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3 Steps to Success in a Real Estate Bubble

Aug 17, 2007
Market Motion: If the real estate market is decreasing how can you make money in it? To make a profit in any market (real estates, commodities, stocks, and bonds) it merely has to be in motion. It must be increasing or decreasing.

A stable market is one you are not going to turn a profit on. The key is knowing how to manipulate the buying and selling of stock in both markets. For example when the NASDAQ was experiencing it's own bubble there were people who made millions of dollars simply by adjusting their investing style to fit the current state of the market.

Obviously investors who bought at top priced and just hung on to their stocks lost a ton of money. Knowing and understanding various types of trading as well as risk management can be useful in th current real estate bubble.

Reality Check: No body can predict the future. If a friend or even a financial advisor tells you a particular investment is a "sure thing" ignore them. This is even more true when trying to predict the movements of whole markets. It is easy to observed if the value of stocks is decreasing or increasing and certainly it is obvious if the market is exhibiting strange behavior. However, predicting when the market will change, for better or worse, is far more complicated.

Warren Buffet believed that the market was way over valued years before it the over value was corrected. Warren has an interesting approach to in that he was a value investor and therefore he stayed on the sidelines. However, most active traders make their money during a downturn within the market. Either approach can be successful when applied to the real estate bubble.

Correction of the Market: There are several ways in which the over valued marketed can be corrected. Many investors claims price to earning ratio in the real estate market is imbalanced. Price to earning ratio refers to the ration of rent collected for a year versus the purchase price. A normal ratio should be around 150.

However, currently there are some areas were the ratio is 400. The out of balance earning ratio can be corrected by dropping prices, increase rents, or the coupling of the two. Additionally the real market may fail to correct anytime soon, some financial experts believe it may be 20 years.

The Question: Do you want for the market to change (20 years?) or do you adjust your investment style and make money now? Remember financial advisors live by the motto that investing is about control risk relative to your potential gain.

For example there are currently several real estate construction deals where a new investor with little capital ($2000) or less can get a pay off of $40,000 or more. Obviously, if it does not work out the investor is only out the original investment. The bottom line is that if you follow these simple steps, you can also learn how to invest in markets that other people perceive as dangerous bubbles!
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