Here are some ideas to give your clients who investors wondering what they should do next. Hold 'em? Fold 'em? Walk away? Run? Or double down, maybe...
Well lots has been written on how our current soft market is hitting homeowners. But it’s not so easy to find anyone addressing the issue that looms largest in the minds of most real estate investors: what should I do now?
There is no single right answer to that questions – it all depends on your local market, your appetite for risk, your view of the future, and the length of your runway - how long you have before retirement. But in my opinion there are five basic courses of action for investors in 2008:
- 1: Rebalance equity in the same market. This is the path that I’ll be following this year. Investors who have been in the market and were well positioned during the run-up will be sitting on a pile of equity that probably isn't going to perform too well in 2008. So it’s time to re-leverage: sell and invest back into properties that will give you the right cap rate. Although it’s not a lot of fun selling in a soft market, when you’re both buying and selling at the same time then it’s a wash. Price your property right and it will sell – and at the same time look to buy a property at the same sort of discount.
- 2: Lift and shift. If you’re in a market like Florida, Las Vegas, Las Angeles or the San Francisco Bay Area then you might be concluding that your market has run it's course and the future might look a bit less rosy. Some might be tempted to try to hold on until the market turns around returns to the peaks that it enjoyed during the peak of the roller coaster ride, but a better idea might be to cash out now, take that equity and re-invest in a region that is less overvalued. Investors like Jeff Brown in San Diego are pushing this type of strategy, moving investors from CA to TX.
- 3: Bargain hunt (speculative version). Fifteen years from now they’ll be asking “what did you do during the market downturn?” Well unless you have your crystal ball up and working you don’t know now what the best answer to this question will be just yet, but investors with a speculative attitude are watching out for the bounce. Again, this is a speculative view. Not that there’s anything wrong with that (as they say on Seinfeld) – as long as you're aware of the risks you're shouldering. There’s nothing as dangerous as someone who thinks they’re an investor but in reality they’re acting like a speculator.
- 4: Bargain hunt (value version). Regardless of your view of what’s going to happen next, in many markets the current correction is creating some great value deals – properties that you can pluck straight form MLS that will generate a positive month-to-month cashlfow with only a 10% down payment. You won’t be seeing many of these in, say, Las Vegas. But you will in Fort Worth, Tulsa, and Kansas City. You’re not looking for the dip with this strategy – you’re just poking around in a relatively favorable market for positive cashflow investments. If the market bounces then great. If it doesn’t then you’re in good shape to weather the storm.
- 5: Ride it out (do nothing). Good traders acknowledge that sometimes their best trade was one that they didn’t do. Strategies 1 and 2 require you to have underperforming equity redy to re-deploy. Strategy 3 is for speculative high-rollers, and Strategy 4 only works if you’re currently living in the right kind of market. So what if you fall into the “none of the above” camp? Well...patience can be a virtue in investing, and I’m not in the “now is always the best time to buy” camp of real estate investors. Waitingn for the market to show it's hand might be the right thing to do.
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