“The aim of education should be to teach us rather how to think, than what to think – rather to improve our minds, so as to enable us to think for ourselves, than to load the memory with thoughts of other men.” – Bill Beattie
Real estate, just like all other markets, has market cycles. (A market cycle is just a measurable “up and down.”) When you understand the factors that contribute to these trends, buying investment property can be easy. And you can give yourself a pretty good education simply by reading articles in print and/or online publications. But first you have to know what it means when they use certain numbers.
Here’s an example of what I’m talking about…
In June, on CNNmoney.com, Rob Kelley wrote that mortgage rates had hit a 10-month high. He went on to explain that 6.53 percent was the highest that the 30-year fixed-rate mortgage had been since August 2006.
But what do those numbers mean? Just knowing that a number is high or low doesn’t paint the whole picture. Numbers are always part of a bigger picture. If you know how they fit together, you can win as a real estate investor.
To help you understand how numbers fit together to affect a market cycle, I have three lessons to teach you.
Lesson #1: Many factors are involved in the creation of a market cycle.
What’s high today was low at another time. Always ask yourself, “What else is going on, and how does this affect the area in which I’m investing?”
When mortgage interest rates were at 12 percent, 15 percent, or 17 percent, mortgage products had different terms and features. Lots of deals went on with private money. A real estate investor could assume a mortgage, because loans for real estate investing looked much different than they do now – and banks wanted to hang onto those high interest rate loans.
These days, loan assumption is rare, and real estate investors might get more deals that are subject to a type of investing that leaves the existing mortgage on the property without making the investor liable for the loan.
Single-family residential interest rates are part of all of the equations, but the sales of other industries factor in, too. Lumber prices affect new home construction. Unemployment rates affect home buying. How the U.S. dollar compares to other currencies also impacts the housing market.
While it may be exciting to read that interest rates are high, always remember that newspapers (and online news venues) are in the business of selling news, not educating the public. They will hype the information to make it exciting.
The 10-month window Kelley refers to in his CNNmoney.com article isn’t a very long period of time. And 6.53 percent for a 30-year fixed-rate mortgage, while higher than at some points in the last decade or so, is still pretty low compared to decades past.
Kelley states that home prices and mortgage rates are closely related. When mortgage rates go up, home prices tend to drop. Some market analysts call the current drop in the real estate market a real estate bubble – meaning that the “good times” bubble has popped.
But, again, that isn’t the whole picture.
Lesson #2: Not all geographic regions will have ups and downs at the same time.
Certainly, the Federal government influences interest rates – but remember Lesson #1: There are other factors involved. Yes, higher mortgage rates will tend to lower home prices. But if a specific geographic area has an employment boom, with lots of new jobs being created, those higher mortgage rates won’t figure as heavily in the home-buying market.
Lesson #3: When the single-family home buying situation looks bleak, investing in commercial real estate opens lots of other doors.
Commercial real estate can be anything from multi-family residential properties (five or more units in an apartment building) to warehouses, office buildings, strip malls, and more.
Lenders treat these kinds of properties much differently than they do single-family and smaller multi-unit properties (of two to four units). So once you start investing in commercial real estate, you could have access to more money to invest with.
If, for example, you’re good at finding good commercial deals, you may find that more potential backers will be interested in investing with you. Mortgage products change. And your place in the investing picture changes.
With commercial real estate, especially with multi-family apartment buildings, you have a lot more control over your investment. You can raise your NOI (Net Operating Income) more easily (by raising rents or adding coin-op laundry facilities, vending machines, etc. to the property). And when you raise the NOI, the value of your property rises with it.
Best of all, when you can control the value of your property, you gain a degree of independence from real estate trends. You can’t bypass all the large factors – unemployment, the Fed raising interest rates, too much of one type of property on the market. But you can control your property in your local area.
Being able to control your investment is your bonus lesson. The more parts of your investment you can control, the wealthier you’ll be![Ed. Note: Dave Lindahl went from an $800 net worth to a passive income of hundreds of thousands of dollars and a multimillion-dollar net worth in less than five years. He did it by becoming the “Apartment House King.” Today, his portfolio has over 3,100 units. Dave will be giving an exclusive one-day training event this fall to teach exactly how he did it, how he continues to grow his portfolio by more than 100 units a month (!), and how you can follow the same path in today’s market.]