Chapter 15

Investment Tactics throughout the Cycle

Strategy without tactics is the slowest route to victory; tactics without strategy is the noise before defeat.

—Sun Tzu

Avoid the One-Tactic Trap

Tactics are the actions that lead to the execution of strategy. As real estate investors we are natural action-takers and seek action that delivers concrete, tangible results. “Taking action” brings a sense of satisfaction. Unfortunately, many non-strategic investors use that desire for action as an excuse to focus solely on tactics, sans strategy.

Many of these same investors also choose to focus specifically on one tactic. There are times when that single-minded focus on one tactic can be very beneficial because the focus allows an investor to be an expert and master the skills associated with the tactic. It is not beneficial when the investor employs (or continues to employ) a specific tactic regardless of the real estate cycle. New investors often focus on the buy-and-hold tactic because they are most familiar with it, as they likely own a personal residence. Unfortunately, most of these one-tactic investors enter the market during the boom phase, and since they don't choose their tactic with the cycle in mind, the impending slump phase proves disastrous when rents and values fall, especially if they haven't budgeted for inevitable change.

Seasoned investors also fall into the one-tactic trap because the routine provides a level of comfort. They are not likely to get maximum results from their efforts because every tactic has an optimal time in the real estate cycle for premium returns. Some may recognize the need to change tactics. Many will remain complacent, stay the course and pay a hefty financial price.

img Cycle Secret

Strategic real estate investors understand that as the cycle progresses they will need to employ more than one tactic if they want to fully leverage the cycle's momentum.

How to Choose a Tactic

How can an investor determine which tactics to choose? Before choosing any tactic, strategic real estate investors look at key driver patterns to determine which phase of the cycle they are in. From there, they determine which tactics are the most efficient and practical for that phase. As mentioned previously, every tactic has an optimal time in the real estate cycle for premium returns. By choosing your tactic based on its ability to bring the biggest return for your efforts, you increase the chance of producing better results than you would with other tactics. The tactics you choose also need to be aligned with your goals (cash flow and equity) and must factor in your resources, expertise and access to capital.

img A Case in Point

New Tactics Are Not Always Better

Senowa's portfolio was completely composed of buy-and-hold properties. A single mother who was attending nursing school, she adopted that tactic because it made the most sense to her. Over time, it also got to be a little boring, leading Senowa to take a look at what others were doing.

Seeing that many of her investor friends had been successful making lease-to-own deals in prior years, Senowa decided that this was the tactic she would use on her next property. She liked the idea of helping someone who couldn't qualify for a conventional mortgage to have the opportunity to become a homeowner. She was so excited to break the buy-and-hold monotony that it didn't take long for Senowa to match a qualified tenant-buyer to a property on a three-year lease term.

While exploring new tactics isn't inherently wrong, Senowa was not in tune with the real estate cycle. When she transacted on her lease-to-own property, the market recovery was just ending and the transition to the beginning of a boom phase was underway. By the time the lease-to-own term ended and the tenant buyer was ready to take possession, the property had appreciated $64,000 above the agreed purchase price. True to the agreement, Senowa completed the transaction, and although she wasn't on the receiving end of the additional equity gain, she still banked a great ROI from the original structure of the deal.

Now as a strategic real estate investor who matches her tactics to the cycle, Senowa looks back on that lease-to-own deal and realizes she missed an incredible opportunity to capitalize on the equity of that property. Had she stuck with her buy-and-hold tactic and then sold the property during the boom, that one deal would have paid for her nursing school tuition.

Senowa's lesson: pay attention to the real estate cycle—not your mood. Switch tactics when it makes sense to switch tactics, but never switch tactics out of boredom!

img Cycle Secret

Strategic real estate investors harness the momentum of the real estate cycle. To maximize cash flow and equity, they employ the tactic that will accomplish their goals most efficiently. That is, they choose the right tactic and let the cycle do the hard work.

Learn the Golden Rule: Always Make Money on the Buy

Regardless of where the real estate market is positioned in the cycle, or what tactics you choose, the golden rule of real estate investing never changes, you always make money on the buy.

