Connect with us

Real Estate Investing

What’s The Best Way To Invest $100K?

Published

on

Let’s have some fun today and talk about the best way to invest $100,000.

It is a lot of money, but it’s also not a lot. You might have $100k after selling a house, rolling over a 401(k) or IRA, receive it as an inheritance, etc.

So, let’s dive into the best way to invest $100k.

Should I Diversify my $100k Investment?

The first thing to think about is diversification. Should I diversify?

This will depend on my current financial situation. If I have a bunch of other investments elsewhere, then I would consider dropping my $100k into just one investment.

If this was all of my disposable money that I want to invest, then I’d diversify it.

I will assume that this 100k is all the money available, so I’ll diversify it. But, if I ever wanted to dump it all in one place, I could just pick one of these categories and put it all in there.

Allocating My Money

Since I’m going to invest my $100,000 in a diversified fashion, I’m going to plan how to allocate the money first. In order to do that, I need to lay out some options to invest in first. Here are a few.

  • Stocks
  • Bonds
  • Real Estate
  • Business Ownership
  • Commodities
  • Venture Capital
  • Crowdfunding (venture capital, real estate, etc)

There are definitely more options but these are probably the most mainstream. I don’t want to dive deep into something that requires a lot of very specific knowledge or experience to get into.

Looking at this list, I’m going to cross a few items off right away.

Crossing Off My List

First, toss bonds. They earn too little and values are inversely related to interest rates. Since interest rates are going up, bond values are going down. Plus, who wants a few percentage points of return when everything else returns so much more?

The next thing I’d toss off is venture capital. The minimum investments are going to be too high and the cashflow is not there. Generally, VC companies have big pay days if they sell or go public, but won’t return any capital in between. I like good cash flowing assets.

The third item I’m going to toss is commodities. It’s an area where you can make a lot of money, but it requires a lot of specialized knowledge that most of us don’t have. Or, it requires a lot of speculation and that isn’t a solid investment strategy.

That leaves stocks, real estate, business ownership, and crowdfunding.

I personally would allocate my money into those 4 categories as follows:

  • 40% – Direct Real Estate Ownership
  • 20% – Crowdfunded Real Estate
  • 20% – Stocks
  • 20% – Side Business Venture

1. Crowdfunding:

I’m starting with crowdfunding because it’s easy to get started. I’ll be putting $20,000 of my $100k investment into this.

I’d jump right onto my favorite platform, Fundrise, and drop a portion of my investments right in there. The great part is you can invest with your retirement fund.

Investing With Fundrise

It’s a super simple process so this won’t take long.

I like Fundrise because it’s done well with the money I invested in it back in 2016. My return has average around 10% per year, and there has been some appreciation as well.

So, here’s how to invest with them:

First, go to the Fundrise website and pop your email address in there.

Next, select your plan.

Third, connect your account and fund the investment.

Simple, right?

2. Direct Real Estate Ownership

I’d put 40% of my $100,000 investment money into my own real estate. At the $40k mark that allows me to buy a property that is roughly $200k in value. I can get a good triplex or fourplex at that price.

I think real estate is one of the best ways to invest money, regardless if you have $10,000, $50,000, $100,000 or even more to invest.

I’d expect at least a 15% cash on cash return and another 2-3% per year in appreciation. So, this $40k should earn around $7,000 per year for me.

Getting started in real estate is a little bit more challenging than just dropping money into crowdfunding. You can get started making offers in the next 30 days by checking this course out.

There are 4 things you need to learn in order to succeed at investing in real estate:

  • Find a Deal
  • Run the Numbers
  • Finance the Property
  • Fill it With Good Tenants

Finding Good Real Estate Deals

There are really 3 ways to find good deals – MLS, Direct Mail, or Online Lead Generation.

Of course, some deals are found by worth of mouth, knocking on doors, etc. But the 3 methods I mentioned are the only 3 that are truly scalable.

Finding Deals on the MLS

I’m not going to go into this too much, but, here are the basics.

