Andras:

Real estate cycles. There are cycles of slow growth and periods of fast growth. Interest rates are sometimes low and sometimes high.

And everytime the cycle re-cycles, people are surprised for some reason. Go figure.

To protect yourself from these cycles, consider these points:

• Do not buy if rent does not cover expenses (interest, principle, taxes, insurance, repairs).
  
  While you can feed an alligator (negative geared house which costs more than the income it generates), the moment You have a loss of income - or just a drop of income - you will be in financial trouble. The loan doesn't care about you or your circumstances. It just wants - demands - to be paid.
  
  The real estate investing highway is littered with the dreams of many investors who went the negative cash flow negative gearing route.
  
• Never sell. In the example of using interest only loans, the idea is to NEVER SELL. By holding onto your properties you will have them through a cycle.
  
  If you had bought in a slow growth year, you will hold them for ten years or so, right through the fast growth period until the growth slows again.
  
  The downturn will not be a concern for you because your expenses are covered because you only bought positive cash flow properties.
  
  Ten years ago, the real estate market peaked down here where I live. For the last ten or so years, prices have not grown much. Recently, they began to pick up again and many "investors" quickly off-loaded their properties.
  
  They held onto them while growth was slow and got rid of them before growth got fast. As soon as they saw a little growth, they were out. Of course, these people also bought at the peak prices all those years ago.
  
  If your property is in positve cash flow you won't care too much how the growth is. It will matter, but not as much as it matters to someone who has negative cash flow.
  
• Buy in growth areas where demand exceeds supply.
  
  I know of places in Australia where you can buy a nice three bed house built in 1890 on five acres for around $40,000A (about $23,000US).
  
  A five bed house just around the corner from where I live, which was built in the '70s, is for sale for $429,000A (about $250,000US). The block is smaller than one quarter acre. And the house is nothing special.
  
  Some people in this area pay $290 a week rent for a single bed apartment. Others pay $170 a week for the same thing. That's $730-$1,250 a month (about $430-$730 US) for a single bed apartment.
  
  And rents just keep going up. Sometimes by as much as 25% - There are instances where people paying $200 a week ($860 a month) have had their rents increased to $250 a week ($1080 a month). Considering the average Australian income is about $500A a week - despite the "official" averages which no-one seems to earn - this rent is about half of what a normal person earns. But they pay it, because they WANT to live here. And if they don't, there is always someone immediately available to move in.
  
  Many investors report HUGE numbers of people wanting to rent their properties. It is not uncommon for 50+ people to respond to a single "for rent" ad.
  
  This is the residential market where I live.
  
  The commercial market is vastly different. I know of modern buildings in prime positions which have 64% vacancy! And while this goes on, more office complexes rise up. It's investing madness.
  
• Know your area. Where I live (The Gold Coast, Australia), many properties are sold to "investors" who travel up here from Sydney. Compared to Sydney, the prices here are cheap. But those investors don't really know if they are buying in a good area, or in a bad area.
  
  Recently, our local authorities changed the name of one street because it had a bad "rep." The locals know the area and still refer to the street by its old name. So it made no difference to them. Those who travel up here don't know if the street is a good one or a bad one as they are only here for a short time. So why the street name was really changed is a mystery.
  
  There are places here where you can buy a 2 bed apartment for about $70,000A (about $41,000US). The area where these cheap places are is known locally as "The Ghetto." That's not its real name... that's its nick name.
  
  Investors from out of the area are the usual buyers of these places because they don't know the area. Though they very quickly learn once the repair bills start arriving ;o)
  
• Don't buy in "bad" areas. A bad area is not necessarily a slum area. It's an area where vacancy rates are high. Even in a growth city where general demand exceeds supply you will find areas of high vacancy. These areas are often privately owned housing which borders government owned housing estates - no-one wants to live next door to the habitually unemployed, single mothers popping out kid after kid, and the other welfare society crowd no matter how cheap the rent.
  
  What you end up with is borderline welfare people renting these places out for similar prices to what they would pay for government housing. Vacancy rates are high.
  
  I know of one place about half an hour drive away where you can buy 2 bed apartments for about $45,000A (about $26,000US) and which rent is around $65 a week (about $280A, $165US a month). Even at such cheap rent, vacancy can be as high as 50% - 50% of the time the property will be without a tenant. And landlords try all kinds of incentives to attract tenants - one month free rent, for example.
  
  You can only know this kind of information if you know your area, or study the area.
  
