finding the next hot market

Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy

1 | P a g e S e a n F . M o u d r y w w w . n e x t h o t m a r k e t . c o m

WWW.NEXTHOTMARKET.COM



Finding the Next Hot Market Identifying Major Markets, Sub Markets, and Property Types

In the New Economy

By Sean F. Moudry

©2008 Sean Moudry Originally Published as Financial Freedom in Five Years ©2008

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Table of Contents

Introduction ------------------------------------------------------------------------- 4

Market Cycles ---------------------------------------------------------------------- 9

Following “Down” Markets ---------------------------------------------------- 25

Cause and Effect ---------------------------------------------------------------- 36

Expansion and Contraction --------------------------------------------------- 41

Property Selection -------------------------------------------------------------- 55

Price Support -------------------------------------------------------------------- 63

Choosing Location Determining the Stage of the Cycle -------------- 66

Speculator’s Spike ------------------------------------------------------------- 85

Exit Strategy --------------------------------------------------------------------- 88



Introduction

My Path to Realization

After working and Investing in the real estate business for more than Fifteen years, I can

Confidently say that I have developed a successful system for real estate investment.

Because of my success, I’m able to conduct seminars across the country to teach people my

strategies.

You may think that genetics and my upbringing are responsible for my success.

Perhaps you imagine that I was born into a wealthy family with parents on my back,

pushing me to succeed. No expense would have been spared on my Ivy League education,

and I, of course, would have an incredibly high IQ. Maybe you even think

that my parents got me started with real estate investing, tutoring me in the nuances

of the practice, even to the point of buying me my first property when I turned

eighteen. A strong background in the field coupled with wealth to fall back on would

have been my formula for making it.

Nothing could be further from the truth. Many successful business people and

entrepreneurs have become successful not only despite their harsh background, but

because of the adversity of it. This was true for me.

My single mother raised my brother and me. We moved from town to town more

than forty-five times before I turned fifteen. When rent came due, we jammed our

miniscule collection of belongings into the trunk of the car and escaped in the middle

of the night. Oftentimes, we did not have money or food and spent many nights in

churches and gracious people’s homes. During those times, we were literally homeless.

I eventually found myself alone at age fifteen in a small mountain town in

Colorado. My brother had gone off to college, while my mother had decided to

move to Wyoming to try to start all over again. Without any family or money, I had



been working as a busboy in a local pizza restaurant, making a whopping $4.25 per

hour. I put in long hours, attending the county high school during the weekdays and

working at the restaurant on nights and weekends. Fortunately, in this small town

renting a trailer home on the side of a mountain wasn’t out of the question for a

minor. My rent was $265 a month, which I split with a roommate.

I will never forget the day I could not take the strain anymore. I was sitting in

homeroom, exhausted from working until midnight the previous night because of the

ski rush. My shoes were partially dissolved from a mixture of grease and cleaners, and

words cannot describe how badly they reeked. Similarly, my clothes were stained and

torn.

I looked across the room at the other students, some studying and others gossiping.

Then I saw the most popular guy in school, two seats away, laughing and

flirting with the prettiest cheerleader as she sat on his lap. They didn’t appear to have

a care in the world—certainly not making rent or getting adequate clothes and shoes.

They had everything a teenager wanted. By contrast, I did not think I had a chance

at that type of life.

As I hung my head low, Mrs. Michaels, the homeroom teacher, spoke to me.

“Sean, what’s wrong with you today?”

“I just want to be a kid!” I answered, scowling back at her.

“You don’t have that choice…. it was made for you,” she replied.

Mrs. Michaels had been my homeroom teacher for three years, and knowing my

situation, had quietly coached me from a distance. But she was to change my life that

day by the startling seriousness of that reply.

At home later that day, I lay on the floor visualizing how I wanted my life to be.

I would not only be a millionaire, but I would also reach that goal by age twentyfive.

Never again would I accept “good enough;” I would be the best at whatever I

applied myself. I was driven to succeed —at what, I didn’t yet know. Nor did I comprehend



how much in control of my life I really was.

By age eighteen, I was the kitchen manager at the pizza restaurant with twentytwo

employees underneath me. I had just graduated high school with a three point

zero GPA for my senior year, after being on the verge of dropping out. Furthermore,

I started living in Denver so I could attend college while driving to the mountains

to continue with my job. I led the county at-risk youth group that I had previously

been court-ordered to attend. Things began turning around for me once I realized

I was the captain of my own ship.

Real Estate

Although I was happy with my accomplishment of managing the pizza restaurant,

I knew it was not the vehicle to get me to my goal. I thought that being smarter was

the trick. So I read Page a Minute Memory Book by Harry Lorayne, which taught people

how to remember any number, name, or face. It worked! I began remembering

every license plate on my drive to work. After committing roughly one hundred

license plates to memory, I realized this was not the key to success.

Then watching television late one night, I found it. Carlton Sheets was wearing

a Hawaiian shirt while standing in front of an ocean, telling me that I could

become wealthy through real estate. I quickly ordered my tapes, and after they

arrived, spent every extra minute studying his system. Back then, Sheets promoted

assuming FHA and VA nonqualified loans that were made prior to 1978. I can do

this! I thought.

I told everyone I knew that I was a real estate investor and printed up business

cards. Soon, I began my search for pre-1978 nonqualified assumption loans. But I

quickly learned that in Denver in 1994 such properties had either appreciated well

over the loan amount or they were already assumed. I was practically laughed out of

every real estate office I visited.

Instead of giving up, I looked for ads under “For Sale by Owner”, trying to find

a seller who would carry my mortgage—another real estate trick. I spotted an ad

seemingly placed just for me: “No Money Down.” I called the number listed and



spoke with Sheila, a rookie real estate agent. She was promoting government grants

to pay for down payments.

I quickly got pre-qualified using the same answers that worked when trying to

buy a car: “No, that car payment is not mine,” and, “Yes, I make $30,000 a year.”

Little did I know that people would verify all the information I had given. At that

time, I had three car payments because I liked cars so much, and I made $7.75 an

hour. Needless to say, I didn’t qualify, and I lost my “earnest money” (a relatively small

cash deposit which for me, at the time, felt enormous).

While working in the restaurant, I met my future wife, Diana. While searching

for our first home together, Diana and Sheila the real estate agent became friends,

and Diana accepted an offer from Sheila to be her assistant. Soon I, too, was drawn

into real estate sales.

By the fall of 1995, I had my real estate license, purchased my first property, and

married Diana—all by age twenty-one. Within the next year, I had sold more than

seventy buyers their first homes using no-money-down techniques. Within four

years, I had received every award at RE/MAX for personal production and was placed

in their Sales Hall of Fame. With the assistance of Diana, I was closing more than

one hundred homes a year, and, when I was twenty-six, Realtor Magazine featured

me in an article on “30 Top Agents under Age 30.”

All the while, I was refining my own real estate investment system, the system

I will introduce to you in this book. It involves understanding what a market cycle

is, tracking a cycle and knowing how and when to buy properties to increase your

net wealth. Now, I teach it in the Denver area approximately every other week and

also conduct seminars across the country. A group of investors are following my

ideas and reaping the rewards.

I’ve told you about my story for two reasons. First, you have seen how determination

can create success. Nothing in my upbringing or formal education would

have been a predictor for my success. I am not so special that you or most anyone

else would be precluded from similar rewards. Secondly, you will learn how my ideas



have been refined by trial and error. I know that they work.

Do you want to create wealth? Do you desire financial independence? Do you

want to purchase income-producing assets rather than money-burning possessions?

Are you determined to make the effort? The process need not be difficult, and it

certainly won’t require the kind of exertion that I expended when I was just starting

out and living in a trailer in the mountains. Nor will you need to work at this full

time, like I did. In fact, I will assume that you have a regular job (and when you are

just starting off in this endeavor, you would be better off not giving up your “day job”)

and are only putting spare hours into real estate investing. But you will need to learn

the system and apply it, so some diligence will be required. Follow my rules and you

will succeed. Follow only half of them and you will fail.

I am proud to offer my system to you. Understand that you deserve all the success

in life that you want. If you are willing to take the steps, real estate investing could

be the perfect avenue for you.

Sean

Bad Reputation

Real Estate has been given a bad reputation lately. The ENORMOUS recession we have been

experiencing was caused by a Mortgage Bubble and Greed. Millions of people have lost

hundreds of millions of dollars by watching their property values plummet. There is no doubt

that there are places you do not want to invest in real estate in. Furthermore, there are places that

are not likely to correct for twenty years. For this reason makes this investment system timely

now more than ever.

We all have lost thousands of dollars of our retirement savings, college funds, and frankly our

security. Many need to make up lost ground quickly without the large risk of speculative

investing, volatile stock market, or start-up companies. I am here to guide you through the

process by reducing risk at every turn.



Market Cycles

What we will talk about more than any other single thing in this book are market cycles. Allow me to simply introduce you to the term and what it means in the

broadest sense.

One goal of national news organizations is to learn about the general characteristics

of the people or situations in the United States and then tell their viewers

or readers what the latest trends are. The temptation is to make the conclusion that

the general trends presented in the news apply to specific situations in your life.

So in the world of real estate, you might hear from time to time that the national

market is not good. That’s the news being given as of this writing. Don’t believe it. Or,

at least don’t make the conclusion that the generalization holds true across the country.

The same is true for positive trends when talking heads on the news are shouting at you,

“Buy, buy, buy!” On the contrary, different markets exist in different locations simultaneously.

One market may be on the downswing, with another market being hot, as you will learn. I

discovered this quite by accident and learned to identify these markets and predict them. This

discovery is the keystone of my system, and the vast majority of real estate guides don’t discuss

it.

The real estate market is cyclical. Most experts believe the full cycle is approximately

twelve to fourteen years. While I agree with this, I break it down into eight steps, each step

lasting, perhaps, in excess of one year. The reason for this is that everything in life does not

work on a three hundred sixty-five-day calendar. On a practical scale, I am looking at

economic indicators, or economical stages, not calendars.

The economic indicators I am tracking are:

• Housing Inventory

• Housing Prices

• Rents

• Real Estate Sales

• Foreclosures



These indicators can be affected by increased job losses, natural disasters, etc., that

can change the path of the market.

Everything I teach is based on the fact that we must accept that markets are

always moving, always cycling. Look around you: Nothing ever stays the same. The

hot music group from five years ago is now on the oldies circuit. Fashions change.

New types of restaurants open and close. We live in a trendy society. So yes, even

something as basic as real estate land moves and changes in cycles.

Why? Think about anything that is “trendy.” Products, businesses. There are

real estate ramifications to a lot of the trendiness around us. Rubik’s Cubes were

really cool a number of years ago. If your town had a Rubik’s Cube factory, employment

was high back then. But I’ll bet that factory is closed today. We are in the era

of “Future Shock.” They say that fifteen years from now, most of us will be employed

in industries that do not even exist today. How could that possibly not affect real

estate markets? And it’s not just manufacturing. Big metal and glass office towers with

white collar workers move around the country. Why? Management is always looking

to improve the bottom line. If real estate costs and labor costs are too high where

corporate headquarters are today, management thinks nothing of picking up and

moving to a less expensive location several states away. Cycles. Lots and lots of cycles.

There is also a trendiness to homes themselves. Builders build what the market

wants to buy at any point in time. Look at post World War II homes. Compare

those to 1950s designs. 1960s, 1970s. Now compare all those to new construction

today. In each era, things were different, often vastly different. Today, big kitchens

are in, big master bedrooms, lots of closet space, vaulted ceilings and bay windows.

Years ago, other amenities were more desirable. So when new housing product comes

on the market, that’s where people want to go. This means that something else, some

other type or style of housing, gets left behind, vacant. What happens to it? Lots of

things. Maybe poorer people move into it. Maybe no people move into it. That

affects real estate markets. Areas go to seed and values diminish. Meanwhile, everyone

has moved to new developments in another town. But then, the cycle turns

around again. A developer gets incentives to come into the old market area and he

knocks down those old homes and builds new ones, newer now than the ones in that



other town. Suddenly, the area that once had those older homes is now the hot new

place to live. Cycle, cycles, cycles.

While this concept has been widely accepted in the stock market, it has been

strangely ignored in real estate investing. Perhaps this is based upon the fact that

real estate will, given an infinite amount of time, always appreciate in value.

Unfortunately, we, as mere mortals, do not have infinite time on this earth.

A buyer of stocks knows to “buy low and sell high.” For the most successful

investors, it is a bloodless business decision. They catch a hot tip and buy a “growth

stock.” They watch it climb, rooting it on like a race horse they just bet on at the

track. As it climbs and splits (the stock, not the race horse), exhilaration grows. But

then, it reaches a point where nothing much seems to happen. An apex a plateau is

reached. It’s still a good place to be; it’s a much higher place than where you started.

But then it begins to drop a bit. Is this the “big drop?” Hard to say. This is where

the consistent winners out-earn the other guys. The winners are the serious guys

who investigate why the stock has plateaued and why it is beginning to drop. Is it

something minor, like a temporary lack of confidence as the company gets ready to

roll out a new product? Or is it that a competitor is hard on their heels with a new

and improved better product? The smart guys know; the dumb guys guess. What’s

more, if it is definitely a real, genuine downturn, the smart guys get out in a flash,

while the dumb guys wait around, emotionally wrapped up in how good it felt to

cheer that stock on when it was rising.

In real estate investing, way too many otherwise smart people act like the “dumb

guys.” They are far more prone to getting sentimental and emotional about the properties

they buy. And why? Because it’s real. They can see it, touch it, visit it on Sundays

and eat an ice cream cone in front of it. You can’t do that with some tech stock.

Another reason we don’t give proper respect to real estate cycles is that we often

focus on the wrong properties. Stable desirable areas rarely take a big hit, even when all the

other local economic indicators race south. Think about it. Every place, no matter

how depressed, has a couple of rich guys. It’s inevitable. And those guys need a place

to live. And if they die or retire to Florida or move, there’s probably some new young



rich guy who’s spent his whole life growing up wishing he could live in that old rich

guy’s mansion. That young guy will pay whatever it takes to move in, no matter

where the market cycle is. (Now obviously, the mortgage meltdown of 2008 has put this theory to

the test, but you have to consider the stated income loans allowed people to purchase properties

they couldn’t afford in the first place.)

Tracking the five major indicators, here is what a real estate life cycle looks like:

Notice that we have eight stages, and that each stage indicates what is happening

regarding local real estate inventory, prices, rents, sales and foreclosures. Our key is

that things are either:



• Zero to Five Percent Basically Flat, but Rising Moderately

• Five Percent Plus Rising, Beating Inflation

• Eight Percent Plus Really Rising

• Twelve Percent Plus Holy Cow, Was That a Rocket That Just Shot Past Me?

• Minus Two Percent Falling

• Minus Five Percent Really Falling

• Minus Ten Percent Good Lord, I’ve Never Seen Something Hit the Ground

So Hard!

• Minus Zero Percent Even, Flat

• Minus Five Percent to Zero Percent Basically Flat, but Falling Moderately

Easy enough for a baby to follow, right?

3

8%

12%

3%

-3%



Now, some of you might wonder, “But isn’t it possible for there to be tons of

inventory, and sales prices going sky high, and little to no foreclosures?”

No.

A glass cannot be both full and empty at the same time. You really can’t have your

cake and eat it, too. These eight combinations are logical and make economic sense.

Don’t believe me; ask an economist.

You might also wonder, what indicates “even” or “flat”? What indicates “up”?

Foreclosures, for example, are typically at three percent. That’s the definition of

flat. When it creeps below that, they are considered down; when it rises above that,

it is considered up. I will give you guidelines for what is considered up or down for

all the other indicators as well, as we move forward.

As you read on, you will learn how to chart and track these economic indicators

so that you can tell what point in the cycle a real estate market is at. But first,

you have to have a thorough understanding of the cycle itself. Here we go…

STAGE ONE

A key to understanding this chart: The cycle is drawn as a circle, so read it clockwise.

We talk about a stage just prior to the numeral indicating that stage.

I start the cycle at the worst possible time: right after an unimaginable increase

in property values (see data just prior to Stage Eight). The novice investor decides it

is a good time to start investing now. Bad move. To invest now would be like buying

at the top of the market, which everyone knows is bad. But the reason there are

less rich guys in the world than poor guys is insecurity. Poor guys see a peaked market

and they want to “jump on the bandwagon” with the rich guys. Insecurity. What

they can’t comprehend is that at this stage, the rich guys will be the guys selling off

to them so that they can get off that particular bandwagon. They know the party’s

over and it’s time to go home, while the poor guys are just entering the club.

Supply and demand. At Stage Eight, there were high prices and low inventory.

Here at Stage One, inventory has begun to increase.



Builders will continue to build at this stage to use up the excess land they purchased

earlier. Price climb has started to slow, due to the local incomes not being able to keep

up with the rising house prices. Suburban areas begin to retract and lose value. As

the builders continue to build, they experience increased failed sales due to purchasers

not being able to sell their existing homes. This will further increase inventory

as the wheel spins ’round.

Despite this, sales will continue somewhat, albeit at a less frenetic pace. Your

market stimulants: entertainment, education, transportation, redevelopment and

employment aren’t going to completely dry up overnight. They’re still there and will

continue to create some sales.

Rents will be down because everyone will have made purchases during the Stage

Eight boom and shortly thereafter. When sales are up, there are less and less renters.

STAGE TWO

Foreclosures begin to increase as homeowners experience a tighter market and the

inability to cash out of their equity. Despite this, foreclosures will not be easily visible

because they take time to surface upon the market. Foreclosures will create a

downward force on sales prices for sellers who are forced to move distressed sales,

desperation sales. When the guy down the street has to sell at any price in order to

avoid a sheriff ’s sale, that affects the asking price for everyone else’s property.

The flat lines you see on the chart are not an indication of no activity whatsoever,

but a plateauing of market action. Bear in mind that this plateau is still higher

than a downturn. Activity is still occurring. In fact, a flat line (= or = = on our chart)

means “moderate” or “average” activity.

If you are already in the market and already own investment properties, this is

a good time to evaluate those properties to determine if they will continue to produce

income through the years ahead. If they do not, I suggest liquidating those

Low inventory = time to sell.

