Finding The Next Hot Market

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Finding The Next Hot Market

  1. 1. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy WWW.NEXTHOTMARKET.COM 1|P ag e Sean F. Moudry www.nexthotmarket.com
  2. 2. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 You have permission to post this, email this, print this and pass it along for free to anyone you like, as long as you make no changes or edits to its contents or digital format. In fact, I’d love it if you’d make lots and lots of copies. The right to bind this and sell it as a book, however, is strictly reserved. You can find this entire book, along with power point slides and notes and other good stuff, at www.nexthotmarket.com Share This Book! Here is how you spread the word about Identifying Market Trends; 1. Send this file to a friend (it’s sort of big, so ask first). 2. Send them a link to www.nexthotmarket.com so they can download it themselves. 3. Visit www.nexthotmarket.com to read the more real estate articles. 4. Buy a copy of the hardcover book at www.nexthotmarket.com 5. Print out as many copies as you like. 2|P ag e Sean F. Moudry www.nexthotmarket.com
  3. 3. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 3|P ag e Sean F. Moudry www.nexthotmarket.com
  4. 4. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 4|P ag e Sean F. Moudry www.nexthotmarket.com
  5. 5. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 5|P ag e Sean F. Moudry www.nexthotmarket.com
  6. 6. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 6|P ag e Sean F. Moudry www.nexthotmarket.com
  7. 7. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 7|P ag e Sean F. Moudry www.nexthotmarket.com
  8. 8. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 8|P ag e Sean F. Moudry www.nexthotmarket.com
  9. 9. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 9|P ag e Sean F. Moudry www.nexthotmarket.com
  10. 10. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 10 | P a g e Sean F. Moudry www.nexthotmarket.com
  11. 11. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 11 | P a g e Sean F. Moudry www.nexthotmarket.com
  12. 12. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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: 12 | P a g e Sean F. Moudry www.nexthotmarket.com
  13. 13. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 12% 3 8% -3% 3% • 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? 13 | P a g e Sean F. Moudry www.nexthotmarket.com
  14. 14. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 14 | P a g e Sean F. Moudry www.nexthotmarket.com
  15. 15. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy Low inventory = time to sell. High inventory = time to buy. 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 15 | P a g e Sean F. Moudry www.nexthotmarket.com
  16. 16. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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!) 16 | P a g e Sean F. Moudry www.nexthotmarket.com
  17. 17. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 17 | P a g e Sean F. Moudry www.nexthotmarket.com
  18. 18. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 18 | P a g e Sean F. Moudry www.nexthotmarket.com
  19. 19. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 19 | P a g e Sean F. Moudry www.nexthotmarket.com
  20. 20. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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, 20 | P a g e Sean F. Moudry www.nexthotmarket.com
  21. 21. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 21 | P a g e Sean F. Moudry www.nexthotmarket.com
  22. 22. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy $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. 22 | P a g e Sean F. Moudry www.nexthotmarket.com
  23. 23. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 23 | P a g e Sean F. Moudry www.nexthotmarket.com
  24. 24. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 24 | P a g e Sean F. Moudry www.nexthotmarket.com
  25. 25. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 25 | P a g e Sean F. Moudry www.nexthotmarket.com
  26. 26. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 26 | P a g e Sean F. Moudry www.nexthotmarket.com
  27. 27. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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? 27 | P a g e Sean F. Moudry www.nexthotmarket.com
  28. 28. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 28 | P a g e Sean F. Moudry www.nexthotmarket.com
  29. 29. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 29 | P a g e Sean F. Moudry www.nexthotmarket.com
  30. 30. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 30 | P a g e Sean F. Moudry www.nexthotmarket.com
  31. 31. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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? 31 | P a g e Sean F. Moudry www.nexthotmarket.com
  32. 32. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 32 | P a g e Sean F. Moudry www.nexthotmarket.com
  33. 33. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 33 | P a g e Sean F. Moudry www.nexthotmarket.com
  34. 34. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 34 | P a g e Sean F. Moudry www.nexthotmarket.com
  35. 35. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 35 | P a g e Sean F. Moudry www.nexthotmarket.com
  36. 36. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 36 | P a g e Sean F. Moudry www.nexthotmarket.com
  37. 37. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 37 | P a g e Sean F. Moudry www.nexthotmarket.com
  38. 38. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 38 | P a g e Sean F. Moudry www.nexthotmarket.com
  39. 39. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 39 | P a g e Sean F. Moudry www.nexthotmarket.com
  40. 40. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. Invest Here for New Construction Invest Here for Existing Homes; Do not buy in the Redevelopment Area 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. 40 | P a g e Sean F. Moudry www.nexthotmarket.com
  41. 41. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 41 | P a g e Sean F. Moudry www.nexthotmarket.com
  42. 42. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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: 42 | P a g e Sean F. Moudry www.nexthotmarket.com
  43. 43. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 43 | P a g e Sean F. Moudry www.nexthotmarket.com
  44. 44. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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. 44 | P a g e Sean F. Moudry www.nexthotmarket.com
  45. 45. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 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). 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 45 | P a g e Sean F. Moudry www.nexthotmarket.com
  46. 46. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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.” 46 | P a g e Sean F. Moudry www.nexthotmarket.com
  47. 47. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 47 | P a g e Sean F. Moudry www.nexthotmarket.com
  48. 48. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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 48 | P a g e Sean F. Moudry www.nexthotmarket.com
  49. 49. Finding the Next Hot Market: Identifying Major Markets, Sub Markets, and Property Types, In the New Economy 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” 49 | P a g e Sean F. Moudry www.nexthotmarket.com

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