• Be patient when buying. If you are buying one property a year there is no rush to acquire. You have ample time to do your research. To run the numbers. To make sure you are buying a property for positive cash flow and that that property is in a good growth area where demand exceeds supply.
  
  If the numbers do not make sense do not buy.
  
• Know your investment strategy BEFORE you buy. Will you be buying and holding - thus giving you great positive cash flow in the future as well as the option of borrowing back the equity while the rents cover the loan? Will you be trying to buy and sell repeatedly and profit that way? What do you intend to do with the money the investment makes you?
  
  Will the investment income be used solely to live on? To buy more investments? Toys? Vacations? Other?
  
  Terry outlined his basic strategy - buy and hold over a number of years. Then at some point in the future, sell the older houses and use the cashed out equity to pay off the loans of the newer houses. Thus being free of debt the rent is all yours to keep (bar insurance, taxes and repairs). I am certain he has a strategy for how that money, once free of its debt obligations, will be used by him.
  
  The property acquisition method I outlined is different. And use of the borrowed equity is something I also have plans for - I know what it will be spent on.
  
  Do you want your real estate income to replace your job income? How soon do you want this to happen?
  
  Many people are taken in with "no money needed" type strategies. Some of the techniques are valid. Others aren't. And many people are interested in immediate and high returns - the lure of flipping a property within 30 days for a $15,000 profit and no money needed to do the deal.
  
  Some people have the wherewithal to do these "deals." Others attracted to them are desperate and are looking for a magic bean to fix all their problems.
  
  No-one wants to be told, "Here's how to do it but it will take ten years." Sure, they'll read it, but it doesn't appear to be quick enough for them. And yet, the slow and steady method is also the least "risky" and causes the least "stress".
  
• Keep it simple. The more complex something is, the greater the chance you will not do it.
  
  Doing a "Subject To" deal with "Lease Options" and tenant buyers thrown in (which will then be taken through a refinancing process later), all covered within a Land Trust with a Company as a Trustee, and using "hard money" to finance any "rehab" work you need done, is about as complex as you can get.
  
  Ten percent deposit with an interest only loan and renters is about as simple as they come.
  
• Start small. Before you get hold of a six-plex make sure you have first hand experience. Get hold of one property first. Not a large expensive one. Just a middle of the road property the average Joe would live in.
  
  It ain't flash. It ain't pretty. It ain't gonna impress anyone. But it sure does work.
  
  After your first "small" deal, do another one. A little bigger if you want to, but not necessary.
  
  You are not in competition with anyone. And you do not have to impress anyone. You will most likely never reach the level Donald Trump has reached. Or the levels of all the full-time investors you read about who do 100 deals a year. You might. But you most probably will not.
  
  But this comes down to your strategy - slow, steady and plain with little risk, or high-flying high-risk fast and complex deals.
  
• Do not invest in sole industry towns. A town which survives and exists because of one industry or big business fits this. These towns are dangerous to the real estate investor. What happens if the company folds or moves, or if the market for the company's products declines?
  
  You end up with over-supply and under-demand.
  
  The logging town where the greenies have made the authorities cease all logging. The mining town where the resource has all been mined. The town which supports the purple bippy dippy factory is doomed once people learn that purple bippy dippies cause cancer and stop buying. The town that only survives due to tourism.
  
• Be free of personal debt before you start investing. Have clear credit cards and no personal loans for cars, boats, furniture, or other items that go down in value.
  
  Being free of personal debt first might seem like a hassle. But the process you go through to achieve the "debt free" status teaches you skills in money management. It also shows lenders that you can handle debt and money.
  
  Looking to real estate as a financial savior is a mistake many people make. You can see them at the court house every day filing for bankruptcy.
  
  Get control of your personal finances FIRST. BEFORE investing. It will save a lot of grief later on when you have a financial hiccup - yes, that's "when" you have a financial hiccup and not "if", because you will have some kind of financial hiccup for a plethora of reasons.
  
  For instance: If you have one property which was covering costs and your tenant has to move and you cannot find a new tenant for one month, where will you find the money to pay the loan, run the "for lease" ads, do any repairs needed, and still pay your car loan, credit card bill, boat loan, and your furniture loan?
  
• Take out insurance. There are insurance products available for all kinds of things, including loss of rent income in investment properties. If they are reasonably priced, consider getting them on your property. If the premium is equal to one month's rent, then put the money aside yourself without taking out a policy.

These are some of the things to consider and make sure you have answers to before investing in real estate. Cover these, and it virtually won't matter what the market does. You won't be adversely effected.

Hope this helps.

Michael Ross


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