First, find a good real estate agent. I like to use Agents Invest for a few reasons. First, the owner of the company is a real estate investor and she finds and trains agents around the country how to work with investors.

Second, it’s totally free to the investor.

Third, her agents often find deals that are not on the MLS, so it saves a lot of work for me.

Direct Mail Marketing

If you want to cut out the agent and go direct to the seller, a good way is with direct mail marketing.

 

In a nutshell, you buy a list of addresses, put together letters, and mail to them. Then, you wait for calls to come in.

Every time I’ve done this, I get about a 3% call back rate. So, if I mail 1,000 addresses, about 30 call me. Of that 30, maybe 3 are good deals and of those 3 I might get one.

In some markets, it’s more competitive so the numbers may be lower.

I go into a lot more detail on this method in my course on creating deal flow.

Online Lead Generation

Most questions start with a google search. Everything from “how do I avoid foreclosure” to “how do I sell my house fast” are all questions that people go to the internet to solve.

So, by creating that resource online, you might be the one they contact!

I use Investor Carrot for my online lead generation sites. Getting started with them is super simple too!

Simply go to the Investor Carrot site and pop in your email address.

Go through the prompts and set up your free trial.

Then start building content!

It does take about 3-6 months to generate any movement on Google, so be patient when first getting started.

Running the Numbers

This is the hardest part and there is no way we can get into it all here. But, we’ll cover the 4 basics you need to know, which are:

  • Determine After Repaired Value
  • Estimate the Rehab Costs
  • Know The Rents
  • Budget for Ongoing Operational Costs

Determining After Repaired Value

After repair value, or ARV is what the property will be worth after any necessary repairs are completed. Hopefully, the ARV is higher than whatever you are purchasing it for.

The goal is to buy it for a certain price, do some work, then have the ARV be significantly more than what you put into it.

The best way to estimate the ARV is to do a comparative market analysis (watch this video and subscribe)

Estimate Rehab Costs

There are a lot of rules of thumb and none of them apply everywhere. It also depends a lot on the size of the property in question.

The best way to estimate costs is to bring a contractor with you to give a rough idea.

You could use the $25/foot method which assumes a full interior upgrade costs about $25/foot, but that is fairly substantial.

There is also the $3,500 – $7,000 rule for interior upgrades on smaller apartments.

or…

You get the point. It’s hard to estimate!

Know Your Rents

Similar to doing a comparative market analysis, you’ll want to look at comparable rents in the area.

Here are the keys to estimating rents:

First, find 3 or 4 apartments for rent in the area that have similar characteristics such as age, amenities, size, number of bedrooms, etc.

List their rent prices from cheapest to most expensive. If one is way out of alignment with the others, you want to know why. If it’s an outlier, I’d discard it.

Look at the remaining comparable apartments to see if they have rents that are similar then simply average them if it’s true. If they have a wide variety, then look to see which one is most like yours. Then, go find more apartments for rent that are more closely aligned with yours.

Operational Costs

This is one of the biggest mistakes that most new investors make – they forget to budget properly for operational costs.

The easiest thing to do is to simply use the 50% rule. Basically, this says that 50% of your income will go your your expenses (everything except the principal and interest payments).

3. Create a Side BusinessI’d take $20,000 and invest it in a side project.

While this is not an entirely passive investment, it can become passive if it grows. Additionally, if it’s set up in a smart way, I can dedicate just a little bit of time to hopefully get outsized returns for the time commitment.

Honestly, not investment starts as completely passive, not even rental property. The key is to set it up well and have good systems in place.

There are two ways to go about this. I could start something completely unrelated to my other investments such as an eBay or Amazon FBA site. The other option is to start something that has synergy with one of my other investments.

Me personally, I’d rather have a business that ties in with other things I’m doing. So, I’d start a business related to real estate, but that isn’t actually investing in real estate.

4. Investing in Stocks

This is the most boring of all the options and the most well understood, so I’ve put it last.

I would invest the remaining money into a low cost index fund that tracks one or more of the major indices such as the DOW, Nasdaq, or S&P 500.

