Rolling With the Opportunities: How to Bank While Others Cry

Fourteen months ago, I bought a four-plex for $265,000. Yesterday, I sold it for a $111,237 profit.



Why do I tell you this? Because I live in one of the worst real estate markets in the country.

I’m in Southeast Florida. That’s an hour north of Miami, 20 minutes south of Palm Beach, and about as far away from economic reality as you can get in the real estate market.



Up until the hurricanes of 2005, everybody was a speculator. Flipping homes replaced stocks as the hot topic at dinner parties. Real estate licenses became more common than drivers’ licenses. If you said "cash flow" or "fixed-rate mortgage," it was like you were speaking Elizabethan English - using quaint terms that no longer made any sense.



Today, it’s a different story.



Property prices have fallen, while insurance, interest rates, and taxes have gone up. Ask people down here how they feel about real estate, and they’ll look at you as if they just ate bad fish.



And yet I was lucky enough to bank another six-figure profit during the worst period in many years for real estate. Plus, I now have another four-unit property on the market, bought last year, that should also bring in about a $100,000 profit.

What’s the "secret"? Whether you’re in a bull or a bear market, you have to buy right.

A Recipe for Success in Any Market



First, don’t get caught up in the hype. Learn how to find motivated sellers and buy at prices under market value. And make sure you have the right financing. Whether you’re using private money or bank financing, fixed rate is usually better than floating. Also - if you want to reduce risk and create passive income at the same time - only buy undervalued properties that cash flow.



Then, realize you don’t have to be locked into a bubble market. No matter where you live, there are markets around the country that are in cycles very different than yours. These are areas that offer great value and where jobs, population, and property prices are steadily rising… yet the prices still make fundamental sense.



It’s precisely in this kind of market where I did the deals I just mentioned. These happen to be in the western U.S., but there are many great value markets. In the past year, I’ve also done very well investing in cash-flow properties in value cities in the mid-Atlantic states… and even in value areas of my own state, a few hours from where I live.



In fact, the very existence of the bubble markets is fueling the growth in many of the value markets, as hundreds of thousands of people flee crowded and expensive areas and move to calmer, greener - yet often very sophisticated - areas.



These are places where you can get two or three times the property you’d find in a bubble market for one-half or one-third the price. And you’ll pay a lot less in taxes, insurance, and general cost of living at the same time.



It’s an undeniable trend that will persist for years as millions of boomers move into retirement age and as many young people who can now tele-commute head to more affordable pastures.



So how do you do it? How do you invest from afar?



Look for Value, Growth, Economic Stability, and Quality of Life



Focus on areas that have good characteristics for value, growth, economic stability, and quality of life.



For value, look for communities where the median home sells at a low or reasonable price relative to (1) the median household income and (2) median rents for that type of house. For example, a community where the median home sells for 20 or 30 times cash flow won’t offer many cash-flow opportunities and is likely near the peak of its cycle and ready for a correction.



For growth, look for communities with above-average job and population growth. Immigration from other parts of the country is usually a strong plus when coupled with good value characteristics.



For stability, look for a diversified economy - not just a one-trick pony dependent on the oil industry or movie industry or automobiles. Towns driven by single industries are very vulnerable to downturns in that business.



For quality of life, look for lively "second cities," especially towns with universities. A university is not only a good economic anchor but also tends to lead to a wide offering of cultural activities. Also look for towns that have walkable downtowns… with festivals, live shows, sidewalk restaurants, etc. The "new urbanism" tends to attract retiring boomers as well as young families looking for an affordable but interesting place to live.



Finally, look for cities that stack up well in all these areas. And then, if you want to turn very good profits into grand-slam profits, learn how to execute value plays in the best value-and-growth markets.



For instance, if a property is vacant and in need of repair, you may be able to buy it very cheaply and sell it much higher if you know how to contract for the repairs and leasing. Similarly, if a property is rented out at rates far below market, that is often a great opportunity.



That’s precisely what happened with the four-plex I just sold.



I found a local partner in a value community who was very sharp. She found a four-plex in a great area that was rented out at lease rates 30 percent below market. It also had some foundation problems that put off many investors, but the problems were very fixable.



The property was listed at $280,000, while rehabbed properties in the area were going for the mid 300s. We bought at $265,000 after concessions (including having the seller pay for foundation repairs). We then put about $18,000 into it and raised the rents for the two-bedroom/one-bath apartments from an average of $550 to $750. Today, 14 months later, they’re at $800… and we just sold the property for $394,000. The moral of the story is that value - and opportunity - flow from one market to another. If you know how to invest with the flow, you can consistently put yourself in the path of substantial profits.