This is a question I get almost everyday from either our web site
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!
Chris Anderson, PhD
chris@GetPreconstructionProfits.com
GetPreconstructionProfit.com