Why do many investors break this rule? Because they lose their point of reference. Instead of staying in the neutral zone and letting the real estate cycle inform their actions, they let their emotions take over. Some are motivated by greed. These non-strategic investors are worried that they might miss out and won't be able to “get” a particular property. They mistakenly believe that any property can fit their investment system, and they compromise the focus they should place on cash flow and equity. Other non-strategic investors can blame fear. They are afraid to negotiate, or know their negotiating skills are weak, and end up overpaying rather than “lose” a property. Greed and fear limit two things: fiscal profit and the investor's chance to be able to employ the most efficient tactic for their goals given the cycle's position and its eventual shift. Keep your point of reference in neutral and don't break the golden rule—your investments will thank you for it later!

Optimize Tactics with Undervalued Properties

Undervalued properties are the best way for strategic real estate investors to optimize the tactics at their disposal. Finding undervalued properties gives these investors more tactical options to choose from to further their profits and achieve their goals. Do your goals require more monthly cash flow? Are you saving for your child's education and need funds in the next four to five years? The tactics you employ will also depend on your personal cash flow and equity goals.

To illustrate how this works, consider the following scenarios. In a booming market, if a property was purchased $50,000 under market you could:

Sell it for a quick profit = Cash flow

Leverage the momentum of the market by negotiating a long close and then sell for an even greater profit = Equity

Tenant the property to provide a monthly cash flow for a few years and then cash out your equity position = Cash flow/Equity

In a falling market, if a property was purchased $50,000 under market you could:

Assign it = Cash flow

Renovate and sell = Cash flow/Equity

Lease-to-own the property = Cash flow/Equity

Hold and tenant = Cash flow/Equity

There are numerous ways to find undervalued and/or underutilized properties. The following are some of the tactics strategic real estate investors have at their disposal.

Fixer-uppers: Find properties that are in need of repair or that are eyesores in nice neighbourhoods. Add value to the property by renovating and/or changing the usage.

Motivated Vendors: If a vendor is getting transferred due to employment, they may be motivated to sell at a reduced rate. A vendor who is downsizing may take a reduced rate if he or she believes the buyer will take care of the property.

Distress Sales: Couples who want to quickly divest themselves of shared property as a result of marital discord may sell for a lower-than-average price.

Estate Sales: Sometimes family beneficiaries are inclined to make a quick sale, in lieu of holding out for fair market value, so they can realize their share of the cash faster.

Foreclosures: Assuming positive equity in the property, a vendor is likely to be more lenient on price to prevent further credit issues before the property goes into foreclosure. If the property is in Canada and is already in foreclosure, be cautious and understand the Canadian foreclosure process, as it is much different to the U.S. model of deep discounts.

Of course, strategic real estate investors looking for undervalued properties also know that not all such properties are necessarily sensible deals. Always do proper due diligence and only purchase properties that fit all of your criteria. Again, to meet your cash flow and equity goals and to employ the tactics that support your ABC Strategy, look for properties that:

img Cycle Secret

Strategic investors make money on the buy. They purchase undervalued properties, which gives them many tactical options. They balance their portfolio with properties that produce both cash flow and equity.

Acquisition and Exit Tactics throughout the Cycle

Strategic real estate investors know this is where the economic rubber hits the investment road. Let's review the most familiar tactics they use to make money in every phase of the real estate cycle, and then look at how they specifically put those tactics into play.

Buy-and-Hold

The premise of a buy-and-hold tactic is quite simple: buy a property with positive cash flow and hold on to it for a long period of time. It is the entry level for most real estate investors, and while buy-and-hold is sometimes considered to be a passive or even tedious investment tactic, its long-term nature also makes it one of the safest and most forgiving.