High inventory = time to buy.



that perform the worst and paying down on the good performers.

This is a bad time to reinvest in more properties, even though you may have to

pay some capital gains taxes as you cash out of the market. Your taxes on capital

gains are less and far less risky than the loss in value and the hold cost through this

recession, or to reinvest into an area that is cycling against you. On the other hand,

once you have mastered this system, you will have already identified a completely

different real estate market somewhere else, one that is perfect to jump into right

now.

STAGE THREE

The foreclosed homes begin to hit the resale market. (It takes six to nine months

to foreclose.)

At this stage, sales are low compared to the large amount of inventory. Rents

begin to rise due to the inability of displaced people to re-buy after a foreclosure

or bankruptcy, forcing them to become renters. Builders begin offering outrageous

incentives to get buyers to purchase. Sales aren’t really horrible, but these guys are

still on that “high” from Stage Eight. Anything less than sales going through the

roof seems like a disaster to them. It’s easy to get drunk on success. Loan fraud

begins to run rampant due to builders and sellers feeling the pressure of the down

markets.

STAGE FOUR

Foreclosed homes seem to be everywhere. Rents are beginning to rise! The demand

for rental housing is out-pacing the demand for ownership. Foreclosures are continuing

to keep pressure on prices, driving them noticeably downward. Inventory is

over-supplied, and builders have retracted plans for future projects. People are beginning

to feel there is no hope to the market. (But we are just getting ready!)



STAGE FIVE

NOW! Rents have hit our guidelines. Due to rents increasing and prices falling,

sales falling, and foreclosures rising, rents have hit or exceeded one percent of sales

prices. This is a mathematical analysis you will soon be learning as we continue. But

as we study a typical real estate market cycle, this is the time when you have the best

chance to succeed in “Buy and Hold Investing.”

Buy and Hold is the simplest and most generic term to describe the cornerstone

of my system. It is not about real estate speculation per se. It is about understanding

real estate cycles, learning the indicators, and then going in, making investment

purchases, renting out those properties, and getting cash flows while your properties

rise in price and value. This is what other books on Buy and Hold strategies fail

to teach you!

This strategy should give you a solid base of income to withstand the ups and

downs of being a landlord.nSee, this system is only dummy-proof if you’ve made a

commitment to not being a dummy! You do not need a Ph.D. to succeed with this

program, but you do need a work ethic. You do need to be willing to do your homework.

I will teach you how.

STAGE SIX

This is the Honeymoon stage. Your rents are increasing, and values continue to pace

upward at five to eight percent. It is cheaper to purchase than to rent. Renters are

seeing the value of purchasing again. There is a large supply of good rentable homes

for purchase due to the lag time in the foreclosure process. You should continue to

purchase wisely.



Note that last statement. It is not always possible or even feasible to make all

your investment purchases at the exact same time. If each of these stages represents

about eighteen months, perhaps you’ll make one purchase at Stage Three, another at

Stage Four, go crazy and buy three of them at Stage Five our very best market posi-

tion then one more at Stage Six. Stage Six is one of our last really good times to enter

the market for Buy and Hold.

STAGE SEVEN

Values are rising eight to ten percent per year in your specific sub market. Speculative investing

starts heating up. Fix and Flips (and Fix and Flops) are abundant.

If you still want to risk getting into the market (and at this stage, it is a risk), your

best bet is to find high-demand new construction. Everybody likes “new.” Think

babies and puppies.

Inventory is low. Rents are hitting resistance, forcing renters to purchase, which

further reduces housing inventory.

It is increasingly difficult to find properties to meet our one percent strategy and

you will learn that that strategy is sacrosanct. What kind of person buys property that

rents for less than what it costs to carry the mortgage, taxes, insurance, and expenses?

A speculator, that’s who.

I give very limited endorsement to pure real estate speculation. Speculation only

gives you one way to make money the property value must rise and rise significantly

enough to not only give you a profit, but a large enough profit to cover all the money

you lost carrying that property while waiting for it to appreciate in value. Buy and

Hold gives you cash flow and someone else to carry the expenses while you wait for

that property value to rise.



But if speculation is your game, this is the time to get in. See, since it is you who

will be carrying that property, not a tenant (or not completely a tenant. If you can

find someone to rent for a little less than what it takes to fully cover expenses, that

is better than an empty house), speculation must be a short-term thing. You want

to try to sell that sucker in two years or less.

Look at our inventory indicator. At this stage, builders are having buyers wait in line to buy a property.

STAGE EIGHT

Values are increasing fifteen percent or greater per year. ( Prior to 2007 this stage would produce

thirty to fifty percent per year appreciation, due to the ability for virtually anyone to be a

speculative investor. Inventory is scarce and prices are unreal. It makes no sense to buy now and

hold, due to rents being so low compared to prices.

This is also the final stage of purely speculative investing. Move forward with

caution. If you still have that speculation itch that needs scratching, do not close

unless you have checked and double checked prices and Days on Market. This is

where greed kills. You must sell speculative properties before the market slows, or you

may be left with a cash drain.

Some people at my seminars ask why I number the stages as I do. “Why not

make Stage One the stage where I should get in and start buying investment properties?”

The reason is this: When you are taught something, it still takes a period of

using it “hands on” before you truly master it. Therefore, even though you will finish

this book knowing all about economic indicators, how to find them and how to

interpret them, I start the cycle with the easiest one to identify: The Boom. Stage

Eight is the boom. Stage Eight is everyone going crazy the whole real estate world going

crazy in some locale. Anyone can identify this sort of thing. The recent boom and bust in the

economy, mortgage industry, and real estate market is a great example of a national cycle

reaching Stage Eight then restarting.

Stage Eight is the peak of the market. What follows the peak is Stage One. All the

craziness of Stage Eight is what gets your attention. Now that you’re focused, you

must begin watching for the slowdown—Stage One. Once the slowdown begins,

you’re in Stage One.



What’s also good about marking our cycles this way is that once your attention

has been drawn by Stage Eight and you begin watching for the slowdown, the first

thing I want you to do is…nothing. That’s right; nothing. When a baby is born, you

don’t ask it to sprint across the delivery room floor. You let it lie in Mommy’s arms a

while, getting used to seeing the lights and colors of the world. The poor thing isn’t even

ready to walk yet, let alone run. Neither are you.

What I also want you to notice as you read through the cycle is the difference between

what the consumers are doing and what the builders are doing. These are two separate

players with two separate agendas. They each operate on a different rhythm. Builders buy

land when it is cheapest. This is rarely when it is the best time for the consumer to buy

a home for investment or otherwise. And just because a builder buys land does not mean

that there are homes on it yet. That takes time. Builders will often be ahead of the curve,

not only in their land purchasing, but also with their building schedule. It is not unusual

for a builder to start selling units to a new development even though there appears not

yet to be a market need. You and I would probably think that the best time to build

housing was when there was a demand for it. What if I told you that most successful

builders do not think this way? Builders build when it is most affordable to do so. They figure

that the buyers will eventually come and they are right more often than they are

wrong. Again, the builder knows what he is doing. He’s positioning himself for when the

need appears. Two great examples of this is Shea Homes and Richmond American Homes, Shea

uses it’s enormous wealth to speculate on land sometimes fifteen years prior to development

plans. While Richmond American Homes saw Stage Eight quit purchasing large parcels of land

knowing that there was cheaper land coming in the future.

One of the things that makes these developers rich is that a lot of consumers see

that new construction and figure, “Hey, I bet these guys know about some new big

employer coming into the area. I better buy up a few of those units and watch my

investment grow.” Well, what if I told you that the guy the developer was waiting for

was YOU? The developer only has to sell the property once, and at a reasonable profit.

Once he’s sold it to you, the investor, he’s gone and now you’re the one looking for a

way of reselling the property or finding a tenant. Being a developer is a big money

venture, and the guys who last are geniuses at what they do. We, as consumers, will often

watch them and pick up market signals from them. The genius on our end, though,



is knowing what to do with what we see.

Bear in mind, though, while I will teach you to be on the lookout for new construction

(the activity of the builders), this is not the only thing that affects Inventory.

Inventory is the total number of properties on the market at any one time. It is possible,

though rare for there to be a large housing inventory somewhere at sometime

without any significant amounts of new construction. This sort of thing might be caused

by a major employer or employers leaving the area, and its employees leaving the area

with it. This would dump an awful lot of homes onto the market all at the same time.

Never forget the Ripple Effect and the Market Stimulants. There are negative ripples and

negative stimulants, too.

When you are working the system perfectly, you are buying at around Stage Four,

selling and getting out at Stage Eight, and sitting out Stages One, Two, and Three.

Another question I get asked a lot is, “How high is up? How low is low?” It’s the

classic gambler’s query. Yes, it does become a little challenging figuring out if your

cycle is at Stage Seven or Stage Eight or even Stage One when you’re looking to cash

out. But that’s greed talking. If you bought at Four, Five, or Six, you will make money

selling at Seven, Eight, or One. Yes, you will make the most money at Stage Eight, but

if you get out at Seven, don’t kick yourself. You made money; I guarantee it. What you

really don’t want to do (and this is a greed-driven thing) is get drunk on property appreciation

and start buying a lot of properties at Stage Seven, hoping to quickly get out

at Stage Eight. That’s like day-trading. It’s risky. It’s called “chasing a trend.” You’re the

tail and the trend is the dog. That’s not where you want to be.

If you buy too early if you buy at Stage Two or Three when you should have

waited for Stage Five, you may have some expenses in your first few years of ownership.

You may have some sleepless nights. But you will survive if you hold on.

An even better answer to the “how low is low?” question is…it doesn’t matter!

What matters is that rents must exceed costs. Again, what is unique about this system

is that rents are the most important factor. If you can purchase a property that

you can rent for $1,000 a month and your costs (mortgage, taxes, and expenses) are



$900 per month you win. If you later discover that you could have waited to buy

that property and had only $800 per month in total costs and still have gotten that

$1,000 a month rent, don’t beat yourself up. The system will still work out for you.

Your only concern should be that the rents sustain at a level above your costs. Once

that turns sour on you, get out, get out, get out. But waiting for lower-than-low

prices, despite the existence of rents that will create a nice cash flow as is, is foolish

greed. The key word is opportunity. If the opportunity is there to purchase cashflowing

properties, grab it. Those properties may not be there tomorrow. Someone

like me may buy them out from under you if you don’t move quickly enough.

See, looking at the chart, we demonstrate that were we to

have purchased a rental property in 1991, ’92, ’93, ’94, all the way through ’97, we

would have had our costs supported by the rental market. That’s our goal; that’s what

we are looking for.

But again, remember the baby analogy. When you put down this book, you will

have learned a lot of things you didn’t know before. Once you start putting it into

practice, your knowledge will grow even more. Pretty soon, understanding the

difference between Stage Seven and Stage Eight will seem like child’s play to you.

I know I started the chapter with this, but let’s talk for a moment about why a

real estate life cycle is approximately twelve years and why markets need to cycle at

all.



For one thing, look at stocks. Consider two companies: Chrysler and Apple.

Both hit the skids at one point in the not so recent past. But both took that time period

to reinvest in Research and Development and retool. Stock prices dropped as this

reinvestment was taking place.

Finally, when things looked gloomiest, both companies rolled out their new

products: First, Chrysler came out with the sporty, funky PT Cruiser, going after the

youth market along with some wild and crazy baby boomers. Then they rolled out

the Bentley-like Three Hundred, which cross-appealed to urbanites as well as the

older crowd. Chrysler was back in the game.

Apple? The iPod brought them back from the dead. Now the iPhone is putting

them through the roof. The approximate length of time of the cycle from beginning

to end? About twelve years.

Cities and towns go through the same thing. Areas fall out of favor; businesses move

out. The towns themselves come under political pressure to find employers to reenergize

the local work force. They shake down the state and the fed for a reinvestment of funds

in order to create new highways or other destination projects. This is identical to the

R&D cycle that corporations go through. This is a fortuitous time for the private sector,

because they will accept a variety of monetary incentives to come into an area. They also

figure they can get cheaper labor and they are right. High unemployment is good for a

new employer coming into a market.

Then the “new product” is introduced and things start to happen. In this case,

the new product is that new super highway, that new hospital, that new multi-use

development, or more likely something from the recent stimulus plan like a small town in the mid

west that didn’t have high speed connectivity. Now a start-up tech company has opportunity to

grow in a new low cost environment. Finally, success starts to breed success and there’s a boom

happening.

It does not always take exactly fourteen years, but fourteen years is quite common.

What I will repeat and repeat and repeat again throughout this book is, cycles must

be watched. If you make a mistake and buy a stock when it is at its peak, what’s the



worst that can happen? You’ll have tied your money up and missed better opportunities.

You may have to keep that money tied up for a long, long time before the stock

price gets to that level again. But if you buy real estate at the wrong time, it costs you

month after month after month. If you buy a share of Disney stock at $200 and it

drops to $40, Mickey Mouse isn’t going to show up at your door once a month for

a handout. But if it’s real estate, your mortgage banker will. You can hold on to that

Disney stock for as long as it takes until, eventually, the stock goes to $210 a share

and you can get out with your big $10 profit. But if the same thing happens to you

in real estate, you would have to wait and have an infinite amount of money in order

to hold on until your property rose five hundred, six hundred, seven hundred percent

in value so as to make up for the money you lost during all those bad months.

And frankly, it may never happen. If you follow the lessons in this book, this will

never happen to you.

Furthermore, don’t downplay the “missed opportunity” position. You are tying

up real money, real credit. If some property is bleeding money from you every month,

no bank is going to lend you more to make up for it in some other market. You will

have missed that rocket to the stars while you’re on a one-way train to Loserville.

Acknowledging the existence of cycles is also important insofar as understanding

real estate investment itself. You cannot buy in your own local market each and every

year. There is almost no way that such a program could be financially profitable.

Accepting the concept of cycles helps you to understand this. It also triggers us to

move outside our local comfort zone. Sure, you could track only your own locale. That

might mean you would finish this book, do some calculations, and realize it would be

a bad idea to invest in your local market for another five or six years. Now, I am assuming

that since you have this book in your hands today, you want to start making money

today not five or six years from now (of course, you’ll want to make money then, too,

but…). It would be frustrating as heck to have to wait for years to start putting this

program into motion. Remember what I said about cycles and markets: Somewhere,

today, there is a perfect market in which to invest. I’ll teach you to find it; I’ll teach

you how to buy into it; the “doing” will be up to you.



Following “Down” Markets

Recession: a significant decline in economic activity spread across the economy,

lasting more than a few months. A recession may involve simultaneous declines in

overall economic activity such as employment, investment and corporate profits.

My system is about buying post-recession properties. When rents start increasing,

population starts increasing, employment starts increasing, then we buy.

Buying During Despair

The perception of the real estate market during recessionary times is “don’t buy.”

This is contrary thinking. We want to buy low, but we want to know that we are coming

out of the recession, not just going into it.

During a recession, high-end housing will continue to appreciate, just at a lesser

rate maybe two or three percent per year. But that’s still an upward movement. But

again, these are not the properties we will be concentrating on. And even if a $5 million

mansion has to drop its price to $4 million in order to sell, there’s no way we’re

going to buy that thing and figure we can find someone to rent it to an itinerant

rock star or pro athlete, perhaps. That’s WAY too much risk.

I use the word “despair” as both an emotional as well as an economic term. When

everyone in the local barbershop is talking about how much the housing market

stinks that’s despair. And THAT is when you want to buy. Why? Because that’s when

the deals are out there!

Despair is a self-perpetuating condition. Talk of despair creates more despair.

And this will continue and continue until something, some big thing, happens that

turns things around some market stimulant. And so, these things are easier to spot than

you might have previously thought. When people at the barbershop or the beauty

salon or the local tavern or diner are saying how bad the housing market is, that’s the

time to buy. When they say that things may be looking up because there’s a new super



highway coming in, that’s the wake-up call that the market will soon begin to rise.

Despair and optimism. They may be emotions, but they’re economic states as

well.

Bad Times Mean High Rents (what did he just say???)

The core of my program is to buy properties and rent them then eventually sell

them. Buying for the purpose of renting requires you adopt a completely different

mindset than what you’ve ever experienced before. Prior to this, perhaps you were

simply buying a house to live in. Fine. That’s another book entirely. Or maybe you’re

a renter residential or commercial. That’s another completely different book. Now you

are buying to rent.

People who have just lost their home due to foreclosure or bankruptcy are often

shocked to find that rents in their area are far higher than they expected. Why? Good

old supply and demand.

If a person loses his home and it is an isolated incident, anything can happen—

he may find high rents, low rents, no rentals, or lots of rentals. It all depends on the

market.

But if a person is part of a regional or localized trend—think of, perhaps, a large

employer going belly up and leaving hundreds of workers standing in the unemployment

line—then the incident is not isolated; it is broad. It means lots and lots of people

who once had homes will no longer have homes. That means that they all become

renters at the same time. And when that happens, landlords can raise their rents, since

people will be trying to outbid one another in order to find a roof for over their heads.

Yes, I know this all sounds cruel. You’ve probably never thought in terms of

capitalizing off of someone else’s misery before. But like they said in The Godfather,

“It isn’t personal; it’s business.” When a home must be sold because it is in foreclosure,

someone has to buy it. The person or entity who owns it wants someone

to buy it. No one wants it to just sit there vacant forever.

These are the sorts of properties we will be looking to buy. Furthermore, the person



who used to live there quite possibly will be staying in the area and will now need

a rental property in which to live. Would you believe, it is quite common for people

to buy a house that is in a “distressed sale” situation—due to bankruptcy, foreclosure,

or simply needing to be preemptively sold in order to raise cash so as not to have to go

into foreclosure or bankruptcy—and then turn around and rent the darn thing back

to the old owners? It happens all the time. Frankly, it’s a win-win. The person with

money problems gets out of debt; then you, the buyer, come along, get to buy it at a

“discounted price” (a motivated seller is a buyer’s best friend) and there’s a built-in

renter looking for a place to live.

The Chickens Come Home To Roost

Every era has its fads—and I’m not talking about fashion or music. In real estate, there

is always some “new cool thing” that everybody wants to jump on board. In the

’80s, it was assumable mortgages. In the ’90s it was “mortgage wraps”—where you’d

take one mortgage that was at a low rate, combine it with one at a high rate, and

“blend” the rates together to give you one middle rate that you thought you could

afford.

