Not all investment opportunities are created equal and this is especially true when it comes to the real estate market. There is never any guarantee that an investment will generate the returns you expected. The overall market in particular plays a large role in the performance of your properties, despite being able to control some elements of your real estate investment strategy.
The different states of the real estate market.
In the case of real estate, market conditions can affect the most appropriate and ideal exit strategy. Let’s discuss the different types of market conditions that exist:
Emerging: This is considered a hot market where housing prices are on the rise. It is an extreme case of a seller’s market where demand exceeds supply.
Steady: This is considered a “normal” market state where demand is similar to supply, yet prices are steadily rising.
Flat: A flat market typically occurs before a decline in the overall market.
Declining: This is when housing prices are on the decline and is considered a buyer’s market. Here, supply greatly outweighs demand for reasons such as the affordability and accessibility of home financing options.
Now that we’ve discussed the various states a real estate market may exhibit, let’s discuss which investment strategies are the best for each one.
How each market state can affect the optimal exit strategy.
As we mentioned, some real estate exit strategies work much better than others depending on the nature of the market.
Emerging Market: It’s truly hard to go wrong in this kind of market. Essentially, all exit strategies are appropriate here. Although, you may not find it very necessary to use lease-to-own agreements and seller financing since there is no shortage of buyers. The only exit strategy that should warrant some caution is that of buy and holds. This is based on the fact that the market could eventually correct itself, causing your property value to return to normal levels. You should also beware of the increased level of competition from investors wanting to get into the action. Don’t be fooled into overpaying for a property because the price is driven up extensively by competing bids.
Steady Market: Again, many strategies work well in a steady market where there is a moderate appreciation in property values. Flipping properties can be an especially effective strategy here. You may also consider lease-to-own agreements in order to capitalize on a property quicker.
Flat Market: With property values not appreciating, a flat market is a sign of trouble. However, from an investor’s perspective, housing prices will be more affordable since sellers may be willing to part way at a lower price point. Also, foreclosures will begin to appear more often which can present a unique investment opportunity.
Declining Market: With housing prices on the decline, investors should be especially wary. However, you will also want to be aware of the fact that you will be able to purchase properties at an even lower price point than in steady markets or flat markets for that matter. On top of this, foreclosed properties will become even more common than previously. However, despite the lower property values, you should be aware that prices may continue to drop. Thus, if you plan to buy and hold you’d better be sure that you can sustain the period of declining prices to avoid suffering a loss on your investment.
Always be sure to consider the market conditions that exist when evaluating potential real estate investments. Today's market is filled with many opportunities for the savvy investor. Our Rich Dad Education trainers will introduce you to proven strategies that can help you launch your career as a successful real estate investor and develop a "Rich Dad Mindset."
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