Buy-and-hold is used by novice and seasoned investors alike. Seasoned investors enjoy the buy-and-hold tactic because it creates long-term sustainable wealth; and if it's a property that increases in value, they can use the equity appreciation to continually build their portfolio. New investors are often comfortable with buy-and-hold because it resembles their experience of buying a personal residence. Unfortunately, many of these new investors enter the market at the worst time, during the end of the boom phase, and are soon soured on the buy-and-hold tactic when the slump takes over and erodes their profits. Some are able to financially ride out the slump and reinvest; others are forced to exit the market by selling as very motivated vendors.

Proponents of this tactic will argue that it is anything but a passive investment, especially if you purchase quality properties and strive to obtain premium rental income during the holding period. Impeccable property management and proper maintenance and upkeep will allow for better short-term cash flow while you await the long-term reward.

Table 15.1: Executing the Buy-and-Hold Tactic in Boom, Slump and Recovery.

PHASE: BOOM
Stage: Beginning
To execute the buy-and-hold tactic during the boom phase, strategic investors need to be very patient and disciplined. At the beginning of the boom, the market is just heating up and there are still many opportunities at this point to purchase under-market properties. The “hold” in buy-and-hold is easy during the boom; it's the slump phase that will steal your profits if you haven't planned for it in advance. Buying under-market properties gives you the advantage of making money the day you buy, but if you plan to hold the property for the long term, you will still need to use your Strategic Investor Scorecard and stress test, and run what-if scenarios on each property for the impending slump phase. That analysis is the litmus test to execute buy-and-hold successfully during the beginning of the boom. Strategic investors can capitalize on the momentum of the market by using a long closing date during this phase of the cycle, or deciding to shorten the “hold” term and realize the profit before the slump begins. The beginning of the boom is a great time to refinance because you have a strong equity buildup from properties acquired during the slump/recovery and can use it to fund further acquisitions. Doing this any later in the cycle could result in being overleveraged.
Stage: Middle
Many new investors enter the real estate market at the midpoint of the boom phase when competition for properties is at an all-time high. Even though there are a lot of multiple-offer scenarios, and the market is in a frenzy, don't get caught up in the emotion of market reports. Strategic investors bring fear and greed back into the neutral zone. Finding good buy-and-hold deals that will pass the stress test and provide positive cash flow throughout the slump is going to be very difficult at this time. Make sure to ask and answer the what-ifs because buying “at” or “over” market fundamentals during the middle of the boom could result in negative equity and cash flow during the slump. If you already have existing buy-and-hold properties and are ready to capitalize on your investment, now is the time to begin to divest or maximize cash flow to prepare to weather the market change.
Stage: End
Patience is the key at the end of the boom phase. Prices are now at their peak and it is the worst time in the cycle to apply the buy-and-hold tactic. Even experienced investors cave in to the emotions of the market and get caught up in the boom excitement, only to be greeted a few short years later by the slump. The equity appreciation in the boom is alluring, but consider the facts: even if the slump brings a best-case scenario of break-even cash flow, most likely your equity will have substantially dropped, therefore not allowing you any leverage.
    Strategic investors set their goals in conjunction with the cycle and won't proceed with a purchase unless it brings them closer to both their cash flow and equity goals. They recognize that because it is the end of the boom, they may have to be patient and wait a few years before it is wise to once more begin successfully applying the buy-and-hold tactic.
PHASE: SLUMP
Stage: Beginning
Investors looking for buy-and-hold opportunities at the beginning of the slump phase may be greeted by vendors who are in denial that values have dropped. Some may be clinging to the hope that higher values are going to re-emerge, which is then reflected in their price and negotiations. Strategic investors need to be looking for motivated vendors, as they will provide the best opportunities at this point in the cycle. During this time, it is still challenging to find “truly” undervalued buy-and-hold properties that will pass the stress test and survive the remainder of the slump.
Stage: Middle
By the mid-slump, the initial shock of the falling real estate values has worn off and some are wondering how much lower values can go. Investors who find themselves with underperforming buy-and-hold properties may now be feeling the cash crunch and want to cash out, only to find that the loss in equity has turned their property into a “forced hold” until values once again rise. Some are not able to financially ride out the rest of the slump phase and may face foreclosure or bankruptcy. Strategic investors looking to acquire more buy-and-hold properties will begin to see profitable buy-and-hold deals materializing during this phase of the cycle.
Stage: End
Here, real estate is officially out of fashion and many are preaching that real estate is an unworthy investment vehicle. But the end of the slump proves to be the best and generally the most profitable time in the cycle to execute the buy-and-hold tactic. Values are at their lowest and confidence in the market is at an all-time low. The end of the slump phase is considered a buyers' market and there is a lot of inventory to choose from. Strategic real estate investors who want to produce maximum results from buy-and-hold will be most active during this phase. Vendors are highly motivated and investors who want to capitalize on the end of the slump bargains will continue to look for quality properties that are undervalued or underutilized.
PHASE: RECOVERY
Stage: Beginning
The beginning of the recovery phase will still be offering great buy-and-hold deals. An initial upturn in prices tends to produce cautious optimism in the market from some, while others dismiss it as a temporary blip. There are still many motivated vendors, and strategic investors who implement buy-and-hold at this time will likely enjoy a steady appreciation for the remainder of the recovery.
Stage: Middle
During the middle of the recovery phase, there will start to be signs of hope from the general public that real estate is once again a wise investment. Values are still reasonable and strategic investors will continually test their portfolios to ensure their buy-and-hold acquisitions are profitable for their cash flow and equity goals. Vendors may start to feel more confident toward the end of this phase.
Stage: End
The end of the recovery phase will continue to see some naysayers projecting their emotions onto the real estate market, and there will be confusion as to whether the trend of rising values can continue. This is still a good time to execute the buy-and-hold tactic, as there is a good supply of underpriced/underutilized inventory. Strategic investors still need to be prudent, especially because vendors are beginning to have more confidence, and negotiating power will be on the decline as the beginning of the boom looms.

