Downturn Opportunity

With an economic recovery not yet at hand, this is not something you may want to read. You know how hard things are, and you may be tired of this kind of rhetoric. You may also be familiar with the old saying “when one door closes, another one opens.” What I want to review this month is a simple fact that due to this economic downturn new opportunities are being created for those nimble enough to respond.

The remodeling market of recent memory thrived on increasing real estate values that showed no signs of topping out. Inexpensive money was available for homeowners to remodel. The issue now is that inexpensive and available money is gone. Due to mortgage excesses, home ownership is becoming a distant dream for many people. In spite of this, people still need a good place to live. It’s a basic necessity.

An opportunity presenting itself now is the purchasing and remodeling of foreclosed and discounted real estate. In most parts of the country, there are thousands of foreclosed properties coming back to lenders, properties that need work and which lenders will sell at discount prices.

Here is the key to this opportunity: In July 2008, the U.S. Census Bureau released some incredible population projections. Take a look at these numbers: The projected increase in the population of the United States by 2050 is 135 million people ­— a 44 percent increase. To give you perspective, that’s equivalent to the entire populations of Mexico and Canada moving to the United States.

The Census Bureau estimates this population boom will require 52 million new housing units.

Due to the current economic climate along with high building and development costs, these additional housing units are not being built. What does this mean? It means that affordable housing will be in high demand. A population boom combined with increased costs of goods and a demand for land will drive increased home prices. This is a recipe for strong long-term performance.

The benefits of purchasing and improving discounted real estate are fourfold:

  • You can create remodeling work for yourself, and put employees and trade contractors to work on the properties you buy.
  • Because you are a remodeling contractor, remodeling repairs can be completed at wholesale prices. (Most investors don’t have your skill-set.)
  • If you are short on capital, investors will be interested in partnering on properties you purchase and remodel at wholesale prices. Investors are looking for safe investment vehicles.
  • Buying and holding one, two or three houses a year will build wealth for you and your family, providing a passive residual cash flow when you decide to exit your business.

I bring up that last point because most remodeling contractors don’t pay much attention to retirement or planning any kind of exit strategy. Most are too busy, don’t really know what to do about it, or are living under the misconception that they are going to sell their remodeling business one day.

This strategic opportunity is one that many remodelers are already taking advantage of. To begin to evaluate this for yourself, educate yourself on the potential benefits and liabilities. Call a local real estate company in your area and ask to speak with the broker or agent that works with foreclosed properties. Speak with two or three to better understand what they do.

If work is slow, take the time to spend four hours a week visiting properties either for sale or in foreclosure. Get to know those areas that you think would be a good for investment. Spend three months understanding the real estate market in your area. Secondly, call some local banks in your area and take some bank officers to lunch. Your real estate contacts can give you some direction on whom to call. Tell them what you want to do and ask them what they would need to consider if making a loan and working with you. Learn the rules of the game.

Understand that buying investment property also has its downsides. You will need to understand the value of properties so that you don’t pay too much. You will learn that from taking the time to understand and study real estate values in your area. When you do this right, you will know when you have found a good deal.

If you buy and hold property, you will also become a landlord and be responding to tenants who will rent your properties. There are numerous property management horror stories, but these can be avoided by taking property management classes and learning how to become an effective landlord. Successful landlords can teach you how to do this right. Learn from their experience.

A good real estate investment will, in time, create cash flow, and build equity. This is a sound financial building block for any small business. I have a series of “tips” for those that would like to know more about working with investment real estate. To receive tips 12, 13 and 14, just e-mail me and I will forward those to you.