Michael Emilio

When the market is hot, it’s usually a great idea to flip and take advantage of increased consumer demand for residential properties – holding on to properties may be difficult to convert into positive cash-flow due to market demand for ownership, especially in upper-income markets. But what do we do when the market is cold?

When the market is cold, it’s a great opportunity to take advantage of the large available inventory, sellers motivated to sell, and the low rates available for mortgages. Flipping may be dangerous in cold markets if you don’t have the capital to hold on to the property for a year or more if it doesn’t sell quickly though. However, if you’re looking for passive income, this is a great time to invest, since a lot of people can’t afford to own and thus are looking for rental properties – including yours!

One of the best ways to find hot new properties to invest in is by using the Multiple Listing Service (MLS) – contact a real estate agent to find out more. Short sales and REO properties are now searchable in the South Florida MLS system – this may be available in other areas as well. You might also want to Short sales may be a great opportunity to purchase a home at very low prices, fix it up, and then sell for a nice profit.

Opportunities available include new construction, foreclosures, and FSBOs (For Sale By Owner) properties whose owners are finding it difficult to sell. In order to get a property that you can sell quickly, generally try to find homes with about 3 or 4 bedrooms around the middle of your market’s price range. You’ll have a good available market when it comes time to sell since almost any type of family can live in a home that size.

Condos are an interesting concept in cold markets, some investors love to invest in them and others stay far way. On the negative side, condos may be problematic as they often are in competition with apartments for renters – making it more difficult for you to find tenants. On the positive side, you don’t have to worry about having to maintain the exterior of condos as that’s handled by the condo association.

If you’re an experienced investor, you may want to look at helping out investors looking to get out of the game – to your benefit of course. New investors, thinking that real estate investing is just running numbers in a Microsoft Excel spreadsheet, can burn out easily if they can’t handle tenant complaints, property management, and negotiation techniques. This is a great opportunity for you to swoop in, help someone get out of a property they want to get rid of, and get yourself something you want for your portfolio.

If you have a real estate license, this can be an excellent time for you to grow your real estate investment portfolio. One way to do this is by buying properties from sellers when a deal doesn’t go through – make sure you always adhere to your fiduciary duties though. Although some agents don’t take a commission if they buy a property from a client, you are in your legal right to still ask for the commission. If the property is actually on the market, and the owner is your client, first refer the listing to another real estate broker for a referral fee and then purchase the property. You want to do this in order to avoid any violations of the Realtor’s Code of Ethics. I also would suggest you always state that you a licensed real estate agent or broker up front when you’re purchasing a property, even if you have no agency role in the particular purchase. If you represent real estate investors, never bid against one of your clients – your clients’ welfare is your main concern! A solid tip is to offer the property you’re interested in first to your real estate investor clients for 48 hours; if none have expressed an interest in purchasing, then go ahead and purchase the property knowing you’ve kept your client’s welfare in mind. As long as you always abide with the Realtor’s Code of Ethics, you can rest assured that you can generate some incredible long-term wealth by investing in real estate in an ethical manner. There’s a reason why 41% of real estate professionals own investment real estate and that reason is that there’s money to be made in investing!

Even with all the temptation to rush out and start buying investment properties like mad, resist the rush and don’t buy more than you can handle! Even if all the properties you come across are “good deals”, don’t get greedy with your purchases. You don’t want to get in over your head – it may be very hard to get out if you’re in this situation if the markets gets colder. Many conservative investors only like purchasing 1 or 2 investment properties a year – of course they make sure these are great deals! Other investors purchase dozens of properties a year (or more)!

When picking your properties to invest in, you need to analyze them thoroughly. Many investors feel there are only good deals or bad deals and that there’s no such thing as good markets and bad markets. Of course, even so-called “bad markets” may net you great deals if you purchase wisely.

“I want positive cash flow” is a phrase I hear prospective real estate investors say often – with good reason too. Tax benefits, appreciation, and leverage are other benefits of holding investment real estate but making positive cash flow after taxes and mortgage payments (or at the least, breaking even and then selling five or more years down the line) is the goal for most.

When looking at annual cash-on-cash returns on investment properties, you generally want to look for returns of 3%-5% on single-family homes and condos and 7%-8% on triplexes and fourplexes.

When looking for prospective residential real estate investments, always keep in mind you’re generally looking for properties that have high demand. Buying homes in areas near shopping, job opportunities, and quality schools can do wonders for your ability to find tenants and buyers. Do some research as to which areas seem to be in the path of progress for economic growth and jobs. Don’t be afraid to go small as well because, depending on your area, single family homes with relatively smaller square footage area can often get higher rents per square foot than larger homes. If you sense a sense of pride of ownership in the neighborhood you’re considering to invest in, then that’s a great sign there will be demand by tenants to live there as well.

If you’re looking for quick appreciation, smaller properties and newish single-family homes can be a great place to look. Of course, if you don’t mind getting your hands dirty, properties in need of some do-it-yourself handyman work can also be a nice source of investment properties for you.

In general, unless you really know the area extremely well, I would avoid purchasing investment properties in distressed neighborhoods, even if the price is great. Think about it this way, even if the numbers work well, what happens 5 or 6 years down the line when the local economy in that neighborhood withers to nothing?

