One of the best things about my job is having the ability to observe my clients' different philosophies and strategies of investing in real estate.  It´s like having a pit pass at a motor speedway. I'm able to see all the individual elements necessary for a successful racing team. Over time I'm able to learn what goes into designing and maintaining a race car that is fast, dependable and capable of staying out on the track long enough to be a winner.

As a property owner you can increase your chances of investment success by carefully selecting a team that shares your values and understands your needs, risk tolerance and financial parameters.

Uncertain economic times have caused many of my clients to reassess their real estate investment strategy. This newsletter is the first in a series that I have created to help you identify options to fine tune your current investment strategy by understanding some of the dynamics in the Sacramento real estate market. I'll share the successes and the pitfalls that I've observed over my 21 years in this market with the hope that you will survive and thrive during this current downturn.

Where's the Bottom?

Ask five economists and you'll get five different answers; six if one went to Harvard.
                                                                                                                                   ~Edgar R. Fiedler

Contrary to that humorous observation, most economists agree that we haven't seen the bottom of this downturn.  And due to its unprecedented complexity, we won't know where the bottom is until after we pass through it.  But that doesn't mean that you can't  buy properties considered at the bottom of the market.  And you can do it at any time without guessing.

Three investments strategies I have seen work very well are described here.

OPTION # 1

Bottom of the barrel homes:  Two to three years ago a property that was valued at $100,000 to $175,000 and rented for $900.00 to $1,200 was not a great investment. As a result we had very few incoming investors.

Today that same property sells for $40,000 to $75,000 and probably needs about $10,000 of repairs. It will rent in the $750 to $1,000 range and is a good investment even without financing.

On average, an unleveraged investment in this category with an 8% vacancy factor yields better than a 15% return.

When the market starts to recover, you can refinance out your capital and your leveraged return on capital rises greatly.

Lower Risk vs Higher Investment

"I believe that economists put decimal points in their forecasts to show they have a sense of humor."
                                                                                                                         ~William Gilmore Simms

If you don´t have the stomach to own properties at the bottom of the market, shared equity mortgages are another option.

OPTION # 2

Shared Equity Investments: Providing purchase money loans to investors willing to take on the liability of owning, maintaining, repairing and managing the property is another form of real estate investment. You received repayment of your principle at the negotiated interest rate. You also receive a share in the profits.  With the banking markets all but dried up, investors have become more open to this option than in the past.  Minimum buy-ins  typically require a larger capital investment for this option, but overall, much less risk with slightly lower returns.

The Safer Approach

Rather than look for the lowest priced investment, you might find a comfortable strategy in the higher price ranges.

OPTION # 3
Higher priced properties:  Homes in specific niches with price ranges all the way up to $350,000 are currently selling below replacement construction cost. It's worth noting that this is net of land cost. This is similar to buying stock with a value below the liquidation cost of the corporate assets. Investment returns may be a little lower and maintenance costs and vacancy can be slightly higher than with bottom of the barrel properties.  As with shared equities, more capital is required, but liability tends to be lower and there's a much greater chance for appreciation down the road.

Conclusion

"I can't speak for them, of course, but I believe that most economists would accept the view that, while sometimes you can make a score by sheer luck, you can't do it constantly, unless you're willing to put the time and resources in."
                                                                                                                                            ~Merton Miller

Successful investing is a matter of putting together the right elements to execute your personal strategy. Having the right balance of risk, equity, leverage, active or passive involvement and return in your specific time frame requires careful thought.

There are many ways to successfully invest in real estate under adverse economic conditions. What I've outlined for you are the types of investment that I have seen work in the last two recovery periods. I know they work well and I know how to help you work them.

I hope this newsletter provided you with a few new ideas to consider when assessing the opportunities in today's market.  Please contact me if you have any questions or you would like me to help you implement some of these options into your investment strategy.