I’d probably divide my total investment between 2 or all 3 of them.

There are other low cost ETFs or funds that mirror other indices in the US or around the world, so you can get creative here and just go with the ones you think will perform the best.

For me personally, I like the S&P 500.

I’ve covered a lot of different ways to invest $100k. Like I said before, it really depends on your personal situation and risk tolerance.

It also depends on any other investments you might currently have as well.

This article originally appeared on idealrei.com. Read the full article here.

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Real Estate Investing

Commercial Real Estate: Property Types And Classes

Published

on

Before you start investing in commercial real estate, regardless if it’s via online crowdfunding or through a syndication, you want to know what sort of investment you are getting into.

In general, crowdfunding and syndications both invest in commercial real estate. Single-family properties are too cheap for developers to raise capital on. There is a fixed cost of raising capital. So, developers focus on $1m+ properties.

And usually those are commercial real estate projects.

Since commercial real estate is new to most investors, we’re going to cover the different property types within commercial real estate, as well as the different classes of property and neighborhoods.

Asset Class vs Property Type vs Property Class

An asset class is a group of investments that have similar characteristics and behave similarly in the marketplace.

Equities (stocks), fixed income (bonds), and cash equivalents (money market) are the 3 traditional asset classes. Additionally, there are 2 alternative asset classes that are extremely common as well – real estate and commodities.

There are a whole host of alternative asset classes which professionals may agree or disagree on them, such as valuable art, numismatics, or other collectibles. Increasingly many are looking at crytpo currencies as an alternative asset class.

Each asset class can further be broken down. For example, there are 11 sectors for stocks (healthcare, industrials, technology, etc).

A lot of people will ask about asset classes in real estate. What they actually mean to ask is about property types within the asset class of real estate. There are no asset classes within real estate because real estate is an asset class.

Property types are what the real estate asset class is broken down into. Just like stocks have 11 sectors, real estate has a variety of property types from office to multifamily.

Real estate does have a “class” rating system as well, which may be part of the reason why people confuse the terminology.

Property classes in real estate are referring to a rating system we use in the real estate industry to help us categorize neighborhoods and property types. This is generally on an A to D rating scale where A is the nicest properties and D is the oldest and most run down.

Real Estate Property Types

The asset class is an overarching and very broad type of investment. Within real estate, there are 4 primary types of property which include:

  • Residential
  • Commercial Real Estate (CRE)
  • Industrial
  • Land

Each one of these can be further broken down. For example, farming and resource extraction (mining and oil) are uses for raw land.

We’re going to focus on commercial real estate because that is what most investors are buying when they want to buy income producing property.

Types of Commercial Real Estate

There is almost an unlimited number of types of commercial real estate, but here are the most common ones you’ll see.

Multifamily

Multifamily is a type of commercial real estate because the owners buy it to produce income, not to live in.

Multifamily is anything that is 5 units and above (in the United States).

There’s really no reason for it except that the primary mortgage lenders Fannie Mae and Freddie Mac will back personal/residential mortgages on any owner occupied property 1-4 units, but not 5 and above.

So, a homeowner can get a traditional mortgage on a 4 family, not on a 5 family.

4 family properties are technically multifamily. But, they are excluded because they are bought by typical homeowners. Commercial multifamily property is exclusively 5 units and above.

Garden style, mid-rise, and high-rise buildings are 3 sub-categories of multifamily to be aware of.

Retail

Retail is the subcategory of commercial real estate that includes all shopping. This includes everything from a building with a single retail tenant in it (such as a fast food restaurant), all the way up through shopping plazas or even shopping malls.

It is a really complicated space because there are a variety of lease terms that can directly impact the value of the asset. For example, a single tenanted building with a lease that is about to expire is worth far less than the same building with a new 10-year lease.

Additionally, there are different types of malls, shopping centers, outlets, and more that complicate the space.

Regardless of how they are broken down, they are all considered retail.