Lease-to-Own

A lease-to-own (a.k.a. rent-to-own) home purchase is structured utilizing what's called a combined “lease with option to purchase” contract. The lease contract is entered into between two parties:

the real estate investor/owner

the buyer

These contracts are structured to provide the buyer, called the “tenant-buyer,” with enough time to qualify for their own financing. Terms typically range from one to three years, but can be completed sooner if the right candidates are selected and the right system is followed. Generally, the purchase price is established at the beginning of the lease term, and is guaranteed by way of an initial option deposit fee paid by the tenant-buyer to the investor/owner. The tenant-buyer also pays a premium monthly rent, otherwise known as an “all-inclusive lease and option” payment. This amount includes lease option credits. The lease option credits and initial option fee are credited toward the purchase price of the property when the tenant-buyer exercises his or her right to purchase the property at the end of the lease-to-own term.

This is an extremely powerful real estate investing tactic. It is very lucrative from a cash flow perspective. It is also gratifying for the investor/owner, who is in a rather unique position to help people gain access to homeownership. Lease-to-own is an innovative way for strategic investors to help people who might not qualify for a traditional mortgage to realize the ultimate dream of owning their own home. When implemented properly, this particular real estate investing tactic can be classified as a true win-win situation for the tenant-buyer and the investor/owner. The tenant-buyer becomes a homeowner and the investor/
owner enjoys premium (well-above-market rent) cash flow during the lease-to-own term with a predetermined or “built-in” exit plan.

Those benefits aside, there are some unscrupulous investor/owners who have no intention of ever selling the property to their tenant-buyers. Instead, they choose unqualified candidates who eventually default. As a result, the tenant-buyers are forced to forfeit their initial option deposit as well as all lease option credits they may have accumulated during the lease-to-own term.

This scenario can occur for investor/owners that experience the same back-end problem with a default. This situation typically results from a serious lack of knowledge and/or the specialized training that is critical for investors who want to successfully implement this intermediate-to-advanced real estate investing tactic. While there are no concrete statistics, it is estimated that the average completion/
success rate on lease-to-own deals is less than 50 per cent. However, this statistic can be closer to 100 per cent if the investor/owner embraces the philosophy of “doing the right things for the right reasons,” and follows the real estate cycle.

