If you just realize and understand that, by design, the markets cycle with great steadiness, timeliness & repetition you’ll be rewarded with great financial windfall 💰!
The Real Estate market is your best friend but she speaks her own unique language! Learn to speak Real Estate and you will understand not only how to clearly positioning the market, but also how to work the right strategy to capitalize any market stage instead of going against the grain.
Before you can understand the different approaches we are about to dive into, we urge you to first grasp the basics by reading:
Why is it essential, a matter of rich or broke, that we understand the market? Well it’s because if you want to succeed you will have to go against what is perceived as the psychological emotional effects of “unknowing” traders. All markets go through different cycles that bring up different emotions to those engaging. Because most don’t have a strategic plan to navigate on, they fall victim to their emotions of fear and greed. Meaning they don’t know when to get in (buy low) or get out (sell high).
The first phase as the market cycles is “optimism”. Buyers feel comfortable as the market continues to rise optimism turns into excitement the signals are mistakenly seen as a buying opportunity. It seems like nothing can go wrong, the reality is that this is the point of maximum risk in the cycle (top inflection point). The innocent blinded by greed & expecting more profits buy in “euphoria” from the experienced, calculated selling for maximum gains, right before a recession market stage. This is called “the distribution” phase where institutional investors gain massive liquidity by unloading as there are big numbers of willing (aka uniformed) buyers. The downfall of the market kicks off the “anxiety’ phase of the cycle. The “denial” phase begins, as the market continues plumbing and the losses rise, denial turns into fear and desperation. Ultimately panic sets in, as the losses are reaching breaking point. This is called the “capitulation” right at the point of maximum financial opportunity as the experienced institutions start buying, at rock bottom prices from the desperate, for the recovery period that is coming.
This is how the experienced profit from the oblivious. This is when big money is made over and over again. Steadily, timely & repeatedly, in any market. Capiche?!🧐
Best Strategy To Profit
To best capitalize the stage of the real estate cycle you’re in, you must understand and implement different real estate strategies. Most strategies will partially work at any time during the cycle, but some are more effective during specific stages. To optimize your business you need to use the strategy that’s most effective and profitable on the current market.
We will first dive deep into the different combinations of Stages, Profiles and the best Strategies to implement during each stage 😵. Don't panic we wrap it all up with an easy quick reference sheet 🤩.
Core, Core Plus, Value Add and Opportunistic are terms used to describe the risk and return profile of a real estate investment. They range from conservative to aggressive and are defined by the physical aspects of the property and the amount of debt used.
Core: means ‘income’ in the stock market. Core property investors are conservative investors looking to generate stable income with very low risk. These properties generate stable and consistent cash flow and their values tend to be steady. Core investors expect between 7% and 10% returns through cash flow from the property rather than appreciation and use less than 40% debt to capitalize a transaction.
Core+: ‘Core Plus’ means ‘growth and income’ in the stock market and a low to moderate risk profile. Core plus property owners typically have the ability to increase cash flows through light property improvements, management efficiencies or by increasing the quality of the tenants. Similar to core properties, these properties tend to be of high-quality and well-occupied and Investors use between 40% and 60% leverage and expect to achieve returns between 9% and 13% annually.
Value Add means ‘growth’ in the stock market and is moderate to high risk. These properties have little to no cash flow at acquisition but can produce a great amount of cash flow once value has been added. These properties often times have occupancy issues, management problems, deferred maintenance or a combination of all of the above. Value add investors tend to use between 60% and 75% leverage to generate annual returns between 13% and 18%.
Opportunistic means growth like ‘value add’, but it is even riskier like ground up developments, acquiring empty buildings and land development. No cash flow at acquisition but produce high amount of cash flow after value add. Opportunistic investors tend to use leverage of 70% or more depending on how much debt they can acquire. For land development, banks simply won’t lend more than 50%. Opportunistic investors expect to generate annual returns in excess of 20%.
Stage – Profile - Strategy
1. Expansion Stage
The market is on the upswing, there is growing demand for space. GDP growth is back to normal, job growth is strong. Occupancy rates growing, rents are on the rise, new construction is justified.
Opportunistic: The ideal time to develop or redevelop properties, because of the current demand for space and leasing momentum.
Core-Plus: Investors who seek lower levels of risk can acquire Core-Plus properties knowing they will enjoy high rates of tenant retention with continued rent growth.
Value-add: The expansion stage is prime time for value-add investing. Sophisticated investors can acquire properties with deficiencies at high discounts. Once value is added, the property can be valued at full current market value. Meaning big cash out with a refinance or sale.
Flipping; Flipping is the process of buying property below market value, adding value through renovation and/or repair, and then reselling it for a profit at or above market value.
Wholesaling is the process of finding and/or negotiating the purchase of property below market value and immediately reselling the contract to another investor for a profit. The best opportunities for wholesaling exist when deals are exceptionally difficult to fi