Be a Contrarian Investor – Not a Speculator
Posted by Peter Vekselman Friday, 18 November 2011 05:25 No Comments
We’ve all heard the soundest investing advice there is – buy low, sell high. However, how many of us actually do exactly that? Not many. Most people follow the trend of the day. They latch onto the same thing everyone else is doing.
Did you lose money in the dot.com bubble or have an investment house foreclosed on in this current real estate slump? If you did, you were more than likely speculating prices would continue going up long after they reached an unsustainable level. Same thing if you now find yourself with rental properties that you have to supplement the rental income to make loan payments. You bought too high.
A contrarian investor is a true buy low, sell high investor. He or she looks for value where others don’t see any. A key characteristic you need in today’s real estate investment is the ability for the property to throw off money. The cash flow needs to fully cover any loans against it and have positive cash flow. It needs to be reliable cash flow. It can’t be a fluke that the current tenant is willing to pay an above market rent but if they leave, the property will become a cash sucking black hole.
That’s always important and especially important in today’s market because you probably need to hold onto to the property for a while. But low prices today make it a great time for those willing to go against the trend of sitting on the sideline waiting for prices to head back up so they can again buy near the top.
Of course, the question on everyone’s mind is which direction will real estate prices go over the next few months? However, that’s the wrong question to be asking right now. Whether prices slip a little more or start going back up as inflation takes hold doesn’t matter much right now. Prices are near the bottom. Long-term they will go up.
Prices being near the bottom make this the right time for a contrarian investment. Interest rates are at historical lows but won’t remain there for long. There’s a glut of properties on the market. Sellers seriously consider any offer they can get. While unemployment remains unacceptably high, it has started improving. Unemployment is the hinge-pin to the real estate market recovery.
I’m not saying you should rush out and grab up just anything on the market. As always, you need to perform your due diligence. Mainly you want a property with positive cash flow and that you’ll have no trouble keeping occupied.
On the commercial side, that might be a retail space on main street where the current owner has already made a rent concession to keep tenants in place and viable. The seller knows he or she can’t demand a premium price after making rent concessions. What you want to do is combine a low purchase price with a low cost loan. If that produces a solid positive cash flow, you have a workable contrarian investment.
You’re looking for stable tenants and a property that will be easy to rent if the current tenant vacates. That means a multiple use property. Not a specialty use property.
Now is not the time to invest in a restaurant because it is a single use building. Instead, a retail space that is easy to reconfigure makes much more sense. A strip mall in the heart of the business district. Something with easy to move walls. That way a tenant can expand by taking out a wall or you can add a dividing wall to attract multiple tenants needing less space.
Don’t wait too long for the market to start back up. Now is the time to buy low and that’s exactly what the smart money is doing.