Generally, it makes sense to buy real estate when the following five conditions prevail:

1. You are financially able to buy. It is advisable to approach any investment decision realistically. You might have plans to invest in real estate; but if you don't have down payment money, or if lenders will not grant you credit, then there is no point in spending time looking for property. Make sure that you are financially able to buy.  It makes sense to know not only that you can get financing, but also how much financing the lender is willing to grant to you. This determination is made strictly by formula, based on your income and. of course, credit history. 

2. It is a buyer's market. The best time to buy is when you have maximum advantage in the market¡ªwhen there is an abundance of properties for sale, and too few buyers to take up the inventory. In these conditions, you are likely to find real bargains. Do your own local investigation to find out whether you are in a buyers market. Don't depend on stories you read in nationally published magazines or newspapers. In real estate, markets are strictly regional, and what is going on in one area¡ªor even in several areas¡ªis not necessarily an indication of what is happening in your area. This is true for housing prices as well as for supply and demand, both for property and for rentals. One expert has observed the regional nature of real estate: "High rental costs have more to do with local overall costs of living than they do with the supply of rental houses.

Another factor making local markets more important than national trends is the difference in living standards between large cities and small towns. In 92 percent of large metropolitan areas, the cost of living is higher than the national average, and one of the biggest contributing factors is high housing costs. So depending on where you live, you need to compare local housing costs with averages to get an idea of current market conditions. A good source for information about prices in your area is the regional office of the Department of Housing and Urban Development, which tracks fair market rents by county.

3. You believe that the cycle is at its bottom. All investors have to estimate the place in the cycle at any given time. Whenever you consider buying, one of the first questions should be, What is the state of the market? Putting it another way. Where are we in the current cycle? Most people are keenly aware of stock market cycles, because the market is constantly being studied and reported on in the press. That is not the case with real estate, for which the cycle is more slow-moving and less exciting. In looking back, cycles are clear to see. In looking ahead, the future is more difficult to predict.

Even though the pace of real estate cycles slower, you need to perform the same kind of analysis as a stock market investor. You need to know the market indicators number of properties on the market, time required for the average sale, spread between asked price and sale price, number of new housing starts, number of sales in the past year. All of these reveal the condition of the market, By being aware of these indicators, collectively and over time, you will be able to spot cycle points and estimate cycle bottoms.

4. There is a demand for rental units. As pointed out earlier, the demand among buyers for investment properties is not the same as renters' demand for rental units. The two forms of demand might appear contradictory when, in fact, the timing is off. so that demand in one indicator lags behind the other. As a real estate investor, you need to be aware of several supply and demand cycles, there being three major ones: The best known is the buyer/seller cycle. In addition, there is the cycle of money supply, which is reflected in lender policies and current interest rates. And third is the supply/demand cycle among rental units (supply) and renters (demand). The demand for rental units should be high enough that you won't have a chronic problem finding suitable tenants. If you suffer excessive vacancies, you will run into cash flow problems early on, and the market rent levels might be towered as a consequence of low demand.

5. The amount of rent is adequate to provide you with the cash flow van need. Be sure that the property you are thinking of buying will yield enough rent to cover all or most of your expenses. This is not to say you have to ensure that rents are always higher than your expenses; but you should be comfortable with the level, even if the advantage is found in tax benefits and not in month-to-month cash flow. If you spend so much for the house that your monthly payments are far above rental receipts, any future profits will be drained away in negative cash flow. You need to find houses you can afford, for which rental income will justify the investment.

When purchase prices are high and rents are low, it could be only a temporary problem. It could also indicate that in your community, it does not make sense to invest in rental properties at this moment. You need to wait out the market or look somewhere else. In some cases, looking at a vastly different economic market in a nearby community gives you the advantage you seek to find the right time and place to buy.

 

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