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Downturn = Opportunity

In the current economic environment, I see a lot of people worrying about their own personal economic situation. The typical pattern is to pull back on expenditures and investments, which is a natural and understandable reaction. For many people, this conservative approach is the best way to weather a storm like this. However, for the more adventurous at heart, times like these are not time for panic, but of opportunity. The chance to make profit through real estate might be the best it will ever be in our lifetimes.

The Numbers

The deals that are coming on the market right now, most of them foreclosures, are at prices lower than those of 10 years ago. Many of these properties would actually sell for quite a bit more than they are being listed at, but the banks just want to get properties off their books as quickly as possible. They’ll take a $20,000 additional loss to not have to wait an extra few weeks to close a deal.

Everything from single families to four families are coming onto the market at prices that allow for cap rates of over 15% . Sometimes well over. Managing a few properties isn’t what one would call fun, but with these kinds of profits it’s almopst like winning the lottery. It’s not unheard of right now to be able to buy a single family for $15,000, rent it for $5,000, and be able to turn around and rent it for $750 a month. After expenses that would leave a cash flow of about $500 a month. That’s $6000 in profit a year from a building you put $20,000 into.

You also need to consider the fact that the market is extremely deflated right now. Many of these cheap homes were selling for three or four times the current amounts in the early 2000’s. Things aren’t going to stay like they are. It will be some time before we are back to how things were, but market conditions will improve. Let’s just say it takes three years to get a respectable real estate market back. In the example I am using here, which is a real property I recently worked on with a client, the property would probably be worth around $60,000 in a better climate. If you turned around and sold the property in three years this is how the numbers would look:

$60,000 sale price
$5,000 sales commissions and costs
$15,000 acquisition costs
$5,000 fixup costs
$18,000 total cash flow over 3 years
=$53,000 total profit

I didn’t make those numbers up. Granted, I am using a good example, but $53,000 in profit in three years is actually realistic. It woud be even higher if you can sell the property for more. That’s an 88% return on your intial investment each year if you paid cash for the property. Compare that to the 10% returns everyone was looking for in the past 5 years and you see where I am coming from.

Supply & Demand

So you are probably asking yourself, “If things are so great, why isn’t everyone doing it?” A fair question. The answer to that is simple: fear and money. Consider the supply and demand nature of the stock market. Stocks are high when they are being aggressively sought after. When people are confident they will pay more. But things can work in reverse too. A couple negative events can turn investors sour and what was once a sought after commodity becomes toxic. People panic and start selling like crazy. Then the stock tanks.

And that is where the opportunity knocks. Smart investors will not buy into this trend buying and panic mindset. They will see this lower price and look to the cause of why it happened. If it is something that cannot or will not likely be fixed they walk away and don’t take a second look at the stock. But if the company just had a momentary downturn and will likely see a quick turnaround, they will buy like mad. What we are seeing in the housing sector is the same thing. The only difference is that housing WILL come back. When it will come back is a question, but it WILL happen. Can you say that about any stock? Just like the stock market, real estate investors hear the bad news and bad outlook and run for the hills. If you can only step back and analyze what is going on for yourself, you can see the opportunity.

The Money

Then, of course, there is the reality of financing. Its no secret that financing is tough right now. In reality, they most successful investors right now are skipping this part of the equation. Cash in hand or a line of credit will take you really far right now. If you fall into this group you should really be thinking hard about investing right now. But even if you don’t have access to a ton of cash, you can still make things work. You need cash for a down payment, but FHA and even traditional loans are still available to more qualified investors.

So after 3,500 words, what am I getting at here? Yes, the market is down, there is no doubt about that. Just don’t look at it as a bad thing. Fortunes are made in times like these when others are too afraid to take a chance. This kind of thing isn’t for everybody, but taking the plunge right now can provide you with profits that can change your life. And quickly too. You just have to maintain a sober mindset and let logic, not emotion chose your path.


Matt Kastner

Matt Kastner is an Investment Real Estate Consultant at St. Louis Real Estate Society in St. Louis, Missouri. He is also develops properties on the side through Threshold Properties. When he isn't representing investors in the purchase or sale of multifamily properties, rehabs, foreclosures and other income producing properties, he is often taking on rehab projects himself. He lives in South St. Louis and has been in the real estate business since 2004.

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