This
is a question I get almost everyday from either our
web site www.GetPreconstructionProfit.com or from my
individual investment activities. The question is “How
Can I Be Profitable When We Are In A Real
Estate Bubble”?
STEP#1.
First you have to recognize that in order to make money
in almost any market (i.e. stocks, commodities, real
estate, etc.) you need to have the market in motion.
In other words, the prices or value have to be changing
substantially, either up or down, for you to make money.
Did you know that many traders back in the NASDAQ bubble
made millions by adopting a style that made perfect
sense for the type of bubble market that was being experienced?
Of course this was financially devastating to buy and
hold investors who bought at the market top. So what
is the difference? The answer is a difference in investing/trading
style and risk management.
STEP #2.
Now throw a little reality into the picture. Specifically,
you need to realize that nobody can consistently predict
the turning point of a rapidly moving market. People
who pay attention to value (which is always a wise move)
can tell you when things are out of whack with the market,
but they cannot tell you if the market will turn in
a week, a year, or a decade! Warren Buffet correctly
predicted that the stock market was way over valued
LONG before it actually corrected. Since Warren is a
value-type investor, it made perfect sense to stay on
the sidelines. In contrast, many active traders became
multiple millionaires during that period and then rapidly
adapted to the market downturn. Both were “correct”
for the type of style that they employed.
STEP #3.
You have to realize that there are many ways for an
overvalued market to correct. For example, in the real
estate markets, many people are claiming that the price-to-earnings
(P/E) ratio is out-of-balance; that is the price you
can collect for rents in a year relative to the purchase
price. Typically this should be around a ratio of 100
to 150 for a good cashflow investment. In some areas
of the country, this ratio is over 400.
You need
to realize that this imbalance can be corrected by the
price dropping (as many claim), rents escalating, or
combinations of both. In addition, it may not correct
as demonstrated in many markets for over 20 years! So
your choice becomes “do I sit on the sidelines”
or “do I learn how to invest safely in this fast
moving market.” This is a personal choice that
you have to make in regards to your own personal style.
Want to
know an additional little secret? Like in stock
trading, the secret to any successful investing
is learning how to control your risk relative to your
potential gain. It’s that simple! As an example,
there are preconstruction real estate deals out there
where an investor can risk less than $2,000 and can
still make a potential reward of $50,000 or more. If
the investment does not work out, then all that investor
is out is the $2,000 initial risk. Knowing that little
piece of information can potentially save you hundreds
of thousands of dollars! For investors that participate
in real estate investments on a continuous basis, they
always try to educate themselves on the risk potential
first followed by the potential for gain.
The bottom
line is that if you follow these simple steps, you can
also learn how to invest in markets that other people
perceive as dangerous bubbles!
About
the Author
Chris Anderson is a leading authority on preconstruction
real estate investing. Get his 4 day e-mail course and
a 33 minute video free today! Visit http://www.GetPreconstructionProfits.com
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