This decade, we had one hundred percent financing (no money down), negative

amortization loans (you can begin with payments that don’t even satisfy the

monthly interest, thus raising, rather than lowering, your principal each month)

and interest-only loans.

The problem with these fads is that all the wrong people purchase them. It’s the

person who looks at life like a big scratch-off lottery ticket who thinks he’ll “hit it big”

and be able to afford that big ol’ mansion who gets that interest-only loan. That kind

of loan product attracts the person with no patience. That person wants that big

house NOW. The fact he cannot afford it means nothing, not if some lender has

some crazy “designer mortgage” deal that can get him inside his dream house anyway.

But then the chickens come home to roost. Today, as I write this, is just such a

time. These whacky, unconventional mortgage products do not let you go on forever

paying interest-only or less than interest-only. That part of the deal is usually only

for a short, finite period of time—maybe three years at most. What happens then?



The piper must be paid. And what happens then to our eternal optimists who

thought judgment day would never come? They’re out selling their houses at fire-sale

prices—or else! And if they can’t move them quickly enough, they lose them through

foreclosure or bankruptcy. In any of these three possibilities, the end result is the

same—a house getting on the market, being sold for less than it should, and another

renter coming onto the market as well. Terrible as it may sound, this is what we are

looking for.

Increased Inventory

So let’s keep focusing upon this recessionary market phenomenon. A local or regional

economy is in the pits. Unemployment is on the rise. Lots of homes are on the market,

many because their owners have to put them on the market. The worse the

economy, the more recessionary the times are, the more housing inventory you can

expect to see. The more inventory there is on the market, the more it becomes a

buyer’s market. Gone are the days of people trying to outbid each other for a home.

Instead, the homes sit on the market longer and longer, and eventually they have to



lower their prices in order to attract buyers. This is when you buy!Wean yourself away

from the “hot, hot, hot” market. That market is overpriced. Look for the “make me

an offer…please!” market.

Higher Rents

When recession hits an area, the number of renters increases. Furthermore, when that

market of renters increases due to foreclosures, bankruptcies and distressed sales,

these new renters entering the market are probably only looking to go down a few

levels, so to speak, on their monthly expenses.

Here’s what I mean: Someone is in a big McMansion paying his interest-only

mortgage for three years, when the time runs out and he must make larger payments

that he can ill afford. Perhaps, his interest-only payments were $1,800 per month.

Now the mortgage company wants to increase that to $2,200 per month and he

can’t afford that. So he sells his house at less than market value, just to get out of debt.

That guy no longer has enough for a down payment and his credit has been beaten

up as well, so he’s looking to rent.

Well, we already know he paid $1,800 a month for the last three years. And

maybe he could barely afford that. So where is he now, financially? No, this guy is

probably not looking to live in a $250 a month outhouse. Most likely, he’s doing a

bit better than that. His number is maybe in the $1,400 per month range. That’s a

decent rental rate, if you’re a landlord. In fact, if there are a lot of renters out on the

market looking to spend that kind of money, two things happen. One, you can take

a rental property that should normally go for $1,400 per month and get $1,500 per

month for it. It’s called bidding. If your phone is ringing off the hook with lots of

people all willing to meet your $1,400 a month price, see if any of them will go

higher. They probably will.

The second thing that can happen is you can take a property that is more decrepit

and should only be worth $1,200 a month and get $1,400 a month for it. Supply

and demand; supply and demand. You can get away with spending less in rehabbing

and general upkeep on your rental property. If your tenant complains, there’s a line

of people behind him willing to put up with the condition your property is in.



I’ve seen this happen all the time. When there’re not a lot of renters and lots of

rentals, the landlord has to slap down a new paint job, install new carpeting, put in

new windows, etc. When there is a down market with lots of renters and not enough

rentals for them, you can leave that paint and carpeting alone. If the tenant wants

upgrades, he can do it himself or pay you more per month. Either way, you win.

But You Said FOLLOWING “Down” Markets

Yes, indeed, I did. So as not to contradict anything I’ve taught you thus far in this book,

there are recessionary times, and there are areas that are simply going to keep bottoming

and bottoming and bottoming for many more years. When that happens,

eventually your rents will have to start dropping as well. So, too, eventually there will

be less and less renters. I mean, if there are no jobs (the quintessential recession), who

the heck is going to still be living there? No one! Thus, everything I’ve said before about

cycles and market stimulants remains true. You want to buy after a “down” market

(recessed market), but before the market gets hot. Once it’s hot, it’s too late.

You will be tracking the recessionary indicators in a market, such as foreclosures

and bankruptcies. But you will also be looking at those market stimulants to see if

they are gathering to help bring the area out of that recession. You want unemployment

(it pains me to say that), but you want jobs on their way, like a white knight

on his steed.

Another major thing that brings lots of renters to the marketplace is new employment.

Think about this: Say you lived in St. Louis and got a great job offer in

Orlando, Florida. While you might take that big deep breath and move down to

Florida, would you also immediately BUY a home there? Most folks don’t. First,

they want to make sure the job is a good fit. For that reason, a lot of people don’t

even sell their old home back in St. Louis or wherever. Secondly, they don’t know the

local market yet. It takes a while to become familiar with a place in order to decide

what community is best for your needs. For some, schools may be the biggest priority.



For others, it might be the shortest commute. Heck, I know guys whose only

concern is the nearness of a great public golf course! But any way you slice it (golf

pun), you still have a lot of people for whom renting—at least for a while—might

be the most prudent choice. THIS is a great market for you, the owner of rental

property.

But bear in mind—one of those market stimulants is “entertainment,” in which

I included things like geographic amenities in an area. A major port city may recess,

but will almost always come back; it’s just a matter of time. If an area has certain

physical amenities like that, I will teach you how to run the numbers to see if buying

rental property is economically viable even if the end of the recession is nowhere in sight.

There are some areas that are going to hold population despite recessionary economic

times. In such cases, properties will continue to flood the market, the prices for them

will keep going down, and the pool of renters will continue to rise. Such areas are very,

very interesting. You may have to hold on to your property a lot longer before selling,

but you will be able to “cash flow” it—make money off of it as a landlord—for a nice

long time, all the while building equity, and eventually, selling off the property at a

profit.

Foreclosures

There is a lot of misinformation around regarding foreclosures. It is not my mission

to school you in a lawyerly way about them, but I want you to be aware of how they

affect my program and positively affect you as a real estate investor.

When a bank forecloses on a property, they do NOT necessarily have to recoup

all of their money. I repeat: they do NOT have to get back all of their money. They

would LIKE to, but I wanted a motorized car for my fifth birthday and I didn’t get

that, either.

In other words, picture a bank holding a property that has a $180,000 outstanding

mortgage on it. In a perfect world, they sell it for $180,000 or more. But

what if they don’t or can’t?



If they can only get $140,000 for it, they will usually chase the old borrower for

the balance. But that guy has probably already declared bankruptcy. If they get the

money, great. But there’s a high likelihood they won’t.

So they “write it off.” This is no different than if you or I had business gains and

business losses during a fiscal year. We add them together—the positive numbers and

the negative numbers—and we finish the year with the sum total. Banks do that, too.

So no, banks do not always sell foreclosed properties for what is owed. They sell

them for what they can get. And most importantly—MOST BANKS WANT TO

GET RID OF FORECLOSED PROPERTIES AS QUICKLY AS POSSIBLE. They

don’t want to keep that property on their ledger sheets forever. For one thing, who’s

going to take care of it? They’re certainly not going to spend more money to have

someone fix and repair it. They will also not pay someone to sit around in it night

and day. Do you know what happens to abandoned houses? They get wrecked. And

what happens when they get wrecked? Their market value decreases even more! So

go back to my tip in capital letters—banks want to dump foreclosed properties

a.s.a.p. And what does that mean to you? FIRE SALE!

Now, some people think foreclosures are a great way to buy a home. Note the

subtle difference in the words I just used. A “home” is something YOU live in. A

“house” is something you buy, rent, and eventually sell. Buying a “home” at a foreclosure

sale, you can be assured that you will have to dump a ton of money into it

in order to make it feel like, well, “home.” This begins to seriously negate the great

deal you got by buying a foreclosed property in the first place.

On the other hand, buying a foreclosure for the purpose of investment, i.e.,

renting to others is a whole different story. They are the biggest, most desirable fish

in the ocean. We always want to buy something for less than it is worth, and nothing

is more prone to such things as some form of “distressed sale.” “Distressed” may,

in this case, also refer partly to the property’s condition, but what we’re really talking

about is a highly motivated seller who will take any reasonable offer.

Note my use of the word “reasonable.” A lot of guys with infomercials on TV

make it seem like the world is teeming with foreclosures that are “literally free!”

Not really.



But if I can buy a property for $80,000 that normally sells for $135,000, I just

got a great deal. Furthermore, my ability to have purchased this property at $80,000

versus $135,000 might be the difference between owning something that I can rent

with a safe cash flow or not.

Bankruptcy

Bankruptcies often follow foreclosures. Why? Picture this: You have a home with a

$180,000 mortgage. The bank tries to sell it, but the highest bid is only $140,000.

They take it and “write off ” the $40,000 balance. But you’ve already walked away

from that house, so what do you care?

Start to care.

I mentioned before that the mortgage lender will try to collect from you, somehow,

someway. So if you do have something, anything, that they can attach or grab,

you might be advised (correctly) to declare bankruptcy in order to hold on to something,

anything, that you own.

The other possibility is even more insidious. When a bank “writes off ” a loss,

it will tell the IRS that this is “income” for you. Think this through—you owe the

bank $40,000. You don’t have $40,000. The bank realizes it cannot get $40,000

from you anytime soon. So the bank tells the IRS that it has “written off”—“forgiven”

this debt. That means that you once owed someone $40,000, but now you don’t. In

the eyes of the IRS, that means that you just “received” $40,000! And the IRS expects

you to pay taxes on this imaginary windfall! And THAT, my friends, could be the

thing that drives you into declaring bankruptcy!

Now, if you have a foreclosure on your credit records, you cannot get a “conforming

loan” mortgage for three years. A conforming loan is one that can be re-sold

on the secondary mortgage market. If you can’t get one of those, your best move is

just to wait out the process, because your other mortgage alternatives are so cost

prohibitive that they’ll only send you into another foreclosure and so on. You’ll just

be throwing bad money after even worse money.



But what does this all mean to you, the guy with good credit who wants to buy

and hold investment properties? It means that when foreclosures or bankruptcies

occur, that’s another renter on the market—another customer. And quite often, these

are not super low-income, homeless (well, they kind of are homeless, but…), jobless

people. They may be engineers, teachers, policemen, you name it. These people

are rarely druggies or criminals. They just have trouble managing their money, or were

simply poor at planning for when bad things happen. They make good renters

because they are less likely to turn your property into a meth lab or throw furniture

out of windows during wild parties. They’re family people who will take care of the

property as if it were their own because they want to keep up the façade to their

friends that they are still doing well and simply “got a new, smaller house.”

Want to know what else is funny about post-foreclosure and post-bankrupt people?

Most of them think they can’t get another mortgage for seven years! That puts a lot of people,

people with jobs and families, out into the rental market for a long, long time. Get

a nice, stable tenant like that for seven years and you’ll be a very successful investor.

Now, here’s another quirk to all this foreclosure and bankruptcy talk. Remember,

we are looking to FOLLOW “down” markets. What happens once these people get

out of foreclosure and out of bankruptcy? What happens two, three, or seven years

later? A lot of them will re-enter the housing market. They will be looking to buy

homes and get mortgages again. And what will this do for you? That’s when you sell

off your appreciated property!! Buy when they want to give you their house and sell when

they are begging you for it!

It’s a beautiful thing.

Recession is Your Friend

What also tends to happen after a bad recession is that politically, the electorate

wants a “kinder, gentler government” that will take care of those who suffered the

most from that recession. And government, if it wants to retain power, tends to

respond, or else is replaced by a government that does respond. And what do we

mean by governmental response? Housing programs get created or more fully funded.

Money becomes allocated for low-income housing and rental subsidies.



What does this mean to you, the landlord? Good times! The low-income get subsidized

housing, often via existing housing stock (such as your building!). The

unemployed get employment, making it easier for them to pay fair-market rents.

It’s a win-win-win.

And when the upswing in the market comes back, when good times are back

again? Government cuts back the funding for housing programs. When this happens,

you sell! And at a nice profit, after having gotten some cash flow and your overhead

paid by renters for x number of years.

I’m telling you, this is a thing of beauty.



Cause and Effect

The Ripple Effect

The symbolism is easy to understand. When it comes to a local economy, when

something noteworthy occurs it is like a pebble in a still pond. The ripples flow out from

the center of activity and keep going until they reach a certain distance, slowing and getting

smaller along the way. In this system, we track certain economic stimulants and then watch

how they ripple out from their center.

Stimulants

What are the most important economic stimulants to track, the pebbles that cause

the ripples? Here we go…

Employment

Employment is market stimulant numero uno. A company from Sothern California moves it

manufacturing division to Small Town, Ohio, it hires people. People need a place to live. People

do not like to travel too far to get to work. Thus, when a new, large employer comes to an area, a

ripple goes out into the marketplace. Homes that may have lain vacant for years are now desirable

because people now have a reason to live near the center of employment. These may have been

bad neighborhoods; they may have been any kind of a thousand kinds of neighborhoods. But that



neighborhood is about to change. Take a place like New York City. Historically, certain

neighborhoods were settling points for one immigrant group, then another, and then another. The

neighborhood got built up; it got run down. Then something occurred and it went up again or

down again. It became chic, it became passé. Cycle, cycle, cycle. But nothing affects a cycle like

employment.

Comparing real estate to the stock market, population is to real estate as volume

is to stocks. You need population to have a growth market. You don’t have population

without employment; simple as that. In other words, stock brokers say, “Buy

on volume, not on shares,” meaning, what does it matter if a stock price jumped $100

if only one guy bought it? But if a million people bought it to drive that price per

share up, you’ve got a boom.

Entertainment

Mountains, ski resorts, lakes, oceans. People always discount these things as “location.”

But it’s not location; it’s what it brings as value to the person living near them, which is

entertainment. This after Employment is the second largest impact stimulant. Entertainment also

includes Downtown areas, new shopping, new sports stadiums, new multiplex theatres. But what

makes a place a “place” is entertainment. You know that old put-down, “There’s no there there”?

This is what they meant. Outside of employment, people need a reason to be someplace. The

location has to have some positive amenities.

Redevelopment

Recessed areas frequently have new or redevelopment a new shopping mall coming

along, a new housing development, a new office park. Should that be a signal for you

to buy, buy, buy?

Not yet, but it’s still incredibly important.

What it signals is that big developers have identified large pieces of undervalued

land. It could be vacant (traditional development) or it could be occupied but ready

for demolition or retrofitting (redevelopment). Either way, it means something is about

to happen…in about five years. See, these guys got to be big corporations by being



smart. They’ve already scoped out new employers about to move into an area. It’s like

insider trading. They know a new hospital is coming before ninety-nine percent of

the locals know about it. These guys are all in the building trades. Word spreads like

wildfire. But these guys must first get land cheaply. When it’s that cheap, it’s still too

early for you to get into the market. But keep your eyes peeled. Something good is

about to happen.

Transportation

New toll routes, new Interstates, new expansion of highways. Utah a few years ago

expanded route Fifteen from Salt Lake City to Las Vegas, making it four-lane in

each direction. The real estate values in that whole corridor went up twenty percent

the following year while the rest of the country dropped. Why? Because now all that land is

accessible, and people in over-valued Vegas are rolling on up the highway to nicer, cheaper

living. If New York City were to add another bridge and dropped it smack dab into the most run-

down, crappy part of North Jersey, the same thing would happen. That area would bloom.

The most important thing to look at is accessibility of an area. Is it easily reachable

by major highway? What about mass transportation, such as bus lines, trains,

or light rail? Even check out taxi companies are there any, and are they of decent size

and doing a decent volume of business? What about airports? Are there any around

and are they fairly easy to get to?

Lastly, look for transportation changes. This doesn’t happen often, but when it

does, it has a massive ripple effect. A major state highway expansion doesn’t happen

in a vacuum, it happens for a reason. Find out the reason and then find out the

details. See what areas will be most positively affected. Then, don’t be afraid to figure

out what, if any, areas will be adversely affected. A new highway expansion could

totally decimate properties near a previously well-used local road, yet make other

properties rise from the dead. Also, look at all of the affected areas. Maybe that new

highway was meant to get people from point A to point Z, but in doing so, it will

positively affect all the areas from point B through point Y. See, ripples.



Education

Fantastic rental opportunities exist where there are centers of higher learning, such

as colleges. College students need off-campus housing. They prefer it to be nearby

campus and they prefer it to be reasonably priced. Also, since new colleges don’t just

spring up everyday, look for college expansion. It’s not unusual for a college to grow,

adding five hundred more students than they’d previously been able to accommodate.

When that happens, you’ve got five hundred new potential rental customers.

Of course, there’s a downside to this. Oftentimes a college’s expansion is new dormitories.

When that occurs, take caution. See how it affects the percentage of students

living on-campus versus off-campus. This data is readily available on college Websites.

If an ever-increasing percentage of students are beginning to live on campus in new

dorms, that’s a negative indicator and a signal for you to get out of that geographic

market.

Centers of education also mean an influx of new members of the local workforce.

The college itself hires lots and lots of people. Some professors are “just passing

through,” and thus are in the market for rentals. But outside of students, your best

bet for renters is the cafeteria help, security guards, maintenance people, etc. This

ancillary staff can be your life’s blood.

Also, don’t just think in terms of traditional colleges. There are a lot of post-highschool trade

schools and tech schools around, and they are sprouting up at a much higher rate than new

colleges. So, too, are junior colleges and community colleges. Keep an eye out for them they have

an incredible market effect.

Finally, many students grow to like an area and choose to stay around there after

graduation. They’ve probably made some local connections, they have friends there,

and they may have done internships nearby. And now they don’t have the option of

campus housing and they must buy or rent off-campus most likely rent at first,

because their finances are still too precarious for purchasing.