Tenant-buyers looking to enrol in a lease-to-own homeownership program need to research and interview reputable companies that have established a proven track record. Tony Peters from Creative Solutions Housing Canada Inc. operates one of these reputable companies; he has been in the lease-to-own business for over a decade. His company offers many creative solutions for people who are unable to obtain mortgage financing due to a diverse range of reasons. Tony believes the lease-to-own real estate investing tactic should be considered a stepping stone to conventional financing. The information in the following table comes from his experience with the risks and rewards of lease-to-own during the different phases of the real estate cycle.

Table 15.2: Executing the Lease-to-Own Tactic in Boom, Slump and Recovery.

PHASE: BOOM
Stage: Beginning
Using lease-to-own as an investment tactic at the beginning of the boom phase is a great way for strategic investors to take full advantage of the emerging momentum of the real estate market, and in the process create a win-win situation for all stakeholders involved. A lot of people want to purchase homes at this time in the cycle, allowing the investor/owner to draw from a much larger customer base. Potential candidates are able to afford and willing to pay the higher monthly instalments that lease-to-own is able to command. Some candidates are also able to afford larger initial down payments at this time, which further enhances their ability to exercise their option to purchase. Doing this typically shortens the length of the overall lease term. Because the purchase price is established in advance, and it is the beginning of the boom, the investor/owner should be fully aware of the fact that the tenant-buyer could be purchasing the property well under market value when they are in a position to exercise their option to purchase.
Stage: Middle
When the middle of the boom is in full swing, consumer confidence in real estate is at a high. Financing may be easier to obtain for some as a result of multiple lenders jumping on the bandwagon of increased activity and demand for real estate. The pool of lease-to-own prospects actually increases dramatically during this phase as a result of the hype generated by the press, friends, family, neighbours and co-workers. Real estate is a hot topic, and this fuels the demand and excitement for people who want to get in on the real estate ownership action before they miss out.
    One of the biggest problems that exists during this phase is that some investor/owners tend to take advantage of the emerging number of tenant-buyer prospects that start to surface. Why? Because the true prospects are more focused on the opportunity of owning their own home than they are on the purchase price of the property or on performing their due diligence when evaluating the investor/owner. As a result, there are many tenant-buyers who are extremely vulnerable to being taken advantage of. The fact is, some of them should never be enrolled in a lease-to-own program in the first place because their current or past credit history will inhibit them from qualifying for a mortgage.
    During the middle of the boom, appreciation is climbing and strategic investors who execute this tactic need to be satisfied with the return on their investment (ROI). They should have already established an acceptable profit spread between what they paid for the property and what they have agreed to sell the property for to a tenant-buyer. If the lease-to-own program is being implemented correctly and for the right reasons, any equity gains over and above the pre-established purchase price should be automatically credited toward the tenant-buyer. A lease-to-own transaction in the middle of the boom increases the success/completion rate as the tenant-buyers often have access to an array of financing products. They are also less likely to default on their contractual obligations due to the amount of built-in equity they have accumulated as a result of the boom phase of the cycle.
Stage: End
Strategic investors should be very cautious about lease-to-own deals at the end of the boom phase because it is the riskiest time in the real estate cycle to implement this particular tactic. That said, it can be executed, but it has to be executed in the “early” part of the end of the boom in order to be successful for both parties. Lease-to-own contracts that are structured too late in the end phase of the boom risk failure if the option to purchase comes due during the slump cycle. When that occurs, there is an extremely good chance the tenant-buyer will not be able to obtain conventional financing due to the difference between the pre-established purchase price and the current market value of the property. The other factor to consider is that lenders tend to (negatively) influence appraised values during a slump cycle. They do this in order to “build in” some additional security and insulate themselves from any further downturn in the market. When this happens, some tenant-buyers elect to follow “the path of least resistance.” Essentially, they throw the keys back to the investor/owner and walk away from their contractual obligations. This is not good for the investor/owner or the tenant-buyer because everybody tends to lose out.
