How to Know Whether You are Investing in a Cash Flow or in an Appreciation Market?
Perhaps the biggest surprise to most investors is when they think they are investing for cash flow and cannot find any decent cash flow properties. Often what has happened is the cycle has switched from a cash flow market to an equity growth market. Just like seasoned investors do, you want to be aware of what market you are investing in.
Markets are always changing and this is an intangible change that does not come with any sort of fuel gauge. Being able to identify the market swings will give you a huge investment advantage as you will know what to look for and best know how to best make a strategic investment.
A Quick Guide
- Cash flow Market: when prices have hit bottom and inventory is in abundance. Days on market for listings are lengthy. This is an opportunity to buy at rock bottom prices which will allow you to generate great cash flow from rents.
- Equity Growth Markets (Appreciation): prices are now on the rise and inventory is starting to tighten. Rental prices are also on the rise and demand for real estate has increased. Cash flow if good but not what you have seen lately
As a market shifts form a strong cash flow market to an equity growth market, you will take notice that cash flow is still good but it has become noticeably less than you have been seeing lately. Many wonder why they cannot find any great deals anymore and it is simply because the market is advancing forward. Cash flow investors either want to adjust their investment strategy into an equity growth strategy or find a different location that is still in a cash flow market.
As we all know, real estate is always about location and there is always a location that exists that represents a cash flow market. Find a market that fits this quintessential cash flow market and you can continue to be a cash flow investor. Your other option of course is to invest for a nice mix of cash flow and equity build up (Appreciation).
The Equity Growth Market Is the Cycle Where Wealth Is Created
Do not be one of those people who get discouraged when they see cash flow lesson. Often lower cash flow represents a growing economic market. Prices are rising, and while you would have done better buying earlier, many are skeptical buying too early in fear the bottom has not yet been realized.
Once the market starts rebounding is the time prices start to rise (along with rental rates). This growing and strong economic condition typically allows for great property value appreciation. Those who have invested and ridden the economic wave of a market's prosperity know that this is the time wealth is created. Property value increases tend to outweigh the performance of cash flow. Of course you do not realize this wealth until you sell the property and when you do the reward is impressive.
Buy and Hold Real Estate
This is a great piece of real estate knowledge that often has a misunderstood meaning. Many years ago Roy Rogers stated, “you do not wait to buy Real estate, you buy real estate and then wait.” Indeed this is great advice as he is saying to buy real estate and hold it long term to capture this great appreciation.
The misunderstood part is that you do not need to buy one piece of real estate and hold it forever; you simply want to hold it until the market suggests you to sell it. When the market transitions into a seller’s market, you are best served selling the property and repositioning your money into the next buyers’ market. If you hold it too long your property may stop gaining equity or worse yet, it may start to lose value.
Reap the Best Rewards By Being Informed
While many people just want to buy property and make a lot of money. They want to find the best deals available and start building wealth. The truly successful investors take the time to learn these basic understandings of market cycles. As is often said, you cannot time the market. This may be true, but knowing the market conditions allows you to know what your strategy for buying should be, what your expected hold time may be and most importantly allow you to ride the economic wave of prosperity and identify the telltale signs when it is best to sell and reposition.