The ripple effect and market stimulants are used more often with pure speculation,

which is not specifically what this book is about, although I will discuss it in



detail. With real estate investment based on cash flow properties, in the early stages

of identification, we’re buying solely based on rent, more so than location. When you

begin, you will be concentrating more on areas affected by “expansion,” a term I

haven’t taught you yet, but that you will learn by heart and learn to take to heart. In

the beginning, you need safe houses that are going to withstand time.

But still, the ripple effect, the ripples caused by these market stimulants, is how

you will begin to start drawing circular lines all over maps, trying to locate places in

which to find properties. You will be looking for where three circles intersect, where

employment meets entertainment meets transportation. You will be looking for the

“perfect storm” of investment opportunities. You will also learn how to interpret

and draw those lines. No, it’s not as simple as drawing a circle. Your circles may go

into bodies of water. Well heck, you’re not going to buy land under a lake! You’re also

going to avoid well-established affluent towns and neighborhoods, places with million

dollar or high-six-figure homes. That’s not what we’re about here. You’ll also take

into consideration the transportation system. Where does it go? What routes do

people take to get to the major employers? I want houses that are going to be within

three of these stimulant rings.

Invest Here for New Construction

Invest Here for Existing Homes;

Do not buy in the Redevelopment

Area



Expansion and Contraction

There’s a phrase we hear all the time: “Don’t reinvent the wheel.” The way it applies

here is that I believe there are some very original ideas in this book and this system,

but there are also some things that are simple truisms that you already know— things

like “buy low and sell high.” I’m sorry, but I can’t take credit for that one; it’s been

said somewhere else before. Real estate investment has been around a long time, and

sometimes it seems like there isn’t much new that can be said about it. Yet, often it

is not just that perhaps there is a new idea, but rather a new way to conceptualize

what is going on around you and how you can better analyze and take advantage of

it.

From watching markets ebb and flow, like the tides, I was able to create the following

original way of looking at markets.

Expansion

Expansion within the market occurs during the later part of the down cycle.

Expansion represents the large disparity between the prices of entry level housing and

high end homes. This occurs because during a recession in a geographic area the

people most likely to be affected are the lower priced or entry level buyers. When jobs

are lost, usually the lower paid workers are affected more due to higher qualified

employees entering the market. This makes it difficult for people who are renting to

become home owners due to unstable employment and lower wages. Affluent, more

stable wage earners earn on, mostly unaffected by the recession. The higher end or

high demand properties will continue to be stable or grow. Over time, the disparity

between the two prices greatens, creating the expansion.

During what I term “expansion,” foreclosed properties and pressured sales are

thousands of dollars below the retail market. Example: Right now, there are homes

in my area that I can buy for $140,000 where there is an almost identical home on

the same block selling for $190,000. But this system is not about simple, quick turnaround.

Yes, I could buy and resell that within six months and make $10,000 to

$20,000. But I would probably have to put almost that much into them in order to



make them retail-able.

After Arizona boomed, I did my research and found some interesting possibilities

in Huntsville, Alabama. In 2004, I called a real estate agent there her comment was “What are you talking about? Our market’s flat; it’s only going up about five percent a year; it’s not a good market.”

I answered, “I think you’re sitting on the best market in the Country!”

I bought there on expansion. I bought the cheapest, lowest priced, distressed

property that I could find. Not necessarily in bad areas, but in high foreclosure areas.

During 2005, these general areas went up fifteen percent, but I made a fifty-five percent total

return. Why? Because it had all that room to swing back up. And remember, these

receded markets first have to catch up to the regular market before they can move

forward. But you can make these huge gains on them.

In Sacramento in 1997, there were condos for sale for $6,000. A few miles away, I

had relatives living in $475,000 homes. The whole thing confused me at the time. How

could this be? Now I get it. It’s expansion. But nobody ever taught this concept before.

Yet it looked so perplexing from the outset that it scared me out of the market.

Expansion is the Opposite of Stimulants.

Expansion typically happens in “bedroom communities.” In a recession, people

tend to move inwards toward the jobs. Thus, the areas NOT affected by positive

ripples are the most receded, with the highest foreclosure rates. This is where you want

to buy early. Once you hit around ten percent appreciation and you can no longer

find cash-flow properties and you’re buying strictly on appreciation, then you want

to flip-flop to identifying the stimulant markets and getting into those.

Here is what I mean by an “expansion” market:



As you can see, there is a definite disparity between luxury homes and “affordable

housing” (call it “starter homes” or “rental properties”—all of these terms work).

Despite what one might consider a recession, the higher end properties continue to

rise or at least hold value, but the lower end is dropping like a stone, losing significant

value. If a large employer moved out of a geographic area, this is the sort of

market we might be looking at. Lower wage earners would be out of work. They

would have to sell in order to leave the area and go to where the jobs now were.

Higher wage earners might be, say, commuters, people living in luxury developments

who could afford to work in a far-away metropolis while living far from that

metropolis, out where they could hear the birdies chirp in the morning. These people

are not affected by the loss of some local factory and so their homes continue to

rise in value.



Contraction

Contraction is just the opposite of expansion. When a market is in the fourth quarter

of a growth cycle, the high demand for housing places pressure on the lower and

mid range priced homes. The pressures are caused by the incredible increase in values

in such a short period of time. When people hear of the rapid growth in a

geographical area, they buy urgently and aggressively like sharks in a feeding frenzy.

During this feeding carnage, the lower end properties begin to close the gap between

them and the higher end or more desirable areas. In some cases it is difficult to discern

between the property types.

Here is what contraction looks like:

Now, you might wonder why the high end properties have not appreciated as greatly

as the lower end. This is because there is not an infinite ceiling to housing prices in

a geographical area during a given period of time.

Looking at the two illustrations, we see that in real dollars, the average lower end

home did not actually increase in value all that greatly. In 2001, it was $200,000.



In 2011, it may go up to $260,000, an increase of only $60,000. But it is what happened

in between that is what is most interesting to us. $200,000 dropped to

$130,000, then doubled in value to $260,000. What we would have wanted to do

is buy not at $200,000, but when the property was $130,000. That’s something

only a person well-versed in market cycles knows how to do—somebody like YOU.

Understanding expansion and contraction allows us to create greater margins in

the same markets that others are struggling in. We will identify the weaker areas in

the Down Markets. Weaker areas may be areas of the highest foreclosure rates or

not the most desirable locations. In growth markets these same properties will trade

within a few percentages of their perfect counterparts.

Tides

During these good times, if we tried to buy land fifty feet from the shore, we

would drown—as waders, we would find it too deep, and as investors we would find

Here is another way to visualize housing markets. Picture

an ocean’s tides. You are probably already familiar with

the quote made most famous by President Kennedy when

he said, “A rising tide lifts all boats.” That one has been

used in many a business guide, as well as by all sorts of

economists.

But let’s take the “tides” analogy in a different direction.

We can call high tide “the good times.” The water is deep

about fifty feet from the shore and even the driest part of

the beach, up near the highway, is getting wet.

That normally dry area that is finally feeling the moisture

of the waves is new housing construction. A geographic

area is doing so well, so fine in fact, that new housing

needs to be built. Dry sand is finally getting wet (I keep

slipping between metaphor and reality).



it too expensive. In either case, we would indeed go under and not come back up.

On the other hand, we know this much about the tides: they change. They

cycle. Gradually, it becomes low tide. The water that once reached far, far into the

mainland recedes, leaving everyone high and dry. It is safe now to walk around thirty,

forty or fifty feet from the shore. Now it is safe there.

Here is what is most important to understand as we compare tides to housing

markets: When a market gets hot, more housing gets built. The physical size of the

market grows. An area that was four contiguous square miles expands to become

five contiguous square miles. New developments sprout up. What was once open

space becomes suburban housing.

Further analysis… The new housing being built where housing had not existed

before becomes the most desirable housing. Why? Because it’s newer. It has been

designed to meet the needs of today’s market. Housing built twenty-five years ago

was built based upon what the public wanted way back then. Things change.

Consumer tastes change.

This is very good for developers; they create a very desirable product and can sell

it at a premium price. Even if what they have built is not necessarily intended to be

luxury housing, it still can sell for more than older housing simply because people like

“new.” Talk to someone in advertising. “New” is one of the all-time best words in

advertising. Tide laundry detergent has been called “New Tide” for decades. Is it

really new? No! It’s just that we, as consumers, get excited by that word. We don’t

want other people’s hand-me-downs; we want new!

This new construction on the outskirts of town will be over-priced. We, as

investors, don’t want it.

So what do we want during this high tide period?

Nothing. This is the time for us to be getting out of a market, not into it. We

cannot “buy low” at this time; so instead, we “sell high.”



Now, let’s study those tides again. It’s low tide now. What happens to housing

during low tide? Well, it differs a little from real low tide on a beach. There, the land

farthest from the water dries up and blows away. In real estate, the opposite happens.

Remember—new is still new. Even when it starts to get a little old, if it is the newest

thing around, that still makes it…well, it makes it the newest thing around. The

newest thing will remain the most desirable, particularly when it is developed in a

new area that has greater privacy, perhaps larger yards, more acreage, quieter, better paved

streets— whatever the amenities are that the public most demands today.

Bull’s Eye!

Let’s switch now from tides to targets. When we were at high tide, the black outer ring

of housing was built—all that nice, new stuff. The yellow in the center? That’s industry.

That’s where the jobs probably are. Even though that black outer ring is farthest



from the employment, it will most likely be inhabited by the most affluent people,

people who can afford something nice and new and want the quiet and solitude of

being a bit farther from industry. These people can afford to commute a little farther.

Consider this: If you could afford to live anywhere, would you want to raise

your children in the shadow of a big, dirty factory? Of course not. Yes, for there to

be a target at all, there must be that yellow center of industry (think about what we

said earlier about “stimulants”). But historically, that metropolitan area probably

started with only the yellow industrial center and the red ring just outside of it. As

each high tide of good economy arrived on the scene, another ring of newer residential

construction was built, each further out, farther from the industrial center.

Here’s what I want you to learn: When that tide first became high and the second

residential area was built—the blue ring—those properties sold for more than

the red ring, but the need for the blue ring’s existence caused the red ring’s properties

to also appreciate in value. “A rising tide lifts all boats!”

But when low tide had its turn in the market cycle, the blue circle was newer than

the red circle and so it retained its value more—it was still the place to be if you

were still living in this general area. And what happened to the red area? That’s where

the foreclosures happened. That’s where the property abandonment occurred. That’s

where housing stayed and stayed on the market, unable to be sold.

THAT is when we want to buy houses in the red circle, and the red circle is

where we want to be buying. For when that tide begins to rise again, that red circle

is where the renters will find places like yours to live.

When the next high tide occurs, the white ring of even newer housing will be

created. Home values in the red and blue rings will rise with the white. Things will

be good—if you already own investment housing in the red ring. You will have lots

of tenants knocking at your door and they will be willing to pay high rents. You will

make money, although at some point I might encourage you to sell, because this is

when you will get your highest price from those guys who always think things will

just keep going up, up, and up and never come down. But hey, we know better than



that. We understand tides. They come in and then they go back out again. They

don’t just keep getting higher and higher forever.

Low tide cycles around again. The white ring is the newest and so it retains its

value. What will get hurt the most? The red ring, for it is now the oldest. Where

should we be investing now? Now would be the time to buy in the blue ring. We

could not afford to invest there before—we would not have been cash-flowing as

landlords. But now the red ring properties are becoming pretty darn old and distressed.

The blue ring has also seen better days, but again, it is more the kind of

place where we want to be. We do not want to buy in extraordinarily bad, seedy,

crime-infested neighborhoods. We cannot cash-flow in the best, but we also don’t

want to be in the worst.

This is the way of the cycle—like an ocean’s tide; like a dart board target.

Visualize it and understand it and you will be able to make money at it.

Buying During Expansion—Retail versus Wholesale

Okay, so now we know to buy during Expansion rather than Contraction. Expansion

means that the supply of housing has “expanded” and so we can buy things at a

lower price. Supply and demand. The more there is of something on the market, the

cheaper it will be priced—it’s called competition. The opposite is Contraction, where

there are more people than there are places for them to buy; the amount of available

housing has “contracted.” In those markets, there are bidding wars to buy even the

most modest homes, overpricing them. This is great if you are selling, but it is anathema

if you are buying.

So let’s say you’re in an expansionary market, which you’ve identified because I’ve

taught you how. You’ve identified the neighborhood where you should be buying.

So let’s cover one last thing, something I’ve alluded to a few times: We want to buy

“wholesale” instead of “retail.”

Now what does this mean? In other areas of life, it means, for example, that the

shoe store owner buys his shoes from a manufacturer for $20, which is called the

“wholesale” price, and then he sells them at his store for $80, which is the “retail”



price. So how on earth could we be using those same terms when it comes to real

estate, unless we are a developer who “holds back” a few units for himself?

Even during a market expansion, some properties will be priced better than

some others. This is not merely comparing luxury homes to lower-end homes. It

means that, even when comparing apples to apples, some properties will be “distressed”

while others will not.

What distresses a property? Well, of course, there is the image conjured up by

the word “distressed” itself. Run down. Ugly. Falling apart.

This is fine, as far as we are concerned, but only up to a point. There is an entire

science to understanding how much money can be invested into a property in order

to make it financially viable. Here is also where we differ from the Fix and Flippers.

A lot of them will buy a property so that they can fix it up really nicely as a kind of

“repairman’s hobby.” That’s great if it gives you genuine pleasure. As far as making

a profit, though, there is definitely a point of diminishing returns. What you have

to bear in mind as a person buying property to hold for a while is that you need only

make it habitable for rental tenants. A Jacuzzi in the master bath might be desirable

to a buyer, but it’s a bit over-the-top as an amenity to a renter.

We, as people who will be buying property to rent, need only look at a physically

distressed property and decide, “How much money will it take in order to

simply make this place habitable?” Once that data is arrived at, we can then calculate

that additional amount into the purchase price and then run our numbers again

in order to decide if things will cash-flow well for us. If it is still what we might consider

“wholesale” at that time, then we might want to buy it. But sometimes adding

in that extra cash to bring it up to code only serves to make it “retail,” which means

it is no longer any different from any other house on the market.

One of the ways in which a property is truly at a “wholesale” price versus a

“retail” price is if it is in foreclosure or is a bank-owned property. Here is a real-life

example that I was involved with:



What we are looking at here are two properties, nearly identical properties, in the

same neighborhood for sale at the exact same time. Study the pictures closely. There

are no discernable differences. The one on the left is owner-occupied and is for sale

with a regular real estate agent. The property on the right is a foreclosure.

Now, what might shock you is not only that the foreclosed property sold for

about $40,000 less (and that’s REAL money, people), but look how much longer it

was on the market. The higher priced property took less than a month to sell, but

the one for $40,000 less took over four months to sell. How the heck can that be?!

Perception is everything. Properties that have been foreclosed are perceived by

the public as having less value. Prior to going into foreclosure, the property owner

will not have been able to have invested much, if any, money into the property. A

piece of rain gutter may be falling down. The kitchen garbage disposal might not

work. A window may be broken. When you are struggling to pay the mortgage so

that the bank doesn’t take your home away, these little repairs are not your priority.



You’re taking every dime you have and giving it to your mortgage lien holder, not

Home Depot or some handyman. So the “retail” property is most likely to be in

“move in” condition, while the “wholesale” property may need a few bucks tossing

into it in order to be habitable.

Have you ever heard of what Realtors and “retail” buyers go through in order

to make their property have “curb appeal?” When they are showing it, they mow the

lawn, they hang a few new pictures, they clean the place up until it’s immaculate, they

put potpourri around to give the place a beautiful scent. No effort is missed.

The “wholesale” property owned by the bank via foreclosure? You may be taking

your life in your hands when you walk inside. Dead rodents may be under the

sink, stinking up the place. I mean, this is no “little step down,” people; this is the

difference between pride of ownership and “Animal House.”

So what does this do to the price? The “retail” property is doing all this so that

you can envision your lovely family growing up and growing old there—a real homestead.

The “wholesale” property is “as is,” and if you don’t like it, tough on you.

Even in an expansionary market, people are more apt to rush in to buy the

“retail” property. It is geared toward owner/occupants, and there are more of those

than there are residential real estate investors. The “wholesale” property? Not only

will it be pretty gross and dirty, in need of some minor repairs, perhaps, but your only

competition to buy it might be “Lowball Larry.”

Now Lowball Larry, he’s a funny guy. Larry thinks that no matter how low the

price is, if he waits long enough, it will go even lower. Lowball is the wise guy who,

no matter what anyone ever pays for anything, will always counter with, “I could have

gotten it cheaper.” The problem is, Lowball rarely ever makes a deal because he waits too darn

long. The property in our pictured example was on the market one hundred thirtysix

days. Lowball Larry figures if he waits a year or two, then the price will be really

low—maybe around $75,000. And he’s right; if it’s around that long, it probably will

be far lower.

But we don’t want to be like Larry and never get the deal. We see the property



on the left and its price; we see the property on the right and its price. We see how

long the property on the left was on the market before it sold. Now if we see the property

on the right, see how much lower its price is, and see how much longer it’s been

on the market, we should know that IT’S TIME TO JUMP IN AND BUY!!!!

The old gambler’s adage is, “don’t get greedy,” and that’s exactly what Lowball

Larry’s problem is. What I’ve shown you is a perfect example of retail versus wholesale.

Since we are assuming that this is an expansionary market, our numbers should

actually work well with either property, but our numbers will really work well with

the wholesale property, the cheaper one, the bank-owned one, the one that smells

funny. Buy that one and buy it NOW.

WANT to Sell versus HAVE to Sell

I don’t want to focus exclusively on a wholesale property being in distressed condition.

I know that probably conjures up all kinds of negative images, not just purely

esthetic, but also as it broaches the topic of investing money into the property in order

to simply make it habitable.

Perhaps a better way of describing things is to say that “Wholesale” pricing is

when a seller HAS to sell, while “Retail” pricing is when a seller WANTS to sell.

