The Economic cycle plays an important role in real estate investing. The idea of an Economic cycle is simple. It states that what goes up must also come down. Although housing prices and real estate in general have had an overall increase in value for a great many years and there is confidence that the market will never crash completely. This has led many investors to consider real estate investment a secure thing, and their strategy is usually based on the long term potential of the investment. In other words, buy property and hold on to it until the profit you seek can be realized.
Although this strategy is not really bad for the long term investor, it will not enable him to realize the type of return that is possible when investing in certain profit rich areas such as Utah real estate. The cyclic nature of the Economic Cycle presents a danger that the market will be on a downswing when you are looking to unload your investment and the years taken to reach your goal might tie up your investment capital so that other opportunities are missed.
In an area such as Provo real estate, where profit potential is so great because of the attractiveness of the area for investing in properties that can be converted to rental units, the hold on to it strategy is a poor choice for the investor who wishes to make a solid return. There are other strategies that make much more sense. Even the Bargain Purchase strategy is better. In this concept, only properties that can be purchased at below 20% their true value are considered. The 20% figure allows the property to be returned to the market at once at its full value.
Another strategy that is related is the Increased Value strategy. This is going to be more likely in an area such as Provo real estate. It involves purchasing at the actual true value and making improvements within the first six months that increase the value by 20%, and then returning the property to the market at the increased value figure.
When rental property is the thrust of your real estate strategy, the Double Digit Cap Rate plan is a good investment choice. It limits your property purchases to those that can produce a capitalization rate of at least 10%. The capitalization rate is the net operating income of the property. The percentage figures in these strategies are guidelines for making the investment practical. If these minimum figures are not met, the investment capital should be invested in other low return investments and the real estate market avoided unless the hold on until it goes up strategy is used.
About the Author
Natalie Aranda is a freelance writer.