on selling the property quickly. If you get your timing wrong and the market is changing, or for some reason the sale takes longer than you think, you’re stuck with the property in the meantime. If you’ve funded the property through finance, you’re stuck paying the mortgage and bills.

In this way, the risks are higher than if you’re investing for income. That’s why the lion’s share of my portfolio is about investing for steady, long-term income.

For any investment where the goal is to sell the property, have a plan B in mind. For example, if the market shifts, you may feel more comfortable knowing you can easily rent the property instead of struggling to sell it. This may mean you focus less on luxury family houses (which would have a fairly niche target rental market) and more on smaller, more affordable houses and apartments (which would rent well).

Suitable boom strategies

Here are some of the sales-based strategies that are well suited to a strong real estate market:

  • Developing properties: Property development is a broad term and can mean anything from a simple refurbishment or remodel, to building a whole block of apartments. As a strategy, it can work in both booming and challenging markets. But combined with the characteristics of a booming, seller’s market, property development is a particularly attractive option.
  • Dealing in property information: Generating and selling property leads and sourcing properties for buyers is a great strategy to deploy in a strong real estate market. There are lots of people buying property, and wanting to buy property. Plus, there’s the added bonus that, when prices are strong, so is your commission! This strategy is particularly worth considering if you’re interested in being more hands-on and learning about the property market firsthand.
  • Flipping houses: Again, I have to stress the importance of buying, adding value, and then selling, rather than buying and quickly reselling purely on the basis of rising house prices. If you’d like to flip (pardon the pun) through more information on the buy-and-flip strategy, check out Eric Tyson and Robert Griswold’s book, Real Estate Investing For Dummies (Wiley).