In the first article of emerging market real estate investing we focused on identifying our markets and buying the property. Now we are going to look at our hold strategy. Most people think that in emerging market investing we have to buy properties in rapidly appreciating markets with massive negative cash flows. This is not emerging market investing. That is emergED market investing - you are chasing the market. I definitely don’t recommend this. It’s much better to buy when a market is down, when everyone else is selling but the market is about to turn. It makes it a whole lot easier to manage your cash flow.
I like properties that cash flow. It makes life a whole lot easier in real estate. If a property doesn’t cash flow you have to cover the difference. Every month. God forbid you get a vacancy because then you are covering a whole lot of money and get desperate to find tenants. I’ve found that’s when real estate investors start making mistakes. In their rush to get tenants they take the first person to come along simply to cover that massive payment. Usually they end up evicting later because desperate investors draw in deadbeat tenants. It’s like deadbeat tenants have “desperate investor” radar.
If you really do emerging market real estate investing you are buying when prices are low and getting a deal. Now in some markets you still won’t cash flow even at 20% down. Those expensive markets are for investors who like more risk than I do. If the market really is an emerging market the investor will still probably make a lot of money. Myself, I would much rather pick a market that is about to emerge but also cash flows. These days most real estate investments require 20% down if you are buying outright with a mortgage. If you don’t have that much money for a down payment there are always some creative strategies like lease options, land contracts and subject tos that are good for little or no money down investing. By the way, those creative techniques are GREAT for emerging markets, your profits on those deals will be much, MUCH higher than if you do them in declining markets, emerged markets or any other kind of market. Not only that but the deals are much easier to find too.
Most emerging real estate markets are not in our own back yard. That means as an investor we want to take a national approach to our investing, look for the emerging markets with the best opportunities (remember to find them we want to use a real estate timing service, such as REMarketStats) across the country. By being a national investor it means that we will definitely need a good property manager to handle our real estate investment. If you find the property manager BEFORE you buy then they can help give you an idea of what the market rents will be so you can plan for your cash flow situation. Not only that but you’ll want to budget for paying the property manager out of the rental income as well. Some people balk at paying for property management but I’ve found that it is so much easier, so much less headache and so much less stress than dealing with tenants yourself. A good property manager is well worth their fee. I’m not going to go into cash flow calculation here, but I will say that it is very important that you do the calculation before you buy. Also make sure you budget for repairs and maintenance as part of your calculations (10% of the gross rent is a good amount to use) - nobody likes buying properties with deferred maintenance except other investors looking for a deal.
Cash flow isn’t our primary source of income for this real estate investment, appreciation is. But it’s always nice to get a property that cash flows or at least breaks even. Remember, if a property cash flows you can hold it forever and still make a profit no matter what the market does.
In part 1 I also mentioned buying properties that need improvements as part or an emerging market real estate investing strategy. The timing of these improvements does make a difference. You need to ask yourself if you need to make the improvements before you find tenants or when you are about to sell the property. If you are making improvements before you find tenants they should be improvements that are necessary to place good tenants. Improvements like remodeling the kitchen or bathrooms are better done close to when it’s time to sell. That way the improvements are practically new and will appeal much more to your end buyer. Our end buyer is how we make our real profit in emerging market real estate investing so we want a home that will appeal to them and sell quickly for the best profit. And who knows if you make the right improvements your end buyer might end up being your tenant. Then you won’t even have to pay a real estate commission.
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