Buying real estate now creates the most wealth since the market cycle is at an all time low. Learn how to calculate a financial return over the next few years. Money is made in real estate from either equity or cash flow. Equity is mostly achieved from appreciation, while cash flow comes from rental income. Appreciation is the number one reason why real estate owners/investors make money. Most real estate buyers know that the best way to make money during a market slow down is through long term investing. When you are investing in real property for the long term, you should plan all buying and selling transactions in advance, in terms of years rather than months; after all, long term investing means just that. The key is to time your sales and purchases with the forecast. By planning your sales one to two years before the end of a market acceleration season (i.e. year 2005), and planning your purchases with the use of both short and long term forecasts, you are certain to make incremental returns on your investments; managing the real estate trend provides a competitive advantage that can be used in buying during slow for fast appreciable markets, resulting in higher financial returns at the time of sale and more confidence in negotiating techniques to achieve instant equity upon acquisition. Your goal is to sell at the peak and buy at market lows.
It is interesting how few people understand the importance of selling at a peak and buying at market lows. Because real estate is a leveraged asset, the use of a forecast to strategically execute your transaction timing usually results in 200% to 300% greater returns over a five- to ten-year investment period. Most of this occurs by timing your buy or sale activity and reaping the benefits of the real estate leverage and forecast cycle.
The term “leveraged asset” means that you have put a down payment on a property and the rest of the investment was leveraged with a mortgage from a financial institution. The concept of leveraging has tremendous effects on calculating the true rate of return on the cash that an investor has put down on a property. For instance, if you were to buy a property for $200,000 with a 10% cash down payment ($20,000), the balance would be leveraged with a mortgage in the amount of $180,000. Your total cash outlay for this investment was your down payment of $20,000.
Let us say that, over a five year period, this property has an appreciable forecast trend that will bring its value up by 20% (or $40,000). If we were to sell the property in 5 years, we would be able to get a price — after selling expenses — of $240,000 (20% forecast appreciation over the original purchase price). Assuming that we had an interest-only mortgage on the property, we would have turned our original investment of $20,000 to the cash proceeds upon sale of $60,000 ($240,000 less the leveraged mortgage of $180,000). That’s a 200% return on our original cash investment ($20,000 earned us 200% more or $40,000 extra cash).
A quick review of the numbers is amazing. The property only went up 20%, but an original investment of $20,000 (the down payment) with this leveraged asset ended up being a 200% return on our cash. Coupling asset leverage with a forecast to time the sale is an incredible method of getting rich from real estate. Even in this example, if the trend were less than inflation, the investor would still likely see a 100% return on their cash investment.
The best time to acquire property is during a deceleration since it is a “buyers market”. Which as we all know is right now! The investor reaps all the equity rewards of the entire next acceleration cycle. The early stages of acceleration also provide ample equity and cash flow returns. Buying cash flow property for a long period of time benefits the investor in both acceleration and deceleration periods which make long term investing real estate recession proof. The investor has the luxury of investing in any forecast season. Anytime is a good time to buy a long term investment.
- Contributed by: Craig Diverse Capital, Inc