A Short, Real-Life Lesson on How to Bank 6 Figures in a Bear Market

A title company wired just over $97,000 into one of my bank accounts this afternoon. Once I get the insurance and escrow refunds, it will amount to a little more than $100,000. It’ll be my second six-figure payday in less than eight months. And it was the end result of a four-unit building I bought two and a half years ago – at the height of the bubble market where I live.

But I succeeded because I wasn’t stuck in my local bubble market. Instead, I went after the best values in the best non-bubble markets I could find. And, thanks to that approach, I’ve been able to bank a few of these types of checks in recent months.

The property I just sold was in Texas. In fact, just a few miles away, another Texas four-unit resulted in a $137,000 cash dump in my bank account… after just 14 months of owning it.

Unfortunately, many people who bought properties in January 2006… when I bought the first of these Texas four-units… are now struggling with falling values and rising interest payments. But if you understand market cycles, and how to evaluate properties correctly, you can consistently make money no matter what the real estate market is doing.

Here are the five key steps:

1. Find a good market at the right point in its cycle.

2. Find a property in that market that’s an exceptional value.

3. Find the right loan and investors for the property.

4. Find the right management.

5. Bank six-figure checks.

Now let’s go over them, one by one.

Step 1: Find a good market.

A good market offers growth and value. Both are easy to define. A good level of growth is one that exceeds the long-term U.S. national average – both for population and jobs. A good value market is one that still makes fundamental sense. People could still afford to buy the homes they bought years ago. Investors can get cash flow with normal leverage (80 percent loan to value) on an average property.

You can find good markets (with value and growth) today in select areas of Texas, Georgia, North Florida, and the Carolinas, to name a few places.

Step 2: Find a property in that market that’s an exceptional value.

Ideally, you want a property that (1) can be acquired at a substantial discount compared to similar properties, and (2) will comfortably cash flow. For the discount, it should be undervalued both on a dollar-per-square-foot basis and on a cap-rate (rental yield) basis.

Step 3: Find the right loan and investors.

Why play Russian roulette with real estate? Always fix your interest rate for at least two years longer than you expect to own the property. (You never know.) If you use equity investors, make sure they have at least a three- to five-year window. And make sure your deals are well capitalized.

In other words, don’t just get funds from banks and investors to cover the buy and fix-up. Get money to back up the property once it’s been rehabbed and leased.

Step 4: Put the right management in place.

Bad management is a cancer that must be gotten rid of immediately. Good management is transparent, reports clearly every month, provides itemized bills and competitive quotes. You want integrity, competence, and experience – in that order.

Don’t lock yourself into agreements. The contract should stipulate that you can cancel without penalty if the manager does not meet certain objective criteria of economic occupancy and maintenance.

Step 5: Bank 6-figure checks.

Do Steps 1 through 4 correctly, and this one is easy. Plus, when you invest this way, you don’t have to do a million deals, running around like a chicken with its head cut off to make some money in residential real estate. Instead, you can make well over a million dollars with a manageable number of smart investments in the right types of properties in the right markets at the right times with the right financing.

[Ed. Note: Real estate headlines may be full of doom and gloom. But if you know where to look, you can find tremendous opportunities. Real estate expert Justin Ford can tell you how to “turn back time” and make it seem as though the national real estate boom is beginning all over again. ]