I’ve been actively selling real estate for over 17 years so I’ve heard a lot of different industry questions. Today I’ll answer a pretty common question I get from people considering buying rental property as an investment.

I’ll cover:

1. How successful real estate investors determine the best time to buy.
2. Why I believe that real estate is the best investment vehicle today.
3. Some useful tools that I use to decide if it’s a good enough price, CAP rate, etc.

Timing: First of all, I’d like to address timing. Let’s say you’re an investor, or considering becoming one. The best time for you to buy may be completely different from what it is for someone who just found out that they are expecting their 5th child in 6 years and desperately needs the extra bedroom. It is also important to analyze your financial situation to make sure you’re not creating unacceptable risk. For example, it’s probably not a good time to buy an investment if you have no cash reserves in the bank to cover repairs, vacancies, etc.

What’s the media say about timing? As you know, the media’s advice has really been a mixed bag and their advice can be as different as night and day. You might hear one channel telling you to buy now, but just as quickly as you turn the newspaper page they urge you to wait for the bottom. I agree with many of you out there, it’s frustrating.

Wait for the bottom? Let’s talk about the error of the “waiting for the bottom” idea. It’s likely that the advice you hear, even from local professionals goes something like:

• Wait for the bottom, or
• Buy now! There are many agents who will give this answer in any market, not because it’s the best time to buy, but because they really need a commission check. This is something we, in the industry refer to as “commission breath.”

Again, it can get frustrating with the local advice you get as well.

I admit, waiting for the bottom sounds like a super idea and great strategy. The problem isn’t buying low and selling high, in fact, I think it’s a great idea and try to buy low myself. The waiting for the bottom strategy has one little dilemma, and that is finding someone who can determine when we’re at the bottom is! So who can analyze the market and tell us when we’re at the bottom?

NOBODY CAN! Not the best real estate broker, guru, mortgage guy, or economist can pinpoint when we’re at the bottom (or top) of any market. If only there were a magic crystal ball holding all the answers to the housing market we’d all be rich! Be careful, though, there are those “guru’s” out there who will teach you (for a price) how to invest successfully in property for a nice hefty fee.

The only way that any one of us actually knows when we’ve reached the bottom (or top) of any market is with hind sight. A perfect example is the market history in the area I live:

• We can easily determine, with our past market data, that July of 2005 was the peak of our real estate boom. Did we all run around announcing that we were at the peak of the market? Of course not, because none of us actually knew that we were at the crest of the market at that time. The fact is, many of us thought we still had a few years of “booming” market left. Little did we know that from that point on, our market was on a slippery declining slope.

The investors who considered selling their property in 2005 but waited for the peak are kicking themselves for failing to take advantage of the market. Often times, it’s the same investors who are so intent at looking for the bottom that they end up missing it all together (and the deals that came with it). This is a common rookie mistake that costs them thousands of dollars on the buying and selling side of investing.

Just a quick tip: A top agent can help you determine when we are close to the top or bottom of the market and when you should consider buying or selling. Of course it’s also recommended to hire a broker who has actual experience in real estate investing him/herself.

So what do the successful investors do to determine when to buy more income property?

We look at the current market and ask ourselves if it’s a buyer’s or seller’s market. We also ask ourselves if we’re comfortable buying a house based on certain factors. We do the same thing when selling and investment too, by the way. Instead of waiting for the top or bottom, we use information and facts we do know. So what are some facts that we do know about the current market?

1. Low Prices. Did you know that home prices in many areas are back to what they were in about 2001?
2. Super Low mortgage interest rates. Even on 2nd dwellings and rental homes.
3. High rental property demand (in my area anyway)

These factors show that it could be a very attractive time to start buying more investment properties.

Did you know that many investors make more money in a down market than in an up market? Why? Because we actually make the money on the acquisition, not the sale!

I love this industry and I love investing! When done correctly, it can truly be one of the best investments you ever make! Unfortunately, many do it incorrectly. Over the years I’ve watched many real estate investors come and go. There are typical rookie mistakes, like commingling investment and personal funds and being over-anxious to buy. Remember, it’s an investment and must be looked at objectively to make sure it’s a good one. Yes, It can be risky, but it can be equally as rewarding. An experienced broker with an investing background should be able to help you minimize the risk.

What makes a good investment?

An investment adviser would tell you:

1. If buying stocks, find those with low P/E. Price to earnings ratio.
2. To know the rate your chosen stock expected to grow.
3. To know the type of assets the company holds. Known as asset backing.
4. Find out if it’s an easily traded stock.

Using similar questions, we can determine how solid our real estate investment will be.

1. What will my CAP rate be if I buy this rental? This formula tells us how much we can actually pay for any given property. Here’s a simple formula to help you determine the CAP rate. N.O.I. / the expected sales price= CAP%.
2. What rate of appreciation can I expect on this property?
3. What type of vandalism risk and vacancy rate will this property have? How often will the property be vacant and is it likely to be vandalized while it is empty?
4. Is this property easily traded? How hard will it be to liquidate this property if I need to sell quickly?

Don’t forget to ask about available financing, owner carry, conventional, etc.

One more tip: A house and apartments up to 4 units are considered residential. Financing on over 4 units can become a bit more complicated and require more down. Hazard insurance tends to be a bit higher on apartment buildings of 5+ units as well. Make sure you understand the available financing before making the offer.

These are just a few of the questions that I would expect any good real estate broker to be able to answer for the investor considering buying rental property.

Troy Schuyler has been helping buyers and sellers realize their dream of home ownership for the past 17 years. He believes that the time is right to buy a home, whether it’s an investment or a place to live. Visit troyschuyler Let’s start your home search search together today!

Don’t worry if you’re outside my servicing area. You can still search for free, and I’m partnered with many qualified brokers who are able to assist you in the area you live.