I have been investing long enough to know the difference between a buyers market and a sellers market. When I started 10+ years ago it was a buyers market in my chosen area, and over the first 3 years of my investing career, the market changed in a big way. We went from buying solid deals to watching everything in the market become overpriced for our chosen model.
Let me paint you a picture. We had 8-10 little houses at the time and it was clear that we either needed to stop buying or we had to change our model in a big way. Since we couldn’t survive long term on these initial houses, which were producing $1,300 – $1,500 a month positive cash flow total, we decided to change our model.
We decided to change our model, and therefore had a few options:
- We could have thrown our financial model out the window like lots of other buyers/investors/speculators.
- We could have changed our chosen market from a semi local market to an out of state market.
- We could change from buying single family homes in our market to a different segment.
Since we didn’t believe in changing our financial model, and we are too much of control freaks for out of state investing, we decided to investigate different segments of our market — specifically we spent six months investigating small apartment buildings with 5-20 Units.
During our research a couple of things stood out.
First, in our market, small office buildings offered much better returns than four plexes at the time, and they required commercial financing as opposed to residential financing. As you may recall, 6+ years ago residential financing was easy to get but commercial financing wasn’t. For example, to buy a 5-plex we were required to put 20-25% down, but to buy a 4-plex we could have put down 10% or less. In addition, commercial appraisals were more strict and detailed, with very little room to fudge the numbers.
As it turned out, this model change did great things for our business. Once we decided to switch our model, we simply listed one property at a time to sell. Once the property was in escrow to close, we simply went out and found a small apartment building that offered a great return. We then moved our equity via a process called 1031 Exchange from over priced single family homes into commercial properties ranging from 5-20 apartment units.
As we look back, this simple adjustment allowed us to capitalize on an over heated sellers market and move our equity into additional units producing significant cash flow. I wanted to bring this up because the market we are in is changing, and while I don’t think we are any where close to a healthy sellers market, we all should be prepared for the eventual market shift.
In closing, the key to long term success in buy and hold real estate is not keeping everything you buy, but instead, ensuring that you capitalize on your equity in the most efficient and meaningful way possible.
in other words, I look forward to selling the 25+ properties I bought at or near the bottom of the market, and moving the equity into a lot more units over the next 2-5 years.