There are some situations where the wholesale property is not necessarily physically

distressed, but there are other mitigating factors. For example, prior to

foreclosure and a bank assuming ownership of it, one way in which a person can avoid

foreclosure is to quickly sell the house before foreclosure action has occurred. This

is a smart move for a person with mortgage payment problems because it enables

them to save their credit; there are very few things worse than a foreclosure on your

credit report. At that point, they are really just trying to get rid of the house for

what is owed on it. If, by chance, the party in question put up a standard twenty percent

down payment and, perhaps, paid off a bit of the principal before hitting hard

times, you might be able to buy it for, say, twenty percent less than what it was worth

when he bought it.



For example:

Original purchase price: $200,000

Mortgage: $160,000

Principal paid $5,000

Amount seller needs: $155,000

This formula can get even better when we factor in that the home price may have

appreciated over time:

Current value: $250,000

Amount seller needs: $155,000

In this scenario, you might be able to purchase the property for $95,000 less than

its retail value. That’s a perfect definition of “buying wholesale.”

There are some other situations where a property falls into the NEED to sell versus

WANT to sell category. Sometimes a large and prosperous employer guarantees to relocate

their employees and find them housing. This perk may include purchasing their old

home from them and then reselling it. When this happens, the employer really isn’t set

up for being a landlord, so they’ll simply try to dump the house as quickly as possible.

What is the quickest way to dump a house you don’t want to own? Sell it at “wholesale”!

If the company is doing well, losing $30,000 or $40,000 on a deal like this isn’t the end

of the world—it’s like a bonus paid to a good employee and their accountants will find

some creative way to write it off.

Bottom line: Be on the lookout for “wholesale” housing prices in the neighborhood

where you want to buy. Be wary of a deal that’s too good to be true, but be willing to be

a little more flexible than if you were going to live in it yourself. Buying wholesale versus

retail can be the difference between winning and losing in the real estate investment

game.



Property Selection

Income is the Only True Value of a Property

There is no question that a person’s personal credit profile is of utmost concern to

a mortgage lender. And yet, there is a basic idiocy to this. If I am borrowing the

money in order to buy a house, that property is a tangible asset with a specific value.

The house itself is the collateral. What I earn as a plumber or as a secretary is irrelevant.

Whether I had a rough patch two years ago where I had trouble paying my

bills on time should also be irrelevant. In a perfect world, if I am borrowing money

to buy a house, the lender should be comfortable in knowing that if I squander the

money and fail to make my payments, they can always take the house.

But this is not a perfect world.

Yet when we purchase investment property rather than a home to live in, the

world becomes just a little more perfect. When you go in to plead your investment

property case to a mortgage lender, you will be going in with a “business plan,” not

simply your personal credit score. If the numbers work on your “business plan,” you

will most likely get approved for a mortgage loan—even with less than perfect credit.

This is far less true if you plan on living in the place yourself. In a sense, then, the

income a property can produce exceeds the value a lender will even place on YOU.

But let’s get back to the bold statement in the bold type at the beginning of this

chapter. In investment property, the kind of rent the property can produce is the

magic number. If you buy a $500,000 property that you can only rent for $250

below its monthly overhead (mortgage, taxes, insurance, upkeep, etc.), that property

has no positive value to you or to your lender. Even if one may speculate that the

property in question may (because everything in speculation is uncertain) increase,

or in the very least hold value, you are still losing $250 per month, every month. On

the other hand, a $115,000 property that rents for $250 above its monthly overhead

is a gem! Crazy, huh? But bear with me; this program will turn a lot of your

long-held perceptions upside down.



The reason lenders look at all of this differently is that if you disappeared tomorrow

instead of trying to sell your income property at a foreclosure sale—which they

hate to do because they inevitably end up selling it at a loss—they can hold on to that

property and manage it to a profit just as you had done, or else sell it to an investor,

using the same “business plan” to seal the deal. Thus, the idea here is simple—find

properties that can be rented for a profit. Nothing else matters at all.

These facts have never been disputed by anyone when the subject is purely commercial

property, such as an office building or a storefront. But the average person

finds it surprising when I tell them it holds true for residential income properties as

well. The reason for this is emotion. Homes are an emotional purchase. We are used

to buying them because we fall in love with them and we can picture our kiddies frolicking

on the swing set in the back yard while we care for the flowers we just planted

in the front yard.

With the current investment climate I am asked often, “Sean, how low do you

think my property will go?” I often respond the same. Your property value will reset

to a value that is once again supported by the rental income for your neighborhood.

With residential rental property, no such illusions need exist. Our personal tastes

mean nothing. Don’t look for the type of place where you would want to live. That’s

irrelevant now. This is nothing more than a math problem. Either the numbers work

or they don’t. So if the current rents in your neighborhood are $1700 a month and

your current property values are $330,000 you may lose another $100,000 in value

since $1700 a month will only support $230,000 in mortgage. Understanding, that

the low property may not be yours but a similar property in your neighborhood will

reach that value, thus resetting the value of your property for that moment.

How to Identify Good Properties

One of the major problems with using a standard real estate agent to help you find

investment properties is that they’re programmed—just as you, the formally-traditional

home buyer—to seek out the “desirable” house. That house is pretty, in good

shape, has lots of amenities, and is close to schools, shopping, and public transportation.

The neighborhood is quiet and the neighbors have lived there a long time;

they all know one another.



What the heck does this have to do with making money in rental housing?

Nothing!

Here’s what I do instead. Once I have identified an area, I get a copy of the local

newspaper. Sure, there is the temptation to use the Internet, and believe me, that

temptation will be strong if you are trying to buy a couple of states away from where

you yourself live. But I’ve found that the local paper is actually a little easier to nav-

igate, gives me just the amount of data I want to begin with, and will often have listings

I won’t find on the ’Net, such as “For Sale By Owners.”

I look through the “Rental” section first—not the “For Sale” section. I look for

a 3-bed, 2-bath, 2-car garage property, preferably built within the last decade.

Why do I target this type of property? Because, it makes an easy comparison, plus

it makes for a good rental property. It usually attracts a strong tenant and might also

make a decent property to appreciate in value over time. Furthermore, being rather

new, it is more likely not to be facing major repairs and upgrades, such as a new

roof or a new heating system during the time that you own it.

Older buildings are a poor market indicator because even when there is little

inventory on the market, old places still take a while to move. 1950s and older construction

tends to always be undesirable. It is very common for the newer

development to have no vacancies, but an older development to be giving away units

with three months free rent. Your market indicator is the newer, nicer place.

Post-war construction with ten by twelve rooms and one bath are difficult rental

investments because even when you can rent them, they will turn over constantly.

Who wants to stay in those kinds of places? Thus, you could easily find yourself

stuck with long periods of vacancy, which will kill your budget.

On the other hand, in some areas the best and most plentiful, rentable, and

desirable properties are newer vintage condos and “townhomes.” If so, redirect your

attentions there. Just bear in mind, you have to do your homework



and factor in Common Area Maintenance fees (CAM fees). These will add

to your monthly expenses and must be considered when doing cap rate analysis.

Homes for sale will usually list their approximate age. Rentals rarely do. What

can you do? Call them! Pretend you’re a renter and ask how old the property is. An

even quicker method is if you are in an area where the local Multiple Listings Service

(MLS—a co-operative of the local Realtors’ Association where all homes listed by

local Realtors are put into a master database) allows “civilians” (people like you) to

look up listings. MLS will almost always list the age of properties, sometimes even

rentals.

Next, I flip to the For Sale section and look for the same category of house.

Then I use the “Rental Multiplier of One Hundred.” I may not know the mortgage

terms I can get, but I know if the price is lower that one hundred times the rent I

will cash flow with most current financing.

Thus, if I find that type of home for SALE for, say, $150,000, I will be looking

to see if there are any rentals for that same type of home for $1,500 per month. If I

can, I not only know I’m in the right state, town, and neighborhood, I know I may

have even found the exact property worth purchasing.

$150,000 (purchase price) divided by one hundred = $1,500 (monthly rent)

Obviously, if the monthly rent is even higher, I’m even MORE excited. And to

tell you the truth, when it gets down and dirty and I’m actually ready to pull the trigger

and buy a property, I’m really looking at a factor of less than one hundred, eighty five or ninety

depending in the location. But that math is harder to do in your head when you’re evaluating two

hundred or so properties, so I round it off to one hundred, then hope I find a number of properties

that are doing a little better than that (Example: $150,000 sales price, renting for $1,525 per

month).



The key here is not to just find one of anything. I’d prefer to find a number of

homes for sale in that same category (three-bed, two-bath, two-car garage, recent vintage)

and average out the prices. This tells me the true sales market. If I find one at

$150,000, but everything else in that category seems to be up around $250,000, I

must assume that one property must be unique—a real dog—what they call an “outlier”

in our calculations. Yes, I might still buy it—it may be a bank-owned

foreclosure—but I still have to know for certain that I can get the kind of rent that

makes my numbers sing.

From there, I hope to find, again, a number of properties in this same category

renting for that “Factor of one hundred,” as well as a number that are selling and fit

into that same formula correctly. If I do, I know I’m in the right market at the right

time.

Now, I mentioned that I rely a lot on newspapers versus the Internet. Don’t ask

me why; I have no scientific answer for this, but I always seem to find higher rents

in newspapers than on Internet listings. I believe when you place a newspaper ad you

have to predict what the market will bring in a week from now; conversely, the Internet

you can change as often as you like. So, I believe the Internet ads tend to reduce prices

quicker because of the nervousness of the landlord. The exceptions to this, of course,

are the listings from a local newspaper that also has an on-line presence (which most

now do). The comparison I’m drawing here is between newspapers (paper or electronic)

versus large national Internet home rental sites (do a web search—there’re a

lot of them out there). Why this is important is that you want an honest look at the

rental market—high or low. You want reality. You plan on entering this market and

you want the highest rent possible. You want to identify the property you can buy

for the lowest possible price and rent for the highest possible price.

Make no assumptions! A lot of people will be so eager to enter a market that they

will try to make up their own financial formulas. They’ll only find a lot of different

properties with prices all over the place—a duplex here, a three-bed, two-bath with

a one-car garage there, something else somewhere else, etc. From that they’ll try to

conjecture things like, “Well, if a three-bed, two-bath, with a one-car garage and is

forty years old rents for x, then a three-bed, two-bath, two-car recent vintage will rent



for x + something.” Sorry, but it doesn’t work that way. Math is math and prognostication

is prognostication. I want you to be conservative mathematicians, not

Madam Marie, the Fortuneteller.

By using my simple math equation (rent times one hundred ten = the total cost including repairs I am willing to pay), I can eliminate most “For Sale” properties in a market. This should

quickly and efficiently get me down to only having to consider a handful of properties.

If I can’t even find that many, I’m also being told that this is the wrong market

at the wrong point in its cycle.

Despite all that I’ve proselytized about not being afraid to move outside your

geographic comfort zone, I still suggest that if you are targeting multiple markets, you

begin with the one closest to you, and then move outward. This is common sense. If

you can buy in a market that is close enough to where you live so that you can act as

your own property manager, this fact can save you some money in the long run. If you

have to go visit the area from time to time, it cuts down on time and traveling costs.

Pennies add up, my friends.

Also bear in mind the market factors and the ripple effects I mentioned earlier.

If you are, say, looking at the greater Cleveland, Ohio, market, lay your data on

maps so that you can identify the geographic area around there—perhaps a certain

neighborhood or suburb—where the factors all overlay. Try this section first—it

should be the place where you stand to make your most prudent investments. If you

cannot find what you are looking for there, then gradually move outward from that

epicenter. Let me remind you, I’m not telling you to find the geometric epicenter of

a town, city, or county. I’m telling you to use the factors of shopping, transportation,

employment, entertainment, schools etc. Be careful and watch for the negative stimulants

and ripple blockers like railroad tracks, divided highways, and rivers that limit

transportation routes from your positive stimulants.

In some cases, you may have to do an entire city or metro area in order to get to

what I call my magic number—ten properties for potential purchase. That’s what I

want you to refine your search to. Once you start going miles and miles away in order

to accumulate ten properties worth considering for purchase, again, you are probably

in the wrong market at the wrong time. But ten is what I would like you to



get—ten where you have run your quickie formula and discovered that yes, you have

probably found something here that will cash-flow for you.

Re-con

Something I do at this point is a kind of “reconnaissance.” Now, so I don’t confuse you,

I am looking to purchase properties, but I am also studying existing rental properties, to

learn about the local rental climate. Sometimes people have existing rentals that they

are looking to sell, but you may ask yourself this question—if they are selling a rental

property, why would they do that if it was cash-flowing for them? Answer: It probably

wasn’t. They may have purchased it in the prior boom, and they may be struggling

to maintain the higher mortgage amount. Your job is to find out why. Are they selling

for the prior reason or did they recently purchase the property, and if so, what is

their experience? There could be a myriad of reasons, but existing residential rental

properties on the market are rarely a good sign—unless it is someone who bought at

the wrong time and is carrying a huge mortgage that their rents can no longer sustain.

If they are forced into selling, and they are willing to sell to you at the price

where the numbers work in your favor, then you’re where you want to be.

Existing rental properties and their owners may eventually become my competition,

but until they realize that, I’m going to pump the owners of those properties

for information. When I see property for rent, I’ll call up and see what kind of reception

I get. If they say, “Oh my God! Thank you so much for calling. Please, please,

come over and see the place today. If you do, I’ll throw in the first month’s rent for

free,” hang up and start looking in another market. This is bad, bad news. What you

really want is someone who tells you, “Sorry, that unit is already rented.”

“But it was only listed this morning.”

“Yep. That’s the way it is around here. If you see another somewhere, better call

up first thing in the morning or it’ll be gone. I know some people who are going down

to the local newspaper plant to get the paper the moment it comes off the press at

four-thirty am just so they can beat the rush.”

If you hear that, you are in the right market at the right time—IF you can find

properties to buy where the numbers jump in your favor.



Competition

Speaking of competition, just so you know—there’s a kind of “a rising tide lifts all

boats” sort of situation when it comes to real estate investment. See, no one wants

to own a property in the middle of an area where all the other buildings are vacant

and boarded up. And no one wants to rent in an area like that, either.

Real estate investment is successful due to investment volume, just like the stock

market. It’s not simply a matter of one person paying a very high price for a large

number of shares of stock. It’s far better if a LOT of people are buying shares at a

reasonable price.

For this reason, I often go on road trips with a whole bunch of potential real

estate investors all at the same time. Are they competitors of each other? Well, yes,

in a sense. But envision this: We come to a city block. Fifty percent of the homes are

vacant and for sale. If I have enough people in the back of my van—and I’ve been

known to rent a van and cart around eight investors at a time on these road trips—

to buy up all the vacant properties on that block, everyone wins. The existing owners

on that block win, and my new investors who have just bought into that block win.

Why? Now the entire block will be occupied. Vacancies breed crime and urban

decay. Tenancy puts an end to those negative things.

So there I’ll be, driving my big ol’ van around, showing my people properties,

and each will be saying, “I’ll take this one.”

“Okay, then I’ll take this one.”

“This one’s got my name on it.”

And on and on. They all make their purchases at a low price because what they

were buying into was a neighborhood with a fifty percent foreclosure vacancy rate.

Once they close, they will be renting to people in a one hundred percent occupied

neighborhood, which will obviously garner them a much better rate of rent. The

owners who were there before will now have homes of greater value. Everybody wins!



Price Support

Markets Correct When Values Reach Price Support

When people who don’t normally invest in real estate enter the rental market, the

market eventually begins to correct itself. In other words, there is a window of opportunity

when things are too good to be true.

Say you are your basic individual. You don’t normally invest in real estate, unlike

some of the big guys. Suddenly, whether you figured it out by reading this book or

whether it was just that you’re an intelligent person with your ear to the ground,

you can’t help but notice that you can buy a property that will cost you $1,000 per

month in debt service and other expenses (taxes, maintenance, etc.), but you can rent

it for $1,400 per month. You’d be crazy not to jump at that investment opportunity.

Now, the beauty of this is in its simplicity. You can make this particular investment

decision without concern for property appreciation, for example. All you have

to know is that you will make money today. Believe it or not, this is considered a far

more conservative investment strategy. Banking on the future appreciation of a property



is speculation. In this instance, you’re not speculating at all.

There are only two times in the Market Cycle that “common people” will buy

more than one property. One obviously is when the appreciation is greater than

ten percent. The income a property and each month the value is going up

$2000.00 anyone who has that ability will consider purchasing another property.

Even if they lose a few hundred a month! This created the “Housing Bubble.” The

reverse of that is also true. Even if values are flat or declining, if rents are stable and

increasing and a property will pay you $200.00 a month after all its expenses are paid

the “common person” will consider purchasing additional properties. This is what

causes the correction in values and is known as “Price Support.”

Once a property proves that it can consistently throw off a high rent, its perceived

value will increase. If you are already in possession of that property, this is great for

you. Why? Because, obviously, people will likely be willing to offer you more money

for the property than what you paid for it. The positive cash flow from your tenant

or tenants is proof of a greater value.

Now, suppose you buy a property for $90,000 and can rent it for $1,400 per

month. This is great! But after a while, comparable properties in the area lower in

value even more to, say, $70,000. Should you kick yourself? No! Sure, it would be

a great world if you could precisely predict just how low a market will go before you

buy into it. But that’s a dream. All you need to know is that you picked the right point

in the cycle and that you are cash-flowing today. Because those rents provide a price

support, even if that property drops to $70,000, we know it will soon climb up to

$140,000 to $150,000. Don’t get greedy!

Have you ever met Kenny Can’t-pull-the-trigger? He’s the fellow who always

says, “The price is dropping; I’ll wait a little longer.” No matter how low the price

gets on anything, he never pulls the trigger because “it might get even lower; then

I’ll have a really great deal.” Poor Kenny talks like a big shot. No matter what you’ve

paid for something, he tells you that you overpaid. The problem is, Kenny has nothing

because Kenny never makes a deal. Don’t listen to him!



Our only concern, even if a property is cash-flowing today, is that you’ve checked out

your economic factors so that you can feel secure that the rent will not decrease, or

at least that it will not decrease enough so that you are not cash-flowing. (Rents decrease due to oversupply of rental housing from increasing unemployment and population loss). That brings

us back to our market stimulants and how we have to keep our eye on them. Every

part of this program leans on every other part. I will never ask you to do something

simply as a form of exercise. This is about making money.

