Erfahrung for Real Estate Investors, Part 2

“Fear is a real killer. I try to trudge through the jungle with as little fear as possible.” – William Shockley

Last Thursday, I discussed the recent media frenzy about real estate market corrections – the bubble-and-bust phenomenon. I showed examples of headlines claiming that any correction would be mild … or severe … or somewhere in between. It’s been a mixed message at best.

I also explained some of my personal beliefs about investing – beliefs derived from erfahrung or “experience-based knowledge” (which Michael Masterson has written about many times in ETR). And I said that one big thing I’ve learned from my experience with real estate and stocks is that an emotional, fear-driven crowd can mean big profits for the smart, calm investor.

Emotions have certainly been at a peak lately. Owners are fearful that their properties are only going to decrease in value … and they’re ready to jump ship. Which means you and I can turn that fear into our own advantage.

In fact, I already have. Let me tell you how …

How I Found 2 Great Bubble-Market Deals

As I told you on Thursday, since the beginning of the year, I’ve done four real estate deals at substantial market discounts – two of them in a deflating bubble market and two in a deep-value emerging bull market.

First, a bubble-market example …

One of my best properties in South Florida is a charming 4-unit that’s half a block off a developing downtown, not far from the beach. Until recently, I had my office in one of the units. The property is zoned residential and commercial, so it has versatile potential.

I bought it under market value three and a half years ago, and paid about $75 a square foot for it. Over the last six months, properties in this same area have averaged $265 a square foot. As I said, South Florida is a bubble. So I would never pay that price today. But I would pay half that price or less if the property cash flowed. And that’s what I just did.

I just picked up a two-cottage duplex a few blocks down the same street – in very good condition – for just $110 a square foot. Even the bank appraisal put the property at more than $50,000 above what I paid for it.

Better yet, the property completely pays for itself, including the fixed-rate loan – even in the current interest environment and even with only 10 percent down. And this is in an area where properties still generally don’t cash flow with less than 35 percent down.

Also, as buyers have been priced out of the market in this and other bubble areas, rents have been getting stronger. I know what my costs are, and my income covers them. And that income is heading up … on a property bought significantly under value.

I could be biased. But I think it’s a good deal.

How did I find it?

The long answer involves “The Matrix”, a system I developed and teach in ETR’s Main Street Millionaire program. It helps you find the best properties on offer in any target area you choose – listed properties as well as FSBOs (For Sale By Owner). But the short answer is simply that I continue to have my partners systematically scour the markets for exceptional deals.

When we saw this one, we knew it was, by far, one of the best on offer. It was in very good condition in a good-yet-improving neighborhood – and we got it for less than 42 percent of what other properties in the area were going for.

I didn’t know it when I presented my first dual offer (one all cash; one involving seller financing), but it turned out it to be an estate sale. The heirs were two brothers who were impatient (and squabbling). One was heading abroad, and they both just wanted out. They didn’t have to accept my offer. In fact, they initially rejected it. But in a market where fear dominates, they weren’t getting any offers.So their agent came back to me two months later, and we ended up with a superb deal.

Deals like this are only possible because – even though I think market value is absurd in much of South Florida – many sellers are becoming impatient. And that can be very good for patient buyers. It can give you the opportunity to buy far below market value.

Because of similar “eager-seller” factors, I was able to do another deal a few months ago. This one, a few towns away, was on a single-family home in an excellent area that produced $30,000 in instant equity.

Both of the above deals are in a South Florida bubble market that, admittedly, hasn’t bottomed yet. Now … imagine the opportunities you can find when you target deep-value emerging bull markets. Because when you buy under value in undervalued markets, the number of quality deals you can find increases dramatically.

Bargains in the Bargain Markets

A few months back, I was able to purchase a 4-unit in a Sunbelt city that’s priced at a fraction of the bubble-city markets … yet it’s growing fast, with a solid and broad economic base and a top-rated quality of life. We got the property for about 20 percent under market value. It’s in an improving B area, and it cash flows all day long … with just 10 percent down. And as good as that investment is, it takes second place to the investment we’re closing on shortly.

It’s another 4-unit. But this is in an A- area. (As a rule, the better the area – even in a value market – the harder it is to find cash-flow properties with little or nothing down.) Yet we’re buying this one a good 30 percent under value at a price where it will cash flow with just 10 percent down. Now this isn’t a deflating market … it’s an appreciating market. But, once again, we’ve searched out a motivated seller.

This particular seller wanted to retire – and he wasn’t paying close attention to his property. Rents are a good 40 percent below their true market value. And once the property gets perhaps $12,000 worth of paint and other improvements, it should not be hard to bring the rents up to full value.

We could turn this property for more than our initial total investment (down payment, closing costs, and repairs) within a matter of months. That is, we could easily make more than 100 percent in a short time. But we’re going to hold it for a while … for a few reasons.

One reason is that we’ll pay lower capital gains taxes by holding it for a year or more. In fact, by not flipping, we’ll also have the option to defer taxes indefinitely through a 1031 Exchange and roll the proceeds into a bigger property with greater income. But most importantly, we’re going to hold it for at least a year or two because the market is so well priced (and growing) that our ultimate returns could be many times our initial investment.

You Can Profit in Any Real Estate Market

Remember that while your local real estate market may be a deflating bubble, other markets currently have excellent economic fundamentals and growth characteristics. In fact, many of these value markets are benefiting from an influx of “refugee” capital from people fleeing the bubble markets.

Point is, you can make money in either type of market – deflating bubble or young bull. And you can make money in both at the same time.

No matter where you choose to invest, the “trick” is to always insist on deep value that adds thousands to your bottom line in instant equity, along with a safety net of rental cash flow.

[Ed. Note: Justin Ford is a deep-value investor in both stocks and real estate. He is also the editor of ETR’s Main Street Millionaire Real Estate Success Program. Justin will be presenting a teleseminar on how you can make over $100,000 in 5 months in bubble markets, value markets – or both – using the 5 Secrets of Deep-Value Real Estate Investing