Office

Similar to retail, these can be multi-tenanted or single-tenanted. But, unlike retail, these can range from giant skyscrapers to small office condo developments.

Self Storage

Self-Storage is relatively new to the list and is not included in most other breakdowns of commercial real estate. But, it should be.

Self-storage is one of the fastest growing and most stable CRE investments available. Supply simply cannot keep up with demand in many markets, and available spaces are being leased up at unbelievable rates.

Hotel

These are properties that are owned and operated for the purpose of very short term rentals. Can also include motels.

Mobile Home Parks

Mobile Home Parks are a huge sub-category. It’s often overlooked or counted as a sub-category to multifamily, but that’s not accurate.

Mobile home parks were very popular in the 70’s and earlier, but few new MHPs have been built in several decades. As such, occupancy is high and stable.

On the other hand, infrastructure is aging and investments in underground water/sewer, roads, and electrical can be very costly.

Special Purpose

This just captures all the other unique types of commercial real estate out there such as amusement parks, bowling alleys, and more.

Classes of Property

In residential and multifamily, the property/neighborhood class is a rating from A to D. It describes the overall age and quality of both the neighborhood and the individual property. For example, you might hear that this is a C class property in a B class neighborhood.

Multifamily is anything that is 5 units and above (in the United States).

There’s really no reason for it except that the primary mortgage lenders Fannie Mae and Freddie Mac will back personal/residential mortgages on any owner occupied property 1-4 units, but not 5 and above.

So, a homeowner can get a traditional mortgage on a 4 family, not on a 5 family.

4 family properties are technically multifamily. But, they are excluded because they are bought by typical homeowners. Commercial multifamily property is exclusively 5 units and above.

Garden style, mid-rise, and high-rise buildings are 3 sub-categories of multifamily to be aware of.

Retail

Retail is the subcategory of commercial real estate that includes all shopping. This includes everything from a building with a single retail tenant in it (such as a fast food restaurant), all the way up through shopping plazas or even shopping malls.

It is a really complicated space because there are a variety of lease terms that can directly impact the value of the asset. For example, a single tenanted building with a lease that is about to expire is worth far less than the same building with a new 10-year lease.

Additionally, there are different types of malls, shopping centers, outlets, and more that complicate the space.

Regardless of how they are broken down, they are all considered retail.

Office

Similar to retail, these can be multi-tenanted or single-tenanted. But, unlike retail, these can range from giant skyscrapers to small office condo developments.

Self Storage

Self-Storage is relatively new to the list and is not included in most other breakdowns of commercial real estate. But, it should be.

Self-storage is one of the fastest growing and most stable CRE investments available. Supply simply cannot keep up with demand in many markets, and available spaces are being leased up at unbelievable rates.

Hotel

These are properties that are owned and operated for the purpose of very short term rentals. Can also include motels.

Mobile Home Parks

Mobile Home Parks are a huge sub-category. It’s often overlooked or counted as a sub-category to multifamily, but that’s not accurate.

Mobile home parks were very popular in the 70’s and earlier, but few new MHPs have been built in several decades. As such, occupancy is high and stable.

On the other hand, infrastructure is aging and investments in underground water/sewer, roads, and electrical can be very costly.

Special Purpose

This just captures all the other unique types of commercial real estate out there such as amusement parks, bowling alleys, and more.

Classes of Property

In residential and multifamily, the property/neighborhood class is a rating from A to D. It describes the overall age and quality of both the neighborhood and the individual property. For example, you might hear that this is a C class property in a B class neighborhood.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

Continue Reading

Real Estate Investing

What is Debt Service Coverage Ratio and Why it’s Important?

Published

on

There are few numbers more important in commercial real estate than the debt service coverage ratio.

It’s one of the first things and one of the last things that any commercial lender or broker will talk about. It’s first and last because it’s simply that important!

A lot of people toss this term around without explaining it while others are using it without fully understanding it. It’s a lot more than just a simple formula and when you understand the debt coverage ratio, you’ll be able to control it to get maximum financing.