    Another risk for the investor/owner is that the tenant-buyer will demand the return of his or her initial option deposit and any lease option credits accumulated during the lease-to-own term. There are many legal cases that have ruled in favour of tenant-buyers as a result of investor/owners who perhaps had been greedy or utilized poorly structured lease option contracts.
    Lastly, if the investor/owner implements the lease-to-own tactic too late in the boom and the property becomes vacant in the slump, there is a risk that he or she may not be able to sell the property and it may not make sense as a rental unit because the numbers just do not support it.
PHASE: SLUMP
Stage: Beginning
For strategic real estate investors, executing a successful lease-to-own deal in the beginning of the slump presents challenges, some of which include but are not limited to the following:
Consumer confidence is extremely low. Depending on how badly hit the real estate market is in the specific geographic area in which the investor/owner is operating, real estate may very well be a dirty word. As a result, finding suitable and quality tenant-buyers is a lot harder.
Unless the investor/owner is a strategic investor and possesses sufficient knowledge about the market's economic fundamentals and the real estate cycle, he or she may not know how to calculate the lease-to-own purchase price of a property with a prospective tenant-buyer.
    Tenant-buyers who enter into extended (two-year or more) lease terms at the beginning of the slump also run a very big risk of the property being worth a lot less than the pre-established purchase price. If this happens, what options would they have? One option already discussed is to throw the keys at the investor/owner and walk away. The other option is for the tenant-buyer to agree to some form of seller-financing terms (otherwise known as a VTB mortgage) with the investor/owner. With this option, the investor/owner should consider the following:
Has the tenant-buyer earned the right to this option? In other words, do they have a good payment history with you?
Are you in a financial position to offer the tenant-buyer terms? In other words, will your existing financing permit an extension?
Stage: Middle
While real estate values haven't hit their bottom by mid-slump, home prices have become more affordable. Many potential tenant-buyers will begin to feel that owing their own home is a very real possibility. There will be a lot of potential tenant-buyers who are still affected by past credit “sins” from overspending in the boom. As a result, they may not have access to cash or credit at this point in the cycle. Low down-payment options and longer lease terms are likely to be attractive in the mid-slump stage. On the flip side, strategic investors have the opportunity to purchase real estate from motivated vendors, and by doing so they are in a far better position to further increase their ROIs. They are also in a position to influence the overall success rate of their lease-to-own tenant-buyers because they do not have to set the pre-established purchase price too high.
Stage: End
The end of the slump is a good time to execute the lease-to-own tactic. It is good in the sense that the end of the slump is the least “dramatic” time in the real estate cycle because appreciation is likely moderate and is somewhat more predictable. This means the tenant-buyer is able to purchase when values are lower, and strategic real estate investors are better positioned to enjoy the extra cash flow during the lease term.
PHASE: RECOVERY
Stage: Beginning
Similar to the end of the slump, the beginning of the recovery lends itself to the lease-to-own tactic very well. With the recovery in its early stages, appreciation hasn't taken off, but consumer confidence is slowly starting to gain momentum and rebuild itself. Financing qualification requirements are still generally quite strict as a result of nervous lenders who have just experienced the slump. This adds to the pool of tenant-buyers. Strategic real estate investors are still (if they look under enough stones) likely to find undervalued properties at this time, which will inevitably increase their overall ROI as they move forward in the real estate cycle.
Stage: Middle
Although values have risen, doing lease-to-own deals during the middle of the recovery is an excellent tactic. Tenant-buyers will be gaining even more confidence, and as a result they will want to enter into the real estate market. Many will have improved credit by this time in the cycle.
    Note to the reader: Be sure that you are in the middle of the recovery and not at the end of the recovery. In mid-recovery, both parties will still be equally benefiting from equity appreciation. This means the pre-established purchase price of the property is closer to the actual or fair market value.
Stage: End
Strategic real estate investors can still do lease-to-own deals at the end of the recovery and profit handsomely. However, if this tactic is applied too late, and the purchase option comes due in the boom, the investor has to be willing to surrender a lot of equity. While additional monthly cash flow is always beneficial, strategic real estate investors may want to consider changing their tactics at this point in the cycle to buy-and-hold. They can tenant their property until mid- to end boom and then realize the benefit of cashing in on all of the equity.