You are not buying a house—you are buying a market!



Choosing a Location

and Determining the Stage

of the Cycle

Checking the News

We’ve talked about cycles and we’ve talked about stages. We know the amenities we

should be looking for in a location. We’re ready and rarin’ to go. So…where exactly,

in this great big country of ours, do we start?

First off, let’s prioritize the indicators we’re looking for. One thing and one thing alone

trumps all else: Employment. Without employment, we have nothing. Without employment,

we have no population. With employment, we have at least a static populace.

With growing employment opportunities, we should have rising population. Without

employment, or if employment has recently left an area, we have loss of population. Loss

of population means empty houses—houses that you can probably buy cheaply, but

which you cannot rent because you have no people to rent them to.

I check out major news sources that frequently comment on areas that have rising

employment. This may include, but is not limited to, Money magazine, Forbes,

US News and World Report, Kiplinger’s, Investor’s Business Daily, the Wall Street Journal

newspaper, even a national newspaper such as USA Today. I’m looking for those

annual articles on “best places to live” or “hot areas.” I’m also searching these same

sources looking for articles on job trends and industrial trends in general. Where

are the growth areas in the national economy?

Now, I realize I’m using the word “area” in two ways, and both are highly relevant.

If I can find sources that identify a geographical area (“Atlanta is the new, hot growth

city”), that’s a home run. I know if I hear this that I have to take a good hard look at



Atlanta. On the other hand, if I read, “Voice Over Internet Protocol (VOIP) is the

hottest new technology trend,” I want to find out who the major players are and where

they are located or locating to. Once I’ve identified the major players in a hot industry,

what I really want to find is news that one of them is expanding into a new geographic

area and bringing along major employment.

This isn’t as hard as it sounds. With the Internet, we have the world at our fingertips.

The only warning with ’Net data is that you must be careful to check the date

on the information. If it’s on some daily Internet news report, you should be fine. If,

on the other hand, you do a web search, make sure you haven’t unearthed an article

from 1998. That news is way past its expiration date. This is one area (there I go again

with “area”) where sometimes you can be a little better off with a hard copy of a magazine

or newspaper. Much less chance of getting old information there; the dating

tends to pop out at you more easily. Some things you find on the Internet will simply

place today’s date at the top, for whatever reason, teasing you into believing it is today’s

news when, again, it may be an article from years ago.

I can’t over-emphasize the importance of timing on all of this. You want to hear

about hot trends, not old news. I don’t want to know that someone built a big new

corporate headquarters somewhere two years ago—that city is already hot and will

not be at the point in our cycle that we are looking for. It will be overpriced. I want

to know what the “next big thing” is, and where it’s looking to locate.

“The Top Suburbs.” “Best Places to Retire.” Internet search engines like Yahoo,

Google, and AOL toss up articles like these all of the time. Check them out. Not only

investigate the places they are hyping, but find out why. Oftentimes it is in association

with some sort of positive employment trend in the area—even the “places to retire.”

Such a designation may occur because the sorts of amenities that retirees look for—

top notch adult communities, golf courses, spas, etc.—may have recently come into

the area. With that, they attract new residents. With that, these amenities themselves

attract new employment. That gigantic adult community—and yes, some of them

can be like enormous theme parks—needs younger people (with families) to work it.

So even if you find you cannot buy into the big adult community itself for investment’s

sake, the workers from there have to have a place to live, too.



On the other hand, sometimes it’s not a new industry or company that needs to

come into an area, but rather an existing industry that is heating up. Space exploration,

for example, seems to be getting closer to the front burner again in our federal budget,

after many years of decline. That means that companies with a hand in moving that

venture forward will be booming again, possibly expanding their operations where they

already exist.

Realize, these are simply indicators—leads—and you don’t go “all in” simply on

the say so of some list or one newspaper article. But leads are always where we begin.

They point us in a direction to look for further information. The data we find there

may lead us to a dead-end, which is frequently the case. Oftentimes by the time these

lists and articles hit the major media, the cycle there has already peaked. Going in now

would only mean buying at the top of the market—not good at all.

A lot of these lists and other data are based upon median incomes and job availability.

Nothing is worse than high unemployment when it comes to evaluating an

area. High unemployment is the death sentence—although it is a flag to government

and industry to look to such an area to relocate or to develop. When you see

areas like this— high unemployment areas—check back every once in a while. These

are areas of opportunity for industries looking for workers. It is also where government’s

“invisible hand” frequently steps in to try to revive an area, providing incentives to

employers and developers.

For other leads, don’t discount the TV evening news. All the info they may be

able to squeeze into their “sound byte” format may be on the order of “Boeing is closing

down a plant in Such and Such, and moving to an even larger facility in This and

There,” but that’s news you can use and you can follow up by doing some independent

research to get more details.

Key Words

Median Home Price

Once you’ve gotten a lead on an area, one of the first things you want to acquire is

the Median Home Price. City-Data.com is an on-line database that will usually have

this information. The primary source for this data is the U.S. Census, although there



are frequently other entities—sometimes state or county governments—that update

this information far more frequently. That being the case, try to gather more than

one number for this, unless they all seem to be quoting the same figure. Your last

resort—or shall I say you confirming source—should be a local Realtor®. They are

often a wonderful resource, although you may not want to begin with them, since

they are sometimes reluctant to give out “free” information before you make a commitment

to contract with them.

What you are trying to do by getting this particular information is, coupled

with other information, finding out how incomes compare to home prices.

I recently got a “hot tip” about a city in Southern Connecticut. While a lot of

other data pointed to this being a good market (some positive employment trends,

etc.), the average home price was still very, very high. This is not good, especially

coupled with a low…Average Household Income.…

Average Household Income

Average Household Income goes hand-in-hand with Median Home Price. In the

Connecticut city I was turned on to, the median home price was still rather high

(around $250,000 to $350,000) while the average household incomes were rather

low. Put simply, as a market, this means that if you bought a house there, you would

be buying at the top or near the top of the market, while there simply weren’t high

enough incomes for there to be enough renters for you to rent to at the price you

would have to charge. That spells trouble. There’s nothing worse than paying a lot

and getting stuck with a vacant property you can’t rent.

People can only afford to pay about a third of their yearly income on housing.

More than that will choke them. Renters typically will not pay much more than

thirty percent of their income towards their Housing, simply because if they are

consistently late or miss payments they will be evicted immediately. It’s one thing for

a family to choose to undergo that sort of financial suicide if, in the very least, they

are purchasing a property from emotion and growing equity. But to go out on such

a limb simply as a renter makes no sense at all. There are crazy people in this world,

but we don’t bank on them or aim for them with this system. We assume instead that

people are intelligent, rational and sane.



The Formula: Average Household Income is One

Third or More Than Median Home Price

If the median home price is $300,000, I need average annual household incomes of

$100,000 or more in order to feel comfortable buying into this market. This is a quick

and easy mathematical formula to gather together and do literally in your head. If

median home prices are $300,000 and average household incomes are only around

$45,000, this is not the market for you. Smile and walk away. What may disappoint

you at first is that you will find yourself walking away from an awful lot of areas. But

this is what this program is about. This is not about how to take enormous risks.

Using poker terms, I’m not here to teach you how to draw to an inside straight. I’m

here to tell you not to bet unless you’re holding four of a kind.

Again, you will feel frustrated. You got a hot tip on an area. You did your due

diligence and gathered a lot of demographic information. You’ve just read this book

or attended one of my seminars and you are just dying to get into real estate investing.

And then you run the numbers and before you’ve even visited the area or looked

at a single property, here I am telling you to walk away. Just walk away. Because you

can’t make money simply on raw enthusiasm. This is all about numbers. The numbers

either work or they do not. All else is emotion, and emotion is what costs people

money. If you’re gambling, you don’t bet on your favorite team to win; you bet on

the better team to win. That is, if you’re out to honestly make money.

Now, you may be wondering, “If these numbers don’t pan out, why would anyone

consider the area ‘hot’”? The answer is that some people evaluate an area looking

for different things than what we are looking for. That Connecticut city I checked out

was, in fact, appreciating, meaning that home prices were rising. That’s good if you are

simply a real estate speculator. But pure speculation, which we will talk about in later

chapters, is not for the faint-hearted. A pure speculator usually has enough in the bank

so that he can sustain months of carrying a mortgage without a tenant to help him out.

A speculator is looking for that one big hit of buying low and selling high fairly quickly.

And bear in mind—“low” is relative. For a speculator, buying a $500,000 house and

selling it soon after for $600,000 is great. But you can’t buy and hold—rent—a

$500,000 home. There’s no market for that. You will hardly ever find an area of the

country where people will pay $5,000 or $6,000 a month in rent. My program is all



about having the insurance of cash flow from renting, and then, perhaps, selling for a

gain.

Now, the one-third formula does not always have to be taken literally. It is, of

course, our very safest bet, but if it’s close, the area may certainly warrant further investigation.

Another example where median home price is $150,000 and median incomes are around $48,000,

that’s getting pretty darn close. In that case I will take further steps to see if I can expect

appreciation in the housing market. If I have good reason to believe that my property will resell at

around $220,000 in two years, for one tangible reason or another, then I’m very, very interested.

We want to get into a market before the speculators can beat us to it. The speculators,

as you will soon find out, are looking purely at home price appreciation. If

they find out that home prices are appreciating at over ten percent annually, they’re

going to jump in. Incomes will eventually catch up, but cycles, you will learn, do not

always go in unison. Home prices may rise faster and sooner than median household

incomes. The two may eventually catch up, but we want to beat the speculators

before they gobble up all the best properties, leaving us with greater risk or perhaps,

even worse, leaving us simply buying at the top of the market with nowhere to go

but down.

I find it interesting to track trends once I’ve identified a market. I discovered one

market once where the median home price was $85,000 and the median household

income was around $40,000. This is a great ratio. A year or so later, the median

home price went up to $110,000, but the income levels remained the same. This,

again, was still a good ratio, but, obviously, not quite as good. Still and all, it merited

buying more into this particular geographic market. This market ultimately

increased one hundred percent in less than three years, although it illustrates what

happens when more and more investors and speculators find out about an area.

Buzz Words to Listen For

Major mention of a new technology or industry should always pique your interest.

Oftentimes, it does not mean a mad dash for buying up a particular geographic area,

but it does merit tracking and watchful waiting.



Green Technology is a perfect example of this. The word is not truly new, but the more

we hear it, the more our ears should perk up. It’s like being in the wilderness and hearing

drumbeats. It begins off in the distance, but since we’re lost, we follow it. As we

get closer and closer, the drum beats get louder and louder. Finally, we’re there, where

the drummers are drumming. In business trends, if we hear about some “new thing,”

we may hear about it once and then never again. Consider the drumbeat in the forest

that we hear and then never hear again. That’s never worth pursuing—if we go

to where we thought we heard the drums, by the time we get there we realize the

drummers have long gone and we’re just wasting time alone in the wild. Economies

work the same way.

Green Technology is something we hear more and more and more about each day. That

means that with each passing day, there is more reason to believe that more investment

and exploration is going into “Green” production. With production comes jobs.

Today, wind farms are springing up in the Midwest, where the wind and land are plentiful.

All of this means good news to you if you have taken the time to find out where these

Green industry-related jobs are popping up. That’s where the people are heading.

That’s where the jobs are. That’s where the houses are that we want to buy and rent

out to those workers.

Tomorrow, there will be another word like “Green” on the nation’s lips. Keep

your ears open. Once you hear it, target it and listen for it again, just like those

drums in the wilderness. The more you hear the word, the more you should be on

the move toward it, finding out where it is, discovering if office buildings or factories

are being built.

News You Can Use To Determine Cycles

Once you’ve found an area where employment is rising and your median home price

and household income ratio works in your favor, there’s little reason to investigate

longer—jump in and get wet. But I believe that an informed consumer is the best

kind of consumer.

A lot of the publications I previously mentioned will also list the rates of real

estate appreciation in an area. Look and listen for that as well. It will help you determine

where in the cycle a place is at when you are getting ready to buy. As I mentioned



before, while there is one absolute optimal stage at which to enter a market, the stage

or two before and after that will also be good bets. But don’t just jump in blindly; find

out. This will indicate to you whether you should plan to be in a market for a significant

amount of time before it will be time to get out (early in the cycle), or whether

you should be thinking about your exit strategy shortly after you have gotten in

(toward the end of the cycle). Sure, it’s great to make money—any amount of money.

But isn’t it better to make $100,000 than $5,000? At least if I figure I may only make

$5,000, I’d like to know it from the outset, rather than start looking up Maserati

prices on-line, only to find out it’s only a pipe dream. Rates of real estate appreciation

help me to understand where I’m at in the cycle, how long I should plan to hold

onto my investment property, and how much I might stand to make if I buy in today.

It may not be a pristine crystal ball, but it’s better than flying blind.

What Rates of Appreciation Am I Looking For?

A good ratio between average household incomes and median home prices will usually

spell “cash flow.” Remember, there are two ways we plan to make money—cash

flow and appreciation. Cash flow is immediate and obvious—if we have $900 in

monthly overhead (mortgage payments, property insurance, property taxes, and average

property upkeep), and can rent for $1,400 per month, we are cash-flowing $500

per month on average (I say “on average” because property maintenance will vary

from month to month depending upon circumstances). This is great. It’s a business

that grosses $6,000 per year, without even taking into account depreciation. By the

way, in case I haven’t already covered it—even though real estate, given an infinite

amount of time, literally always appreciates in value (there’s a finite amount of land

on the planet), on your taxes it is an asset that actually depreciates—the structure

upon the land, but not the land itself. That’s another reason real estate is such a great

investment.

Two big pieces of the cash flow puzzle are household incomes and average home

prices. But for appreciation, I, of course, would also like to know that I can eventually

break out of that $6,000 a year business and make a big hit by selling. I mean,

let’s face it, you can’t retire on $6,000 a year income—that’s below the poverty level.



This being said, when we come into a market, we may find a good cash-flowing

situation, but the average real estate appreciation (the local real estate market) may be

stagnant, increasing only slightly, or may even be dropping. Sure, if I can find an area

where my cash flow analysis is in great shape and it is appreciating ten percent a

year, wild horses couldn’t keep me out of that market. But friends, those markets are

few and far between.

It is far more common that you will be finding areas that are either not appreciating

or are appreciating only slightly. This is not a bad thing. The appreciation will

come. Remember, remember, remember: You are NOT a speculator. You are a real estate buyer and holder.

Tracking Population

There are a lot of ways to track population trends in an area. In this, the Internet age,

nearly every town in America has its own Website. If the town itself does not have

one, the local or local area Chamber of Commerce will have one. One of the most

important things that will usually be posted on these Websites is population trends.

Even Wikipedia, another on-line source, will have a page for literally every town in

America. Population and its trends will usually be posted there.

What I obviously mean by trend is not that you simply learn the town’s population,

but that you have its current (or most currently available) population and

can compare it to a recently previous number. If a small town has forty-five thousand

residents today, but only had thirty-eight thousand five years ago, that is a HUGE

increase. That’s seven thousand more people, in a place where seven thousand is about

one-sixth of the total population. Check that town out! Something’s happening

there!

Some of the better sites really stay on top of this information. If I can find out

year by year population comparison, that’s a home run. Some sites will even give you

employment tracking, telling you the number of jobs in the area. If you can track

that against previous, older information, that’s an incredible plus, maybe even more

valuable to you that population. Whereas population can be deceptive due to family

size (babies don’t own their homes), jobs are what we are really looking for. If there



are one thousand more jobs today than last year, unless we are talking about some

urban megalopolis like New York City, population eight point two million, this is

the kind of increase we are on the lookout for.

An increase in building permits is also a great indicator. Usually if building is

up, it is because demand is up, or about to come up. But, remember this, Builders

in many areas are three to five years behind the market trends. So, if you are dead

on the market or early permits will be low or even decreasing.

You can often get building permit information from the local census. Look for

a five year history. Another good place to gather this information is by calling the

county in which the city is located, or the town itself. Again, local or regional

Chambers of Commerce may also have this data and are, unlike some other sources,

highly motivated to provide this information if they have it. Some may even get it for

you. Chambers are about growing business in an area, and once you become a real

estate investor, you become a businessman, if you weren’t one already. You become a

valuable part of the local landscape, even if it is a place where you don’t even live.

Now, remembering what we said about cycles, we want to buy when housing

inventory is up and sell when housing inventory is down. This may sound like a

contradiction from what we said about building permits. It isn’t. It’s the difference

between investment in the local economy and home ownership. There are often

cases where a builder will plan out a thirty-five-unit development and will be able

to presell each and every unit. That means thirty-five new building permits but zero

percent vacancy. That’s one heck of a hot area. Demand is way beyond inventory.

We are looking to buy in what I refer to as the wholesale market. This means that

I do not want to pay market value for a property. I want a piece of that thirty-fiveunit

development when there are some vacancies, and perhaps one of them is even

in foreclosure. I want some of those units to be on the market for a while. I want them

to have dropped their price because there was no mad rush to their door. I don’t want

to get into a bidding war for a property. If I come into an area and there’s a bidding

war, I’m in the wrong place at the wrong time.

Here’s something that happens a lot and can benefit you. Sometimes developers



will over saturate a market. They know that people are coming in—usually because

of some employment increase. But they get some of the numbers wrong. They build

two thousand new homes when only one thousand new jobs have been created.

Investors seeing, like the developers, that there will be an increase in jobs, will

gobble up those new homes, expecting to speculate on them and flip them for a profit.

Then they realize they calculated wrong. For you, this is good. Now you can buy that

new-ish property for a lower price and rent it. The numbers should now work in your

favor.

Phrases to Look For: Absorption Rate

Absorption rate has to do with the amount of homes on the market in a geographical

area and the actual number of home sales per year. A high absorption rate is bad

for you, the investor, because it means that the market has peaked.

This information is fairly easy to find. You can contact any Realtor or a local

Realtor’s association to find out, on any given day, how many homes are on the market.

You can also easily find out how many homes sold the previous year. If there are

three hundred thousand homes on the market today and only one hundred seventy-

five thousand sold last year, this means that there is almost twenty-one months of

inventory on the market. People will be practically giving their homes away. This is

when you buy. This is a low absorption rate.

