Because of the dot com bubble bursting in the late ’90s and the housing bubble bursting back in 2008, real estate investors are always concerned about bubble-proofing their business. Of course, as I write this, it’s 2018, and the bubble’s cycle is eight to twelve years. So we’re right in the middle of that window and concern is warranted.
There are two questions I hear more than anything else:
- Do I need to wait until the bubble pops to get into real estate investing?
- Do I need to change my current strategy to bubble-proof my business?
The first one is easy to answer. At the end of the day, nobody should wait. Would you rather get your major mistakes out of the way before housing becomes cheap? And with buying now, if it’s a good deal, it’s a good deal.
But the best way to bubble-proof your real estate business is to understand the three types of real estate investing and be sure to transition with the market. Don’t be static with your strategy.
Type 1: Construction and flips
Building a house is extremely market dependent. There are a number of factors, including materials, cost of land, and the market price of wherever you’re building. Of course, there’s a lot of money you can make building houses, which a lot of people do when the market is good.
Flipping a house is a high risk, high reward type of business. In some markets—California comes to mind—you can buy a house, hold onto it for two days, then sell it for a $30K profit. However, you can also buy a house, wait two days, and it loses $100K in value. Then you’re probably in trouble!
The key with both construction and flips is to be sure you have enough money to cover yourself even if the house doesn’t sell.
Type 2: Rentals
Rentals are slow but long-term money. It can be fairly passive income, which is great. It provides more security than the other types of real estate investing but also comes with fewer short-term rewards.
If you enjoy the other types of real estate investing but want to have some stability as well, then renting is a great option.
Type 3: Wholesaling
Wholesaling is when you put down earnest money to buy a house, then you sell the right to buy that house to someone else for a higher amount. It’s typically a riskier investment than real estate agents would work on and you’re usually selling to someone who’s willing to do a lot of work to the property.
If you’re worried about the real estate bubble popping, don’t put all your eggs in one basket. Make sure you have options. Have a strategy going into the deal, and be sure you can make money when you buy, not later.