Let’s dive into it.

Why the DSCR is Important

Imagine finding a commercial property worth $400,000 and you need to put 25% down.

You think, “alright, I can afford that!” and move forward with the deal, expecting $300,000 in loan proceeds.

As you approach closing, your mortgage lender calls you to say “The maximum loan we can give you is $225,000 because the debt coverage ratio is too low.”

Now what do you do?

This is real and happens every day. To avoid a situation like this, you need to fully understand the debt service coverage ratio before you make offers.

The fact is that it’s regularly used by banks and loan officers to determine if a loan should be made and what the maximum loan should be. If you don’t have the extra money laying around, you won’t be able to close the deal and you’ll lose a lot of money.

Debt Service Coverage Ratio Defined

The debt coverage ratio is a simple ratio that tells a lender how much of your cash flow is use to cover the mortgage payment. It’s known as the debt service coverage ratio, debt coverage ratio, DSCR, or DCR.

Debt Service Coverage Ratio Calculation

In general, it’s calculated as:

Debt Coverage Ratio

where:

Net Operating Income = Gross Income – Total Operating Costs

Debt Service = Principal + Interest

To calculate the debt coverage ratio of a property, first, you need to calculate the NOI. To do this, take the total income, subtract any vacancy, and also deduct all operating costs.

Remember, operating costs do not include debt service (principal and interest), or capital expenditures. Insurance and taxes are operating costs, so don’t forget to include them.

Next, take the Net Operating Income and divide it by the annual debt service, which is the sum of all principal and interest payments during the year.

To do this you must take the entity’s total income and deduct any vacancy amounts and all operating expenses. Then take the net operating income and divide it by the property’s annual debt service, which is the total amount of all interest and principal paid on all of the property’s loans throughout the year.

How The Debt Ratio is Used

A Debt Coverage Ratio below 1 means the property does not generate enough revenue to cover the debt service while a debt ratio over 1 means the property should, in theory, generate enough revenue to pay all debts.

It’s very common for lenders to require a 1.2 DSCR, give or take.

If your debt coverage ratio is too low, the only way to make it work out better is to reduce the loan balance. Your NOI is the same but now your principal an interest decreases, making the ratio go up.

And that’s how you can get your loan proceeds cut dramatically.

Debt Coverage Ratio Example

Let’s say there is a property that generates $10,000 in revenue, has total operating costs of $4,800, and yearly debt service of $4,000

NOI = $10,000 – $4,800 = $5,200

Debt Coverage Ratio

In this example, the debt coverage ratio is above 1.2, so this would be a good risk for the bank and they’d likely give the loan.

Let’s say that interest rates change and the bank gives a slightly higher rate, causing a new debt service of $4,500.

DSCR

Notice how a small change can suddenly change everything!

The Bank Will Reduce Your Loan

Image result for bank loan

In this situation, the bank probably won’t reject the loan. Instead, they will reduce the loan balance until the payment comes in line with their minimum DSCR requirements.

In this situation, the lender will simply reverse the formula and determine what the maximum debt service can be. We can plug in the variables we know to solve for the allowable debt service

1.2 = $5,200 / Max Debt Service

Max Debt Service = $5,200 / 1.2

So, the maximum debt service can be $4,333. Now they just need to figure out what loan balance that will be based on their interest rate and loan term.

…and you’ll be stuck trying to squeeze some quarters out of your couch to pay for the extra down payment.

How the Debt Ratio Affects Returns

In the example above I showed how a loan can be adjusted down before the lender will give the loan. This can significantly reduce your cash on cash returns.

Let’s say you are buying a property in the example above costs $100,000 and requires a down payment of $25,000.

Let’s also say that it generates $10,000 in cash each year and has an NOI of $5,200.

Originally the debt service was supposed to be $4,000 per year, leaving $1,200 in total cash flow.

Now, let’s calculate our cash on cash return. We know that it’s calculated as:

Cash on Cash Return =  Total Cash Flow / Total Cash Invested

CoC = $1,200 / $25,000 = 4.8%

This means that for every $100 you invested, you get back $4.8 every year, cash in the bank. This is not to be confused with the overall return on investment.