Remember, though, that we are trying to track multiple things at the same time.

You don’t want to buy simply because things have hit rock bottom. You may never

find tenants in that market and you’ll have to hold onto that property forever, waiting

to A) get a tenant to help you carry your overhead, B) sell at a profit, and C) sell

at a high enough profit so that all the money you initially lost when you weren’t

able to cash-flow has been made up. This could be forever or maybe even NEVER!

Thus, bear in mind that all of these factors we are taking into consideration in

finding a location meld together with finding the stage in the cycle and determining

that the cycle is, in fact, moving.

I mentioned before that cycles do exist, and that twelve years is a common cycle.

But there are exceptions. Some areas may stay down in the dumps for a very, very

long time. They could take twelve years simply to move from one stage of the cycle

to another, let alone complete a cycle. This will most commonly happen when an



area is extremely depressed. So make sure you never forget the single most important

factor you are looking for first and foremost: employment. Areas with a high

number of jobs are moving in a positive direction.

A question I get sometimes is, “But what if the jobs are in a really terrible area

where no one wants to live?” Good question. There are two possible answers. One

is gentrification. That lousy area may, in fact, because of the influx of employment

become a nicer area. Developers may get incentives to knock down old homes and

build newer, nicer dwellings for the employees. This is good.

In other cases, people may only use the area where the new jobs are as an employment

destination. Thus, you must get out your maps and look at your local

transportation routes. Maybe everyone is now working in Slumville, but they are

all living in and picking up the train to work in Suburbia. If that’s the case, you

want to look into buying houses in Suburbia.

Taking What the Local Area Gives You

I had mentioned before that I usually look for a three-bedroom, two-car garage,

three to ten-year-old home as my guide when I come into an area. This is meant only

to be a guide, not a hard and fast rule.

I don’t love duplexes or four-plexes. Too often they have common area maintenance

fees or shared utilities. They also tend to be revolving doors and I want stable tenants.

This being said, I have to take what a market gives me. Some areas where all the

indicators add up in my favor simply do not have three-bedroom, two-car garage,

three to ten-year-old construction. In that case, I don’t bail out on the area; I look

to see what they do have.

Some areas have nothing but newer construction. New Mexico. So much of this

state was undeveloped until fairly recently. Thus, most of what I will find there will

be new. This is where I am most likely to find that type of property I’ve been rhapsodizing

about. On the other hand, I may not be able to find anything like that in

older areas of the Northeast. There, I may find tons and tons of condos or townhouses.



Or I might simply find older homes. Admittedly, I have some reservations

against homes that are simply too old. There is a reason why the IRS allows for

depreciation on housing structures. They simply don’t last forever. Some folks will

move into them and do massive upgrades—new bathrooms, larger closets, etc., but

there will eventually come a time when the need for major upgrades is so compelling

that it is just cheaper and more practical to knock the whole thing down and start

from scratch. See, while real estate—land—will almost always increase in value, the

structure on the land will eventually lose its value. For that reason, I do get scared

off by, really old, or poorly constructed buildings. While a person may be motivated to do major

upgrades if they were living there, only a fool would invest that kind of money into

rental housing. You would have to hold onto it for decades upon decades to recoup

that sort of money. I believe in buying and holding, but not buying and hoping I

don’t die of old age before I can sell at a profit.

Let’s talk again about the overall quality of the area. This may again sound a little

contradictory, but it’s not. You are going to be buying where people tend to rent.

Say that to yourself a few times. Think of some really gorgeous neighborhood where

everyone takes great care of their property. It could very well be a very old neighborhood.

But if people are all taking great care of what they have; if every lawn and

garden looks like a pretty picture, there is almost no likelihood that there are renters

in that neighborhood. Why? Because renters do not invest that kind of time and

money into something that they do not own. And landlords do not invest that kind

of time and money because it would make them unprofitable.

You must take what a local market gives you; specifically, you must take what

the local rental market gives you. This means that the neighborhood will not be that

great. The lawns will not be plush. How bad is bad when it comes to a neighborhood?

Cars up on blocks in people’s front yards are okay. Cars burned out and blocking the

street are not okay. It’s all a matter of degree.

What kind of houses are in the “rental neighborhoods”? If I’m in New Mexico,

it could be my three-bedroom, two-car garage, three to five-year-old construction.

If I’m in Boston, it is more likely to be an eighty-year-old, three-story brownstone.

You don’t want the areas that will never be nice again. I know, it’s a fine line, but you



have to think things through and yes, even if you are investing a thousand miles

away, you really should take a look at things with your own two eyes in order to

make a proper assessment. Again, you must take what the rental market gives you,

provided that all of your other numbers work.

More often than not, this program will direct you more toward smaller towns or

suburbs. Inner cities often do not work out well. I would think twice about buying

there. You want families. Families are more likely to stay with you for a few years.

Singles are more transient. Singles will be more prone to inhabit the inner city, but

only for a short time. Once they decide to become a family, they want to get further

from the city.

One of the best types of areas I’ve had good luck with are suburbs that have

been left for nicer, newer suburbs. You’ll see these all the time. Some other suburb

got hot and everyone from the first suburb moved out to that one, leaving the other

suburb behind. What’s good about this as far as you are concerned is that this is

now your land of opportunity. The basic housing construction is still meant for families.

You will likely not be in the eerie shadows of an abandoned factory. What will

happen is easy to visualize. Once more jobs come into this general geographic area,

some will find nicer housing in that hot, newer suburb we just talked about. The overflow—

and there will be overflow—will end up filling up the older suburb. That’s

where you’ll be. That’s also where the renters will be. There will probably not be any

rental units in the hot new area. Rentals will be where you are. That’s where you

want to be. That will be the revitalization of your area.

Here’s something you’ll hear sometimes when you get around to speaking to a

local Realtor®: “Oh, you don’t want to buy there. That’s all rentals.” Laugh. You

should. A line like this is actually music to my ears. I want to be where the rentals

are. If I were to buy some mansion at a foreclosure sale, its price would still be so high

that I could probably never rent it. Thus, I would definitely be speculating, which

is not what this book is about. The neighborhood with mansions will not have any

rentals. I need to be where there are other rentals. It doesn’t have to be all rentals,

but yeah, I expect some other rentals in my general area. This tale also exposes the

fact that most agents do not understand real estate investment. They are primarily



tuned in to putting people into homes in which they plan to reside. I am not going

to reside in these houses. I am going to rent them. If at some point down the line I

sell the unit to someone who wants to move into it and live, God bless ’em; it’s his

to do with whatever he or she pleases. But this is another reason why you should never

mistake your agent for a financial advisor. That’s not what they do.

What areas have the greatest movement during their cycle? Older, inner city

areas stay pretty stable all of the time. In a recession, they drop, but not in as high

a percentage as a suburb. A suburb might drop forty percent in value during a recession,

but the inner city will only drop fifteen percent. This also means that when

things get back on track, the inner city might rise twenty percent, for a net gain of

five percent, while the suburb may rise sixty-five percent, for a net gain of twentyfive

percent. But the net gain is not the real issue. If you bought at the bottom of

the market, you are only concerned with how high it rises. Rising sixty-five percent

is better than rising twenty percent. Buy in the suburbs.

Would you believe that areas where there are a lot of rentals have some of the

most highly motivated sellers? It’s true. And a highly motivated seller is what you,

the buyer, are looking for.

Areas to be Wary Of

There are lots of incredibly varied areas within our country. You might think that

everything is either an urban area, a rural area, a suburb, or a small town. In reality,

there are dozens upon dozens of other variables that are out there.

I’ve already said that I’m not a big fan of inner city areas. Sure, there have been

some success stories across the nation, but I have found it is just more difficult to

cash- flow on inner city single family housing.

Some urban areas go through redevelopment. That’s great. This should occur. But

it doesn’t necessarily produce housing units that will work well for you.

Developers are also redevelopers. Redevelopment, though, has a lot of different

issues. For one thing, redevelopers tend to want to go out of their way to get all of



the profit they can out of the acreage, more so than a developer using open space.

This is because of the tendency for inner city areas to turn bad again after time.

This is also a peril for you. Rarely will you be the first buyer of new construction and

get a really good deal. You will be paying “retail.” With this system, you want to be

buying “wholesale” —below market pricing. Thus, by the time that redeveloped

area starts turning over and some units come on the market at below market prices,

they will be below market because the area has lost the buzz from the $40,000 a

month advertising budget. It’s a lesson in economic psychology. A small town can

rise and fall, rise and fall, rise and fall again, without the necessary need for new

housing construction. An inner city will usually need redevelopment—lots of money

pumped into it—in order to rise again after falling. That influx of investment means

high prices for you to buy in. You won’t cash-flow. You won’t hold and appreciate.

Another area to be cautious about is a one-industry town. What do you think

would happen to Los Angeles if the entertainment business got up and left? It would

be a ghost town. Now, that’s an extreme example, and entertainment is a very varied

industry. But think of towns where there is one major employer—say some big

pharmaceutical company. What happens if everyone in town is employed at that

pharmaceutical company and that company has a really bad year? Maybe they got

slapped with some hellacious lawsuits or got beaten to the market by some competitor.

Crash! If their stock drops fifty percent, they may lay off half the town.

Crash! No employment, no population, no renters. Crash!

This is some scary stuff. If I have a choice, I try to avoid a situation where the

entire local economy is based upon one company. It’s too precarious.

Population Growth is What Will Sustain You

You feel you’ve identified an area. You feel you’ve identified the right stage in the cycle.

You feel you’ve picked the right property. If you’re like a lot of people, you may still

be hesitant. Okay, calm down. Let me give you a security blanket.

The most important thing, the thing you must cling to as you are trying to muster

the courage to pull the trigger and buy your first investment property is population



growth. You looked at a lot of data, but this is the one thing you should go back to

again and again. A lot of people will say to themselves, “Sure, the numbers work out

today, but how do I know I’ll have renters six months or a year from now? How do

I know that with my next lease, I will be able to hang onto my tenant or get a new

tenant at the same rent? If my rent decreases past a certain point, the numbers no

longer hold up.”

This is a realistic concern. My comfort is gained by double and triple-checking

that I picked an area where population was growing. If that is the case, my rents

should hold. If I glossed over that piece of data, then yes, I have reason to worry. For

every worrier, there is a lazy optimist. That’s the person who glances at a number or

two and is so excited to get into a market that he doesn’t look at things thoroughly

enough. That’s the person who isn’t really sure that population and jobs are growing

in an area, but is so confident that they will that he goes into an area anyway.

That person is relying too much on luck and not enough on economic analysis.

Something else to bear in mind is that we are not buying to hold forever. In

later chapters, I will talk you through your exit strategies. You may be holding a

property for three, five, seven, or ten years, maybe even longer. If things radically and

unexpectedly turn downward on you, or a storm is brewing on the horizon, you

may only have it for a year or two. So don’t worry about what the area will be like

in twenty years. You probably won’t own that same property that far into the future—

although, if conditions are right, you may choose to.

Another tangential worry is, “What if I can’t find a tenant and my property is

vacant for three or four months?” Yeah, I’d worry about that, too. This is again why

you must be careful in identifying your area. You can’t cut your numbers too close

and you can’t be arrogant about your rents. You may think you can get $1,400 a

month; you may have found similar rentals in the area getting $1,400 a month; but

if you can’t get a tenant at that rate, it is better to get $1,350 and have it rented than

stick on $1,400 and be vacant. Thus, your formula for cash-flowing should work not

only at your target rent but at some lower rental points as well. If I was hoping to

cash-flow $200 per month and I can only cash-flow at $150 per month, that’s a lot

better than paying the overhead completely out of my own pocket.



Population growth will only occur with increased employment. Increased

employment drives your local economy.

Volume

Another factor in choosing your location and determining your stage is the volume—

the number—of properties on the market. If you only find one property for sale,

even if the other numbers work in your favor, you should be wary. A truly good market

is a vibrant one. There should be a lot of properties changing hands and there

should be a number of renters in the neighborhood that you are considering buying

into. Otherwise, you may have simply found an anomaly. While that anomaly may

work for you on one level, it may not over the long run.

This sometimes happens when there is simply one distressed sale available. Sure,

you can buy this one property at a below-market price, and you may even be able

to rent it at your target rate. But if there are no other investors in that market, it is

doubtful this situation will sustain. You may have to get out earlier than you had

planned because you deluded yourself into believing you had found a trend when

all you had found was one single investment opportunity. It is the same concept

that stock investors consider when they look not only at stock prices—rises and

falls—but at trading volume. Heavy trading volume is good. A stock simply going

up on a given day without heavy volume is not as desirable.

Remember the basics of your cycle. We buy when there is a large inventory of

properties for sale. If that is not the case, we are misreading the stage the cycle is in.

Another thing that is driven by volume is employment. When we look at an

area, we want to open up the local daily newspaper and see a TON of employment

ads. We want to see those ads screaming out that they will do whatever it takes to

get employees. We want to see words like “signing bonus” and “relocation allowance”

or “housing allowance.” This means that there are more jobs than people. When

the volume of jobs exceeds the volume of workers, more workers will soon flood the

area. New workers to the area often rent first before buying. This is what we want.

Open up the local newspaper and look for a heavy volume of real estate ads as well

as a heavy volume of employment ads. If you find those two things, you’ve gotten



the right stage of the cycle. If one or the other is small, you may be too early or too

late.



Speculator’s Spike

During Stage Seven and Eight large amount of Speculation cause a peak in the market

called The Speculator’s Spike. The Spike occurs from the last minute increase in

volume into a market usually caused by inexperienced as well as some experienced

investors purchasing multiple properties. As you can see in the diagram at the beginning of this

chapter, the last few years appreciate rapidly due to the increase in volume, multiple bids, and

wait-lists. When logic is removed from investing, a feeding frenzy often occurs, thus

overpaying is commonplace. Then when the market corrects due to falling rent and

the inability for employment to keep up with the rising cost of housing, the overpaid

prices punish the late arrivals. You will lose fifteen percent to twenty percent of

what I call “fluff ” after the Speculator Spike. Fluff is just what it sounds like; it is fan-

tasy—unreal numbers where people are chasing after imaginary fiscal ghosts. Imagine

two crazy people at an auction, bidding up and bidding up some worthless piece of

crap. Is the thing they are bidding on really of that high a value? On one hand, yes,



because these two yahoos are willing to pay that much for it. But the reality is that

outside of those two guys, no one else accepts that what they are willing to pay is the

true value of the object in question. When the same thing happens in real estate—

and it does all of the time—you get a Speculator’s Spike.

An example of pure speculation is when you buy a property in an area that is

appreciating enough that the negative cash flow from rents does not really hurt you.

Example: I bought a home in Grand Junction, Colorado, for $173,000. It only rents

for $1,300 because the median income there is $42,000 per year, so I am negative

about $200 per month on it—I cannot rent it so that it cash-flows, and so I am

reaching into my own pocket each month for about $200—but it has been appreciating

fifteen percent per year. I will track the trends and plan on being out of that market

ASAP. At that time, I will be taking a small profit, but I won’t be in long enough to lose money.

Remember, don’t be greedy; be conservative. The idea here is that losing $200 per month

translates into losing $2,400 per year. That’s not a lot of money. If that property is appreciating

ten percent per year, depending upon what I originally paid for it and how long that appreciation

goes on, I could be cashing out with, say, a $25,000 profit. Wouldn’t you give away

$2,400 in order to make $25,000? Of course you would. But only if you knew what

was going on and knew that your $2,400 would turn into $25,000! That’s why you have

to learn this stuff before you go off half-cocked.

The Speculator’s Spike is fool’s gold. It is an insane market that will cause you

to sail your financial ship into the hull-ripping reefs of reality (don’t you just love my

metaphors?). Properties that go up twenty percent or thirty percent in a matter of

months are not the product of marketplace reality. It is artificial; you must always

remind yourself of this. If you get caught up in it, keep your head, take profits, and

get out; get out today instead of tomorrow. It is the fools who will stay in the market

and keep buying and buying, thinking the markets will never correct. But markets

always correct.

When markets get so crazy that there is a Speculator’s Spike, you should be a

seller, not a buyer. The people getting into a market and driving the prices sky high

are amateurs. It is Joe Blow who never invested in real estate before. He sees properties

going up, up and up, so he thinks he can grab one and make big bucks. Don’t



be that guy; sell to that guy. He’s what is causing the Spike. Take his money from him

and run.

Where Does Speculation Fit In?

So when it is all said and done, Speculation is the putter in our golf bag; the smallest

club that we only pull out at the point of the End Game. As the cycle goes ’round,

right before the cycle goes completely bad there is the opportunity for Speculation,

and, if you are feeling frisky, you can get in on it. The key here is to understand that

you really are at the end of the good part of the cycle and that you must get out

quickly, taking some profit with you. If you can cash-flow a speculative property for

a short time, that’s great. But there is something seductive about having a tenant carrying

your load for you. You can start to believe that tenant will always be there for

you. You get complacent. The problem is, a tenant can pick up and go at almost any

time. When cycles get bad, it may be because employment is drying up. Your tenant

may lose his job or relocate and he will disappear on you while you are thinking that

everything is hunky-dory. Then, exposed to the elements of the real marketplace, you

suddenly see that your tenant was shielding you from the fact that you should have

dumped that property months ago; maybe even years ago. Now that he’s gone, you not

only can’t get a new tenant at almost any price, you also can’t sell your property unless

you drop your asking price down into the gutter where you will lose your shirt.

Speculation is a high wire act and you must, must, must know when you are in the speculative

point in the cycle so that you are already planning your exit strategy almost from

the moment you close on the property. Speculation is a quick hit and run. Greed and

complacency are your enemies. Greed will also make you hang on too long, thinking

that if you wait just three or four more months, you will make another $10,000. Hey,

if you can get out with, say, $60,000 in profit today, don’t kick yourself if you find later

that you might have been able to get $70,000 had you waited a little longer, because

right around the bend from that $70,000 profit might very well be a situation where

you’d be on the market for eight or ten months and then selling at a loss. Always study

the cycle and if you know you’ve bought during the speculative time at the end of the

good times, take that profit when you see it and run with it. Get out while you still

can and cash that check before it bounces.



