How Do You Invest in a Hot Real Estate Market?

Actually, there are several ways to find real estate deals in a hot market. The answer depends on your investment goals and the level of risk you are willing to take. Personally, I'm conservative in a hot market. I may make less money than others who speculate and buy just because the market is hot. But your goals and risk-tolerance may be different.

Here are some different temperaments of real estate investments and how they approach finding properties:

The Speculator: In a HOT market the speculator is a genius. A speculator can do no wrong, because whatever he pays today there will be somebody willing to pay more tomorrow. And, just like the stock market, when you're hot, you're hot and everybody's a winner.

The downside for the speculator happens when all good things must come to an end. And sometimes when it does, the speculator might be stuck holding the bag. I have no personal objection to people speculating, but I have zero patience or tolerance for whining when the ride is over! It's like Russian Roulette; your odds of winning are 5 in 6 and that's pretty good, isn't it?

On the upside, a lot of money can be made speculating. If you are in and out quickly, your risk is limited to your holdings at any given time. The flip side of this is that markets often give back some of the artificial profits. There is a risk you could find yourself having paid more than a property is worth, and if the markets turn around quickly it is an ugly position to be in.

In a hot market, many investors are willing to pay retail price and then turn around and sell at higher new market values that result from the rush of buyers. Hopefully you can see the danger in the game. If you choose to play, make sure you understand the risks. I used to trade commodities, and that's a game all about managing risks. With the risk comes the reward, and my hat is off to those that win. :)

The Investor: A market that is on fire is a speculator's dream and an investor's nightmare because methods that used to work no longer get the same results. Your marketing efforts will see decreased efficiency and you'll have fewer opportunities to purchase properties at the discounts you are accustomed to. It's frustrating because even though your marketing results are plummeting, the answer is to market more and become better at marketing!

A hot market can deliver a real blow to an investor's self confidence. It makes the investor stop and ask if they are doing something wrong. They're not, but changes need to be made. Since marketing is less effective in a hot market, more time must be spent on marketing to generate sufficient leads. A possibility is to specialize in a field and dominate a niche.

A few possibilities:

• Pre-foreclosures (and yes, it is a dog-eat-dog world)
• Bankruptcies
• Divorce Filings
• Eviction Notices (disgruntled landlords)
• Quit Claim Properties
• Death Notices
• Tax Liens Filed

And, when the market is hot, look for opportunities to buy "subject to" properties that create cash flow. Anytime property cash flows it's hard to go wrong long term!

What do I do in a HOT real estate market? Personally, I've sold many of my properties to realize cash profits. I am now anxiously waiting for the markets to turn. I know when it does, most investors will be running for cover while I'll be one of the few to pick up deals. The entire investing game changes at this point and I'll explain what to do in this type of a market later.

However, don't think I've stopped buying houses. No way! We're still wholesaling houses and most of the time the profits are a little smaller, but we're in and out the same day and making cash money without risk. Nothing wrong with that and there's still plenty of deals out there.

When will the markets turn? The answer is, "Who knows?" and, "Maybe they won't." And, it doesn't really matter if you know how to invest in your current market. But, let me tell you why I believe the markets will change:

1. Markets Cycle - Nothing is immune to the ups and downs of a market and cycling is a natural part of the process. When there is not enough housing, there is a rush to build houses. Then too many houses are built and everyone stops. Then there are not enough and on and on the cycle continues.

2. Interest Rates - As interest rates rise, consumers will be able to afford less and less of a house. This will affect the market demand, prices, and construction of new homes. When the market turns, some smart investors will be looking to buy entire subdivision projects from bankrupt developers. In a hot market many houses are pre-sold, but when this dries up, many developers are in BIG trouble because they were dependant on deposits and profits from pre-solds when construction is completed.

3. The U.S. Economy - I didn't plan on covering this topic, but it is important to at least note. For the last 100 years, the U.S. has been the financial powerhouse of the world and has been able to push its weight around (and during this time the U.S. markets went through many natural cycles). But, this is changing quickly and the new currency of the world is the Euro. This is demonstrated by the Euro's strength and the number of countries scaling back U.S. dollar investments (T-bonds, etc.) and moving into Euros. In short, the U.S. dollar has taken a beating.

Combine this data with a $50 billion per month deficit, and you should see that something is wrong. Put those two together and you might see a bigger picture beyond just a hot market.

In addition to the US Economy a lot of work is finding its way overseas through services such as www.elance.com. It's an entrepreneur's dream come true, because it is a free market economy, but to the American employee it is a brutal wake-up call.

Will the markets turn? Always, and when they do we'll adjust our investing strategies to the market and make great profits.

by: Gerald Romine