But due to some fluke, the terms changed and now the debt service will increase. Let’s say that the interest rates increase so your $75,000 loan is at 4.5% now and your debt service goes up from $4,000 per year to roughly $4,560/year. You can see that the new debt service coverage ratio is well below the 1.2 minimum.

I’ll spare you the math, but when I punch it into a calculator I find that the maximum loan value is now roughly $71,000. This creates a yearly debt service of $4,320, bringing you back to 1.2

Comparing The Two Scenarios

Since you’re loan has gone down, you will need to invest an extra $4,000. You’ll also have a lower cash flow because of the higher debt service.

Cash Flow = $5,200 – $4,320 = 880.

Now let’s compare two scenarios. Imagine if you were still able to get 25% down, your cash on cash would look like:

CoC = $880 / $25,000 = 3.5%

Not very good, right? But, that’s because of the increased interest rates.

Now, let’s see how the change in the loan amount affects your return. Remember, your down payment is no longer $25k because it became $29k.

CoC = $880 / $29,000 = 3.03%

Even worse…

Never Neglect the Debt Coverage Ratio

You can see how important this simple ratio is to banks. It can change your returns, your down payment requirements, and it can even kill your deal.

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

Continue Reading

Real Estate Investing

Real Estate: Is It In A Bubble?

Published

on

I originally wrote this article 6 months ago but the same question applies so I’m updating and improving it. The question still applies, is real estate at a bubble? Is it at the top?

I was at the bar for a friend’s going away party and a random guy at the bar started telling me how I needed to buy some new coin. Not Bitcoin, he said, but some other coin he had discovered that is going to make you rich.

In fact, he had just quintupled his money since this morning. I needed to hurry up and get in on the action!

…When the local regular at a small bar in small-town USA has finally started giving investing advice, it’s time to move on to the next big thing. So, I’m done with cryptocurrency (until it collapses).

Mind you, I wrote those words back when Bitcoin was was reaching new highs every day (it’s since lost 90% of it’s value)

But, What About Real Estate?

Ten years ago when I got started in real estate, everyone thought it was a terrible idea.

“If it was so easy everyone would do it.”

“Don’t you think real estate is too risky?”

You know the lines. I heard them all. But now, real estate is the best investment on the planet.

A huge number of friends and also former co-workers of mine have jumped into real estate investing within the last year. People who used to warn me how dangerous real estate was are now telling me real estate is probably the best thing to get into (except cryptos, of course!).

It’s the “best” because their best friend’s, uncle’s, nanny just house-hacked a home and earned $50k and quit being a nanny and is now a full-time house flipper!

Or…someone they knew bought a house 3 months ago and already sold it for $20k profit!

Maybe…their friend’s nephew just became a landlord though he’s 19 and doesn’t really even have a stable job (so he’s technically “retired”, right?).

The Vibe in Real Estate

If you’re getting this feeling or this vibe with any sort of investment, you need to be very cautious. Every time I’ve seen it, it’s been bad.

I turned 18 in 2003. Though I was young, I remember the boom years – I was 16 and everyone was offering me part time work at $10-$12 per hour to do construction work that I had no idea how to do.

When I was 18, 19, and 20, I was remodeling apartments at $10-$15 per hour though I had basically no experience.

Everyone was making money and throwing it around. Then I graduated college in 2008 and the economy collapsed.

It was the same feeling with cryptos. Everyone was excited about them, now I never hear about them anymore.

…and now, everyone I know has become real estate investors.

Real Estate & Economic Fundamentals

When your gut tells you something, you need to pay attention. But, I question myself at the same time.

Housing inventory is chronically low which is forcing housing prices to go up. House construction simply can’t keep pace with demand and the same is true with apartment developments.

Interest rates are dampening demand. If interest rates continue to rise, it could affect the entire economy, but the Fed has signaled it might slow or stop their interest rate increases.