Exit Strategy

Okay, there is one more important talent for you to master before you put it all

together and make this program sound like a fully-integrated symphony of personal

profit: How to get out.

Yes, as we discuss cycles one must realize that there is a time when it is most prudent

to get the heck out, cash in and take some profits—or reinvest elsewhere, which

we will also discuss.

You might be thinking, What is so challenging about getting out of a market? Isn’t

it as easy as putting up a ‘For Sale’ sign? Well, yes and no. It is knowing when to get

out, knowing why you are getting out, knowing what you are getting rid of and



what you are keeping, and yes, knowing how to get out, which is more complicated

that one might at first imagine.

Exit Strategy: When?

We have studied the cycles and we should have an idea from what we have learned

in order to know when the time to start unloading properties is. On the other hand,

sometimes it is challenging to know exactly where we are in the cycle at all times. Sure,

if I lay it out for you in nice bright colors on a graph, anyone can figure it out. But

real life isn’t like that. We see some things, we hear other things, and the media tells

us conflicting information from time to time.

I’ve found that the single best way to know that it’s a good time to sell properties

is when people are banging down your door offering to buy your property. This

is a “dummies” method for judging when you are in a “buyer’s” market versus a

“seller’s” market. When this begins to occur, you may start to feel that it is too early,

that there is more money to be made if you wait a bit longer, maybe a lot longer. In

fact, when I give seminars, I tell my audiences that this is the single toughest thing

to do because it truly runs contrary to human nature. When people are banging

down your door to buy your property is when all the media will be telling you that

the real estate market is turning cartwheels and money is being made hand over fist.

Why on earth would a sane person sell at a time like that? Easy. No run lasts forever.

Make money when there is money to be made. Don’t get greedy. That’s the toughest

lesson—we are all greedy by nature, whether we like to admit it or not.

The other thing we must look for are the rents. These are things we have at our

fingertips—we see them with immediacy because they are right in front of us. Our

property manager—if we have one—can tell us if the market appears to dictate that

we can increase our rents or that we must decrease them, depending upon what they

are seeing with other properties. Property managers are a great resource for current

information because even if we do not have a vacancy or a lease coming up for

renewal, a busy property manager probably has some other property that very month

that is going through a changeover. Keep up a good relationship with your property

manager so that you can constantly pick his or her brain for this sort of data.



Bear in mind that population charts and employment statistics are very often way

behind the times. Things change quickly and an upswing in population that is not

reported until twenty-four months after it has occurred may be masking a population

decrease that is occurring right now.

So theoretically here we are in what one might refer to as a real estate “bull market.”

We will imagine that properties are increasing in value by ten, twenty or maybe

even thirty percent per year. As for rents, for as much as people are lining up to buy

our properties, our rents may actually be going down. These things will almost always

go hand in hand, as we have illustrated in past chapters. Thus, if no one is actually

knocking on your door to buy your property—because people don’t necessarily tend

to do that with properties that are not, in fact, on the market—we can certainly

track rents. Once we see that it is getting harder and harder to rent our properties,

we should check with local real estate agents to see how sales are going. Look for comparables

that have sold very recently. By doing so, we may suddenly see that properties

like ours are going for a greatly appreciated price.

There is also the issue of “quality” of tenants. This is not meant to besmirch the

reputations of specific individuals who wish to move into your properties, but the more

renters there are, the more people line up for any one rental slot. You, as the landlord,

get your choice of tenants. I have previously said that your best long-term tenants are

often families. When the rental market begins to dry up because your past renters

became home owners again, those families are no longer filling out rental applications.

If we are running credit checks, our potential tenants are now more likely to have long

term abysmal credit profiles. If and when we call previous landlords to check how they

feel about these people as prior tenants, they are more likely to tell us that they would

not rent to them again if given the chance. These things should be like red flashing

lights, telling us that it might to be time to begin selling properties.

At the point at which you begin to notice these red warning lights, there are

eighteen to twenty-four months left in the “good” part of the market. That’s how

much time you have to get out. Stay in longer and you will have stayed in too long

and you may begin to lose money. Get out too soon and…you’ll be fine. Again, this

is the toughest thing for me to convey to people. If you sell now, you will make a



profit. If you wait, you may make an even larger profit, but your risk goes up. I say,

take a nice-sized profit and live to fight another day. Win small time after time,

rather than always looking for the home run. Don’t kick yourself when your neighbor

sells twelve months after you and makes twice the profit that you did. Never look

back; always look forward.

Also, understand how these markets work. We know all about market stimuli.

When real estate values skyrocket, lower-wage workers will start to get locked out of

the market. They, in turn, will complain to employers for higher wages, citing the

inability to be able to live in this market area. You cannot work for $2,500 per month

if housing alone runs in the vicinity of $2,000 per month; you wouldn’t be able to

drive a car or eat. If wages go up in order to match housing costs, large employers

will begin to look around for areas in which to relocate in order to get cheaper labor.

Workers will then be forced to either move to these new “boom” areas or…things

will get very bad for them. This defines a recessionary scenario. You must get out

before a recession hits. Remember— we buy as an area is coming out of a recession,

not going into one. You must sell many or maybe even all of your properties before

you, too, become a victim of this sort of market shift.

As bad as some of these signs sound, what will be deceiving is that speculators

will sometimes still be flooding the market because real estate sales will still be increasing.

A speculator only tracks real estate sales. They do not care about other market

issues such as rents or employment. If a four-bedroom, three-bath colonial went for

$400,000 last year and goes for $500,000 this year, that’s all they care about. Many

of them are buying blindly—getting this kind of narrow data from charts and reacting

like a financial SWAT team. Great for them, but potentially confusing for you.

In order to keep your eye on the ball, simply keep apprised of what I’ve taught you:

Are the number of renters drying up and are real estate sales appreciating? Once that

occurs, put properties on the market.

But Which Properties Do I Keep (Buy and Hold)?

As you will see when we put this whole plan together and as I have inferred in the



Buy and Hold chapter, there will be some properties that we will keep forever—or

what passes for forever. In other words, in some cases we would like to position ourselves

to own some properties long enough to pay off their mortgages and then make

much larger monthly incomes from them since we no longer have mortgages to pay.

So how do you decide which is a “sell off ” property and which is a keeper?

First off, don’t feel the need to keep any property that does not merit keeping. Even

when, in the next chapter, I am telling you to buy five, say, and then after a time sell

off three, if you cannot find any that are truly worth keeping, sell them all off, take

your profits, and ask for a new deck of cards. Ever play draw poker? The rules state

you can only draw a maximum of three cards unless you have one ace and then you

can draw four. Well, in real estate, you can draw all five if that is what is most financially

prudent. I would rather you pay attention to the rules of this chapter so

that you can never be saddled with a property or properties that will break you and

ruin everything for you. Take profits!

When population decreases, rents will come down. When market stimuli leaves,

so do people and so do rental dollars. When the rental market gets worse, the renters

get worse. The higher your rents, the worse your tenants will be; you will only get

people who may have money, but they are otherwise completely undesirable—I’m

talking property trashers, partiers, criminals, etc. If you lower your rent, you may be

able to improve the quality of your renters (strange concept, but true), but you must

still be able to make a profit. Once things gets really bad, even at a lower rent all you

will get are terrible renters. And so you drop your rents again. Eventually, there may

come a time when your rents dip below your break-even point—even to get a bad

renter. When that happens, you really have to dump that property; in fact, you probably

should have dumped that property a long time ago.

BUT…(big but) not every property will drop that badly at any point in the

cycle. Yes, some properties will make you have to drop your rents, but they might

never drop so low that you are not able to pay your mortgage. If so, that is a property

you hang on to. Even if at its lowest point it simply breaks even for you; that’s

a good thing. What you don’t want are losses.

The problem is that most of these losses are what we call “slow bleed” losses.



Maybe your rents are exactly even with your monthly expenses. But what about

property maintenance? The toilet breaks and you have to invest money into it. Now

you’re operating at a loss. We know from the outset that things will break; we know

that eventually major repairs will be required such as new roofs and new siding.

Things do not last forever. But the real slow bleed is when you are losing $50 or

$100 per month, every month. You mentally write it off because it really doesn’t

amount to a whole lot, but you must still look at your overall financial picture. How

badly is that one property dragging you down? Does it appear that it will turn around

within some reasonable amount of time? Can your other properties carry it for a

while? You must still look at all of your market indicators to make these judgments.

But remember—look with your head, not with your heart. Don’t fall in love with a

dog property.

Here is the best property to keep: Your break-even point—your monthly overhead

—is, say, $800 per month. Perhaps you initially were only able to get $900 per month

in rent. As you held and the cycle turned ’round, you eventually and gradually increased

your rent to a high of, say, $1,400 per month. This is good.

Now the cycle continues to turn and your rents drop. But they do not happen

to drop to or below $800—they only go to a low of, say, $1,000. Now, this is a

major drop, both in dollar amount as well as percentage, but if even at your lowest

point you are still cash-flowing, THIS is the property you Buy and Hold. You will

probably live to see those rents go back up to $1,400, maybe even beyond.

Furthermore, your property will be appreciating in value from what you bought it

at and as you pay down your mortgage as well, you will get more and more equity—

the definition of wealth.

And what makes all of this happen? Buying the right property at the right time

in the first place! And so the decision of what property to keep is almost like a fate

that has been sealed from the moment you bought the place. If you bought a property

that once went for $300,000 but has now dropped to a wholesale price of

$100,000, as it goes up and down and up and down throughout market cycles, you

will still probably always cash-flow. If, on the other hand, you bought a property that

once went for $300,000 and you got it for $265,000.—So what? This property will



probably go through fluctuations where it will hit points where it will not cash-flow.

You bought wholesale rather than retail, but not by a large enough margin.

A formula I like to run is to see if I can cash-flow if my rents were to drop by

twenty percent. If so, I am probably good to Hold. It is usually rather unlikely that

rents will go lower than twenty percent. If it looks like that will happen and if it

looks like you can dump the property and not lose money, then dump, dump, dump.

But figure that a twenty percent drop is usually the worst that you will have to sustain.

If, when you run this formula, you see that twenty percent will take you below

a point where you will cash-flow, then look at this property from the start as one you

will most likely not hang on to for a long time. Watch for its appreciation and then

sell when the time is right.

Properties that are not performing need to be sold off as soon as they can be sold

off at a profit. Properties bought during the speculative period need to be watched extra

carefully because we knew going in that these would be quick hit and run deals.

When it appears that they have appreciated enough that we can get out with a nice

profit—get out.

As you analyze the market cycle, you will probably come to find that the first properties

that you bought—the ones you purchased right at the bottom of the market

when the rents were the highest and the purchase prices were the lowest—those will

probably be the only properties you keep. They will be your Buy and Holds. Almost

everything past that little window you will most likely sell at a profit and forge ahead

into new and different properties. The idea is that you will buy low and sell high and

then take that money and do it again. When it works right, you will be buying one

property, watching it appreciate while it cash-flows for you, then you will sell it and

perhaps make enough to buy two other properties from what you made from that one

property. The idea is to grow your real estate empire—you want to get bigger and bigger

and bigger, giving yourself lots of equity and personal wealth—and this system

will help you to make that happen.

Benefits of Nearby Properties

I’ve been preaching that you should be comfortable buying outside of your locality.



But when it comes to deciding what to Buy and Hold and what to sell at the height

of the market, properties close to where you live or work have a certain advantage.

For one thing, you can save money and make them cash-flow better by managing

them yourself. You can’t do that with a property three states away. For that reason,

I tend to advise investors to think “Buy and Hold” more with nearby properties

than with properties farther away.

Remember the Tides

Remember what we said about how real estate constantly pushes out from an urban

or employment center, mimicking high tide and low tide. What we’ve also discovered

is that the properties closer to the “bull’s eye”—that center—will be our best

Buy and Hold properties. They will not likely appreciate as greatly as those newer

properties out on the perimeter, but they will be less likely to lose their value below

a certain point. Their swings during the best of times and the worst of times will be

narrower and thus easier to prepare for and deal with.

There are an awful lot of ways in this world to make money. The most basic is to go

out and get a job. But what most of us do not comprehend is that someone else

woke up one morning and created that place of employment where other people

got their jobs. Someone did not think to “get a job,” because if everyone did that,

who would hire these people? Someone instead woke up and decided to create a

job.

Some people also march to their own drummer by making what I like to call

“passive income,” a term I’ve used throughout this book. These are people with

jobs— jobs they themselves created or where they work for someone else—but they

also have this “side business.” It can be something as slow to grow as a bank savings

account, or it can be something as aggressive as what I’ve taught you about in this

book—investing in real estate. There are also a million other things in between—

playing the stock market, selling things on eBay, whatever.

The thing is, nearly every single one of these other forms of passive income

involve taking money and using it to hopefully grow more money. It reminds me of

an old saying: “Do you know the easiest way to make a million dollars? Start with a



million dollars.” The point is, once you have a million, there are a lot of simple,

fairly conservative ways of eventually doubling that money and making a second

million. But doubling nothing equals…nothing. The concept is predicated on you

first having a million dollars. Is that you? Perhaps not.

You can get all the stock tips in the world, but if you have no money with which

to buy stock, the information is useless. Literally every other way to make passive

income involves investing money in order to try and grow that money. If you don’t

have money to invest, you are left forever on the sidelines of life…except for real estate

investment.

Despite that, the world is full of financial advisors and stockbrokers. God bless

them, they serve a very important need. But what about advisors for real estate

investors? They hardly exist.

Real estate agents, brokers or Realtors? By and large, this is not within their job

description. In some states, they are actually warned that they can get into a lot of

legal and ethical trouble by even discussing property investment and property appreciation.

They are supposed to present properties, help you make bids on properties,

help you list properties for sale, and advise you on how to get the best price for your

property when you go to sell it. Very little of this has anything to do with my program.

I believe that in the future there will be real estate investment advisors the same

way that there are stockbrokers. Have you ever gotten a call from a stockbroker touting

a hot stock? I believe that in the future, your real estate investment advisor will call

you up and say, “Tony, you really ought to look at these properties I found in Oklahoma

City. The market there is perfect right now. Today is the best time to get in.”

By now you have finished reading this book—unless you just skipped it all and

started reading from the back forward. You’ve learned an awful lot. The thing is, I

know a lot of people who invest heavily in the stock market and who also have a lot

of things going with their financial advisor—things like IRAs, 401ks, mutual funds,

treasury bills, municipal bonds, etc. Some of these people are doing better than others.

The ones who are doing the best are the ones who made a point of learning



everything they could about the kinds of investments they entered into. Sure, they

may have left the day-to-day charting to the guys who do nothing but chart things

all day long, but that doesn’t mean that they gave up all control and responsibility

to someone else. If they got a hot stock tip, they probably put the guy on hold and

then went to their computer and checked things out for themselves. That’s a good

thing to do, but only if you know where to look and know what you are looking at.

Thus, these smart guys have also picked up a few books along the way so that they

can fact-check and double-check what they are being advised so that they don’t make

a bad move.

The reason I bring this up is that I envision a day when people give this sort of

advice in the area of real estate investment, perhaps even creating “one-stop shopping”

for real estate agents, property managers and so on. Imagine that real estate

advisor actually being the person you call when there is a repair problem at one of

your properties in Oklahoma City, instead of the actual property manager. Some

property managers are notoriously hard to get a hold of. If you’re working for a living,

you can’t keep calling and calling this property manager all day long; it will

distract you from your job. But your real estate advisor could take care of all of this

for you. The same goes for finding a real estate agent a few states away and so on.

BUT…you should still read this book. A professional advisor can lighten your

load quite a bit, but nobody loves you like you love you.

I was chatting with a guy the other day. He told me that he knows how to change

a tire, but since he belongs to AAA, he rarely ever does change a tire if he gets a flat.

“Sure, if I’m stuck in the middle of nowhere late at night and my cell phone has no

bars I can change it myself, but otherwise, it’s a quick call to AAA and I let them do

it for me.” I believe the future may be something like that. AAA exists because of people

like my friend. In America, there are people who make a living doing every single

thing that someone else might not want to do for themselves. Don’t want to walk

your own dog? Hire a dog walker. Don’t want to go to the store for yourself? Hire a

personal shopper.

Time is precious, but I believe that every minute you spent reading this book



has been invaluable to you. Now you know how to become a millionaire in five

years. Your only anxiety might be the time involved in all of the research and fact

checking that I’ve suggested. That is why I believe that people will start springing up

to fill this niche, which is something that I have already done. Check out my Website

at: www.awsre.com. In the future, I also believe that the Internet will continue to change all of our

lives. Right now, buying real estate outside of our home locale is still something that

gives potential investors anxiety; I know, because I hear it every day. I think the ’net

will begin to accommodate those anxieties and assuage them. More and more real

estate listings are being made available via video file. The next step from there—

which is already underway—is a full-fledged narrated video where a real estate

investment counselor walks you through the property and not only points out the

benefits and issues of the property ala a regular real estate agent, but also discusses

the investment numbers and takes the camera around, showing you the neighborhood

and the centers of employment. In short, I envision full-fledged infomercials

for individual investment properties, touting all of the information needed for an

investor to make an educated decision about investment property purchases.

Further on down the line, I see a time when real estate is traded online similar

to how stocks and commodities are traded on e-trade. I believe that investors and

speculators will be as aggressive and informed as all other kinds of investors. With

the exception of big commercial properties, real estate investment has for very long

been a “mom and pop” venture, where a person gathered together some money and

bought one house that they rented out—Buy and Hold. The concept of Buy and

Hold, I believe, will continue on forever, but the “mom and pop” aspect of it will

be replaced with greater sophistication and education, with investors such as yourself

doing it in much higher volume. And again, I see the Internet Age making the

world grow smaller and smaller, as the idea of living in San Francisco and buying

property in Wisconsin becomes less and less strange and unmanageable.

Education, such as what you have learned in this book, will be the key to success

in this new age, as will professional facilitators such as myself who will help take

some of the grunt work off of investors’ shoulders.

In conclusion, there is simply no better investment than real estate. Only real



estate enables you to invest without already having large amounts of money, yet

through prudent investing be able to make a million dollars in your first five years.

I hope you have enjoyed this book and that it has inspired you to roll up your sleeves

and begin grabbing your piece of the American dream. Best of luck.

finding the next hot market

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