Risky Business Part III: How to Minimize Economic Risks

Editor’s Note: This article is the third of a three-part series. For more information on minimizing real-estate risks, check out Risky Business Part I: How to Minimize Tenant-Related Risks and  Risky Business Part II: How to Minimize Property Risks.

Real Estate, like other investments, has ups and downs. Knowing when to buy and when to hold is key to success.

Every sensible real estate investor worries about economic risks. Anyone can stumble into a good market at just the wrong time, and though the property might be great, the economy can ruin you.

Fortunately, just a little bit of know-how can go a long way. By applying the following knowledge, strategies, and tools to your approach, you can navigate economic risks with ease.

When should I buy?
Buy at the beginning of absorption, toward the end of decline. Watch for fewer foreclosures, climbing prices, and quicker sells. If you get in at the right time, you’ll see huge value jumps.

Don’t buy in expanding markets because you can count on it to slow down soon. Instead, focusing on flipping.

Markets in equilibrium aren’t as risky as expanding markets, but they aren’t necessarily ideal, either. Unless you find a motivated seller, there’s a good chance you’ll stagnate.

If you decide to buy in market equilibrium, you’ll need creative financing. If someone has great interest and is willing to owner finance the deal, your cash flow is more likely to build.

Still, it’s not a bad idea to buy in decline rather than equilibrium. The value might go a little lower, but so long as you’re getting good cash flow, you shouldn’t be worried.

Should I buy one nicer home or two or three cheaper ones?
Two or three cheaper properties are usually a safer, smarter choice. Look for homes at or below the median costs. As things enter tougher economic cycles, you’ll still make a decent amount of money while the expensive homes suffer.

Buy properties that sit between 40% and 70% of the market’s median home cost. Anything below 40% will be in too rough of a neighborhood, and anything above 70% will have a rougher cash flow.

What is economic obsolescence and how do I avoid it?
An area is economically obsolete when its entire industry dies or moves overseas. West Virginia, for instance, struggled when the coal industry declined. When huge employers take a hit, the entire market does.

To avoid economic obsolescence, compare median home prices to what they were in the past. Choose markets that rely on more than just one industry.

Reach out to the chambers and councils in your target market and ask them to tell you about the economy and major employers. The Economic Development Directory will give you all the contact information you need.

Compare median home prices to what they were in the past. Choose cities with eggs in more than one basket. Reach out to the chambers in your target market and ask them to tell you about the economy and major employers. Use data, not hope as a strategy. The data’s there, so make use of it.

How can I learn more about my target market?
We’ve created a market data spreadsheet to help you do just that. It analyzes over 278 markets across the country and examines several variables, including, but not limited to, the following:

  • Vacancy
  • Owner occupancy
  • Median income vs. median home prices
  • Violent crime indexes
  • School scores
  • Property taxes

Though this tool isn’t available to readers yet, but it will be in the near future. Click here to get notified when it’s released.