Real Estate Investing: How To Make Money In A Down Market

One of the most stimulating things about real estate investing is understanding what markets will produce the best long term returns — particularly while in the middle of …

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One of the most stimulating things about real estate investing is understanding what markets will produce the best long term returns — particularly while in the middle of a challenging real estate market.

In a down market, savvy investors in real estate are enthusiastic to discover how they can best leverage their resources. And expert forecasts are some of the finest tools they can utilize to back up their methods. An excellent example comes from property consulting firm John Burns Real Estate (JBRE), that has forecast that home-ownership will fall from 70.0% to 62.1% by 2015 thanks to a soft economy, low consumer confidence, limited mortgage availability, increased rates of foreclosures and short sales, among other things.

John Burns Real Estate predicted, although based primarily on broad market conditions, points out that we’re going to see a rising number of renters and so a larger demand and need for rental housing.

Savvy investors in real estate select investment properties that are located in markets with the best long-term growth potential. This enables them to invest intelligently today while hedging their bets on the future expansion and appreciation of their target markets.

Our 2012 Housing Market Forecast lists the Top 100 Metropolitan Markets based on future job growth and projected price appreciation. If you’re interested in finding growth markets with robust appreciation potential, then the McAllen-Edinburgh-Mission, Texas metropolitan area could be your primary choice. We project its 10-year future job expansion to jump by 32.3% and home values to appreciate by 37.9% in 5 years. Additionally, property values remain comparatively affordable with the median sales price around $100,000.

Apart from this Texas metropolitan investment area, our report uncovers other real estate markets with great potential including 2 from Colorado (Colorado Springs and Denver-Aurora) along with California (Sacramento-Arden-Arcade-Roseville, and Oxnard-Thousand Oaks-Ventura). Other markets that made the Top 10 include North Port-Bradenton-Sarasota, FL; Las-Vegas-Paradise, NV; Hartford, CT; Springfield, MA; and Phoenix-Mesa-Glendale, AZ. These areas have a five-year appreciation outlook well above 21%. (You can download the full report here.)

And what does this mean for property investors? There’s a gold-mine out there waiting for you to take advantage of! A fall in home-ownership means a rise in rental units to deal with the surge in demand from people who have recently lost their homes to foreclosure, people who can’t afford to purchase property, and people who are still saving up for a new home. Last October 2011, the National Association of Realtors (NAR) announced that the amount of rental houses had gone up to 38 million units in 2Q11 and the vacancy rate of single-family houses and multi -family units was at a record low rate of 9.2%.

Investors never think twice about snapping up bargain properties with positive cash flow. As NAR chief economist, Lawrence Yun, puts it, "The dynamics of falling rental vacancy rates mean increased owner pricing power. Naturally as a consequence rents have been pushed higher… Rising rents mean an improved rate of return for property investors."

Cash flow investment properties are indeed your best hedge against the negative impacts of a down market. Take it from Morgan Stanley’s "Housing 2.0 The New Rental Paradigm" report. The financial services company observes that gross rents are "historically attractive relative to current distressed prices. Adding to this attractiveness is the fact that multi-family data shows rents continuing to rise." Therefore it favors single-family houses as the most ideal type of property investment in today’s market due to their large rental potential.

JBRE’s outlook also reveals that home-ownership won’t be on an upturn until 2025 at 67.1% on the back of foreclosed homes returning to ownership, improved market conditions and regular mortgage credit, and a rise in the tendency of households to own a house. That can signal the time to think about selling your portfolio and taking a decent profit, or trading up into more real estate utilizing the IRS 1031 tax deferred exchange.

There are many real estate investing opportunities out there today. Be certain to take action, do your homework and invest intelligently. As John Burns puts it, "The American dream of home-ownership is still alive and well."

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