It’s not Rocket Science, It’s Economics
If you’ve read my blogs over the last several months, you’ve probably noticed that I’ve been fairly bullish about what I think real estate values are going to do. You’ve also probably noticed that I tend to lean a little heavier on the appreciation side of investing than most investors. While I whole-heartedly agree that cash flow is an essential part of a long term real estate investing plan, I also believe that it makes sense to understand market dynamics so as to increase the possibility of capturing as much appreciation as possible.
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One of the primary concepts that originally sold me on real estate investing was the ability to combine leverage with appreciation. Basically, it’s the idea that you can put up 20% of the cash to buy a property, but 100% of the property increases in value. Combine this with some intelligent research into specific markets, and you have a recipe for huge profit potential.
Case in point is the market I operate in – Atlanta. I’ve been active in this market since 2005 and have never seen anything like what’s been going on here over the last year. We’ve watched the hedge funds and other institutional buyers swoop into our market, buying up huge portfolios of properties in a very short period of time. I’ve also witnessed an REO market heat up very quickly with multiple offer situations on almost every house. Couple this with double digit decreases in inventory over the last 3 years and its doing exactly what your Economics 101 professor would have told you – pushed prices upwards.
Just last week, I was looking back over the power point presentations I was giving in early to mid 2012 where I was predicting exactly what was going to happen in our market. Eventually, these market forces are going to operate the way you would expect. It really isn’t rocket science and it doesn’t require a crystal ball. Decreasing supply and increasing demand in any industry will always end with an increase in prices.
The Proof is in the Pudding
Sure enough, Clear Capital just released their market report for February and Atlanta led the nation with 3.5% growth over the last 3 months. Honestly though, it didn’t take a genius to see the writing on the wall last year. I worked with numerous investors in 2011 and 2012 who were closely watching what was happening and specifically came to me to buy properties in Atlanta because they saw the potential in this market.
I know some investors will still scour at the thought of trying to time markets and invest for upside potential, but I can’t help but think that the investors who invest just a little more time in market research will end up more profitable in the long run. I would love to hear from you on this – what dynamics are you seeing in your market and what do you think the end result is going to be?