Following that line of thinking, while purchasing luxury properties for investment can be a source of bragging rights among your buddies, I would suggest you focus more on middle-range properties more moderately priced. Average priced homes mean average priced rents, which can usually give a wide group of potential tenants that may be less likely than other income groups to move to a home higher up on the luxury scale. If following this strategy, look for areas where the average person in the area is a reliable working person who perhaps lacks this ability to quickly move up to buying a home.

As a general rule, when it comes to sell, single-family homes are the easiest to sell and multi-unit properties are generally more difficult. The reason for this is that multi-unit properties are judged according to NOI (Net Operating Income) while single-family homes, if sold to an owner-occupant, are often purchased for more emotional reasons. Having multi-unit properties so tied to NOI can be tough if rent prices don’t go up as quickly as interest rates do – this may cause that multi-unit property to decrease in value. However, if you know what you’re doing, multi-unit properties are the only way to go for experienced investors – they can give you huge amounts of passive rental income!

For a quick guide when you’re running the numbers, I would suggest using a 35% expense factor. The reason for this, even though some may think it’s too high of a number to use, is that it gives you a realistic gauge as to the profitability of the prospective property. In other words, if the property is still coming up as profitable when using this high expense factor, you may have just landed on an investment gold mine! What you do is take this 35% expense factor and then subtract it from the projected income. This will let you know if this property will be bringing in enough cash flow to cover your monthly payments.

Now that we’ve gotten ourselves acquainted with how to invest in real estate in a cold market, we’re now going to be talking about a topic that may be on your mind once you’ve gotten to this point… which is where to get the money to do all this! Although some real estate gurus might like to tell you otherwise, in most large markets, it’s extremely difficult to find no money down deals – even 20% soft second mortgage deals are rare. Prepare yourself to pay a down payment, it’d be extremely difficult to get a loan anyway if you’re only putting down 3%-4%.

If you’re investing in smaller properties, then you’ll likely be putting 20% down on conforming loans – this is because of the changes in mortgage insurance restrictions. Of course, do your best to raise your credit score – try companies like Lexington Law and Source One Credit Repair for some help in this area.

With all the mortgage law changes, loans may sometimes be hard to come by, but if you have 20% available to put for a down payment, verifiable income tax returns for the last 2 years, and verifiable assets, then you’ll stand an excellent chance of getting approved. Local lenders may be your best source of investment funding.

I really advise you to keep up-to-date with the latest developments in laws and regulations that apply to real estate – I cover the most I can in this real estate blog but you would be well advised to also read publications such as the New York Times and your local newspaper. What I can tell you right now is that the financial climate coming up in the near future may be more challenging, but by no means impossible. A new Freddie Mac regulation prohibits the agency from buying any mortgages that have been made to investors that own more than four 1-4 unit financed properties. Fannie Mae still has its loan limit for investment property ownership set at 4 – this number is expected to hold constant.

Moving forward, I see most real estate investors going for the 30-year fixed loan approach in order to finance their investments. Adjustable Rate Mortgages (ARM), known as Variable-Rate Mortgages in other parts of the world, are too volatile in cold markets. 30-year fixed loans, in cold markets where buy-and-hold is generally the preferred strategy compared to fix-and-flip, may give you the best opportunity to get positive cash flow.

If you are going to be holding on to a property for only the next 3-5 years, then short term loans can make definite sense. I’ve touched on short term loans in two posts, Consumer Debt Worst Offenders: Banks, Advertisers, and Advisors and Rule to Grow Rich By #2: Refinancing Your Home, but the main factor you want to consider is whether the market will be strong when the rate eventually changes.

In order to be able to move quickly when you’ve made a purchase and need some quick cash for repairs, “impulse” purchases, and other miscellaneous items, establish a line of credit with your preferred bank. You can use this line of credit to make quick purchases and it gives you a leg up on getting hold of preforeclosure properties before a bank possesses. Keep in mind, if you plan on flipping, that there are new anti-flipping laws which make it mandatory for investors to hold onto a property for 6 months before it’s possible to sell or refinance for a higher value – confirm this with a local expert.

Yet another source of funding can be your retirement account, if you’ve been diligently funding it. If you have a Solo 401(k) or Solo Roth 401(k), you can utilize funds from these accounts for investing in real estate, as long as you return income from your investment properties to these accounts.

Worst case scenario, let’s say you’re reading this article, you’re excited about investing but there’s one big problem: You have no money and you have no way of getting any in the near future! Obviously right now is a perfect time to invest in properties, but even if you don’t have the capital to do so right now, you can still pick up some great properties a couple of years down the line when you’ve saved up enough cash or you’ve raised your income or credit score. There are always great deals out there, no matter the market, as long as you perform your due diligence by doing a financial analysis of all prospective properties. Always remember there is no greater investment than investing in yourself, so use your time wisely! Constantly read and feed your mind with reading material about real estate investing, subscribing to real estate blog RSS feeds, following real estate twitterers, listening to audiobooks, and subscribing to real estate podcasts.