This is not a secrete in the world of making money, you want to buy low and sell high. Stocks, bonds, commodities or even real estate, it is all the same. The difference is with real estate, cycles can take time. Often the cycles run in years and are evaluated and studied by the decade. That is where we are now. We are in a property downturn cycle of a gigantic proportion.
This downturn is so large and has such a wide scale impact that major cities are even feeling the pain. Some locations are hit so hard that they will never recover, or if they do they will have a totally different look than what they had 10 years ago. Flint, Michigan is just an example. Nothing against the city at all and Flint is really a nice place to live, but Flint is gone and I don’t think there is any chance of it ever returning.
The jobs are gone, housing has collapsed, the infrastructure is deteriorating and there is no foreseeable solution in the near or far future. No business will be returning there any time soon unless the local government gets proactive and starts some program to attract new, non-automotive based manufacturing or businesses.
This is definitely not the place to invest in real estate unless you get a super great deal or you have some inside information about some company that will be moving into town. This is just one of those places that has “dried up”.
Southern California on the other hand is the exact opposite. The economy in California is so diverse there is no way to stifle it. Everything from shipping, transportation, IT, all types of manufacturing and even produce, farming and agriculture can be found in almost every single county and city in the State of California in every location from the Oregon to the Mexican border.
Even the California wine industry is a world leading market that rivals the best regions of France. There are very few products available that are not produced, designed, manufactured or available in some part of California.
This is what makes the housing market in all parts of the state so resilient and why even though dips in prices are often extreme the recoveries are even more extreme. Housing prices are not always up in California, and there is not one person that will say they are, but when the cycles turn the prices will exceed previous highs in 95% of the areas in the state.
The same goes for most of the major cities in the “sun belt” region of America. From California to Florida and everywhere in between (especially the costal areas with major ports and shipping).
If the location has a robust economy then it does not matter how bad the housing market gets hit, it will recover to a level higher that it was at before the initial downturn. It is just a matter of time.
If you are entering the housing market after other people have taken the hit on a downturn then you are buying at the right time, even if the market drops down another 5% or even 10%. As long as you plan on holding the property for a length of time to weather the storm you will be making money.
The types of people that benefit from this the most are first time home buyers that will hold their home for 5 to 7 years or investors that are buying residential properties to rent with the intention to hold the properties for 5 to 7 years. This will give the buyer / investor the time required for the property to recover its equity while also appreciating in value. In the case of the rental investor they also enjoy the added benefit of the income to offset the cost of the property.
Many people that have the financial ability to buy rental properties during a major downturn like we have experienced over the last few years have put themselves in a position to make earnings that are so significant they change the status of families for generations. A single property has the ability to not only recover hundreds of thousands of dollars in equity over a few short years, this same property demands rents in the thousands of dollars per month which will significantly eliminate the mortgage and further increase the investors equity.
If you have the ability and skill to acquire 5 to 10 properties during a devastating downturn they could easily and realistically materialize into millions of dollars of hard cash within a few years.
On the other hand, people that have the financial ability to purchase their dream home during a major downturn in prices will also create a financial environment where they could easily realize hundreds of thousands of dollars over a few (up to 10) years. It is always better to buy at the bottom and reap the benefit from the appreciation in prices.
Of course, when it comes to real estate, all the best deals are in the existing home market. In a down market you will still find some really good deals on new construction, but you will be buying at top dollar from very sophisticated sellers. The best deals are found in the existing home market and foreclosures.
Look around for a home that meets or exceeds your needs and imagine what that home will be like (or what it will be worth) in 7 years. Also evaluate what that home was worth in 2006 (if it was built then) to get a feel fro what you should expect as a minimum recovery price. When you put all the factors together then you will get a pretty good idea of what you should be able to expect from your investment.
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