3 steps to profit in the real estate bubble
By Justin Hunter
The real estate market
has been making a downturn for the past several months
after record-breaking prosperity for about five years.
Even though many economists are waiting for the market
bubble to pop (many believe it already has), there are
still opportunities to make a sizeable profit before
it is too late.
Chris Anderson’s article, “Want To Be Profitable
In This Real Estate Bubble?” posted on reidepot.com,
provides three easy steps to follow to ensure a successful
real estate venture in the delicate last stages of the
“bubble.”
The first thing you have to do is recognize that in
order to make money in any market (stocks, commodities,
real estate, etc.) you need to have the market in active
motion. Basically, home prices
or values must be changing, either up or down, before
investing anything.
“Did you know that many traders back in the NASDAQ
bubble made millions by adopting a style that made perfect
sense for the type of bubble market that was being experienced?
Of course this was financially devastating to buy and
hold investors
who bought at the market top. So what is the difference?
The answer is a difference in investing/trading style
and risk management.”
The second step is to realize that no one can consistently
predict the turning points of a rapidly moving market.
Professional investors who speculate property value
can tell you when a market is over or under valued,
but they cannot accurately predict when it will correct
itself; by day, week or year.
The final step towards profiting in a real
estate bubble is to realize when the market is overvalued.
This will prevent you from getting stuck with multiple
high-end properties once the bubble pops.
“For example, in the real estate markets, many
people are claiming that the price-to-earnings (P/E)
ratio is out-of-balance; that is the price you can collect
for rents in a year relative to the purchase price.
Typically this should be around a ratio of 100 to 150
for a good cash flow investment. In some areas of the
country, this ratio is over 400.”
You also have to realize that a busted bubble may only
affect increasing rental prices or directly affect mortgage
and housing markets, and again, it may burst in 20 years,
one year, a week or tomorrow.
“So your choice becomes ‘do I sit on the
sidelines’ or ‘do I learn how to invest
safely in this fast moving market.’ This is a
personal choice that you have to make in regards to
your own personal style.”
One more informational tip is that you should always
measure your risk against potential gain in the real
estate industry.
For example, if you have a chance you invest in individual
pockets of land or pieces of a company, for $2,000,
to potentially make $50,000, then the risk is worth
it because the most you could lose is $2,000. A larger
initial investment, however, may warrant more caution.
If you follow these basic steps, you will be able to
determine if you have the knowledge and guts to profit
in the real estate bubble,
even if it bursts!