The economy is great, unemployment is rock bottom, real estate prices are increasing. New wealth has been created by the trillions in the last year or two.

Stocks are going through a correction, but stock prices are not an economic indicator. If they get too low it can change people’s perceptions of the economy though and reduce spending. So, we need to pay attention to it.

Wages are growing faster than inflation for the first time in decades.

But, cap rates are amazingly low and property prices are ridiculously high compared to the income being produced. This means people prefer real estate over other investments.

Economists are constantly revising up their estimates for growth.

But… the yield curve inverted, at least on part of the curve, which usually signals an upcoming recession within 1-2 years.

So, which is it? Is real estate at the top or are economic indicators showing strong fundamentals?

Image result for real estate rates

Is it Rational or Irrational Exuberance?

Well, my crystal ball is as clear as yours. No one can predict the future but here’s my take.

I don’t feel that all signs point to bubble yet because there is enough conflicting thoughts to make me believe we aren’t quite there yet. Real estate is cooling down, but a lot of that is due to interest rates. If they don’t continue to rise, then real estate should be more stable or continue to rise.

For now, though, all we can do is to plan and to prepare. Here are your options.

Joining The Herd.

Most people invest a lot and take risks when times are great, but pull way back when times are bad. They dump $50k into stocks then when they drop 20%, they immediately sell to protect them from further losses.

Then once stocks have dropped 40%, they are too scared to reinvest until stocks are back up or higher than where they were before.

People jump into bitcoin when it’s 15,000, ride it to 17,000, then dump it when it gets to 10,000.

This is the herd mentality and is the absolute wrong way to invest.

Back in 2007, they were giving loans to anyone with a pulse but by 2011 it was basically impossible to get financing, even though housing was at rock bottom prices.

When properties could be bought for literally 40 cents on the dollar, nobody was lending and nobody was buying.

Bucking The Herd…

The hardest part of doing the opposite thing is you’ll have some serious FOMO (fear of missing out).

I know people who have made $200k+ in cryptos. FOMO was taking hold of me and I almost I actually invested $1,000 into bitcoin right around $15,500. I played with it for a week or two and sold it, losing roughly $3. That is not a typo.

I did it for fun because investing due to FOMO is the absolute worst reason to invest. A lot of people put a ton of money into it right at the wrong moment.

Instead, I believe people should invest when times are great and invest way more when times are bad. Also, I only want to invest in well known and historically good investments. In a way, it’s like dollar cost averaging.

Using the above example, if the market is hot, I wouldn’t dump all $50k into the market. Instead, I might dump $20k and leave $30k cash. As the market drops, I keep buying more. If it goes up, I buy more too, just more slowly.

In fact, this is almost exactly what I did during the market crash after Lehman Brothers collapsed. I invested my life savings in the beginning of september 2009 and lost half 2 weeks later.

I was somehow able to make all my money back within about 6 months because of dollar cost averaging.

Dollar Cost Averaging Works in Real Estate

The fact is that nobody knows when we will be at the top and nobody knows how hard the market will correct when we get there. It could come in 3 years or it could come tomorrow.

3 years ago I knew a person who sold a lot of their multifamily because they said we are at the top. 3 years later they lost out on a ton of money because it’s still going strong.

So, if you held back your investments today, you could lose 3 more years of a bull market.

My point is, I wouldn’t avoid buying. Just buy a deal or two, buy them right, and focus on adding serious value to keep you above water when the market corrects.

During a correction, use your capital reserves to really get in and buy as many properties as possible with as little money as possible. Don’t focus on adding a lot of value, just focus on getting them cash flowing.

Adding value means typing up capital. Tying up capital means buying fewer properties for huge discounts.

So, save those improvements for when the market is hot and deals are hard to find.

How Are You Planning to Invest in the Next Few Years?

Are you following the herd and diving in, or are you bucking the herd and doing the opposite.

 

This article originally appeared on IdealREI. Follow them on FacebookInstagram and Twitter.

Continue Reading

Trending