Fix-and-Flip

The fix-and-flip tactic is certainly not a new one. Here the investor finds a home that is in need of repair, completes the repairs and sells the home for a profit. Before the 2007 U.S. housing crash, the tactic was also featured in many television shows that squeezed the trials and tribulations of these deals into one-hour—or even half-hour—time slots. It is not a coincidence that by 2011 these shows were mostly in re-runs due to the shift in the real estate cycle.

The bottom line is that these deals can work. But to successfully complete a fix-and-flip project, strategic real estate investors have a lot of preparation work to do well before they swing a hammer. Preparations include:

Again, properly executed fix-and-flips can be a great source of cash flow in a relatively short amount of time. When done poorly, they can bankrupt a person, financially and emotionally, in what will seem like overnight. Strategic investors are mindful of the cycle and the opportunities it brings for real estate flippers during all phases.

Table 15.3: Executing the Fix-and-Flip Tactic in Boom, Slump and Recovery.

PHASE: BOOM
Stage: Beginning
The beginning of the boom phase is a great time for strategic investors to implement the fix-and-flip tactic. It is a smart way to use the momentum of the cycle to earn cash flow relatively quickly. At this point in the cycle, the masses are not using this strategy, and trades are reasonably accessible because they aren't yet in the full swing of the boom.
Stage: Middle
The upside to fixing and flipping in the middle of the boom is that when done correctly, the market will do the hard work for you. The equity appreciation is gaining rapidly and strategic investors are able to take advantage of this. But be wary of the pitfalls. Bargains on properties are going to be hard to find and trades will be expensive. The lack of availability of tradespeople is also apt to extend your timelines. There is the potential for large rewards, but strategic investors must also be prepared for time delays and cost overruns.
Stage: End
The end of the boom phase will still produce terrific cash flow results with a well-structured fix-and-flip, but now more than ever the timeline and exit options are critical for strategic investors. If you are undertaking a structural project (such as moving or adding walls or additions), ensure you have a competent team in place before you begin, and that you have firm contracts and timelines in place for all of the trades required. During the exit, do not out-price the market: consider underpricing the property to create a multiple-offer situation. Waiting until the “end of the end part” of the boom can be dangerous because any delays in the project will push your exit into the slump. Strategic investors will do their best to avoid that, but will also have a contingency plan and make sure they have cash reserves for worst-case scenarios.
PHASE: SLUMP
Stage: Beginning
A lot of inexperienced fix-and-flippers feel confident at the end of the boom phase that they can become rich by doing a fix-and-flip. However, the beginning of the slump phase is the wrong time in the real estate cycle to complete fix-and-flips. Values are dropping and carrying costs cut further into profits. Investors who were able to complete their fix-and-flip likely will have to sell the property at a loss unless they have enough cash reserves to ride out the rest of the slump. Others may be saddled with a partially renovated liability.
Stage: Middle
While there are going to be deals out there (possibly some foreclosures as well as some incomplete fix-and-flips), the market won't be working for you in the middle of the slump. It is likely that values will take another drop, so that has to be factored in to your ROI if you are considering this tactic. The exit options might also be very challenging at this phase. Strategic real estate investors must know who their target customer is before making any middle-of-the-slump purchases.
Stage: End
Fixing and flipping at the end of the slump means strategic investors need to do their homework to find the hidden appreciation in neighbourhoods and properties. They must work the numbers and calculate the net profit to determine if a fix-and-flip is worth the time and effort. Also, there are extra carrying costs to take into consideration. Remember that listings are likely at an all-time high and values are at an all-time low. The good news is that, at the end of the slump, trades that were once hard to come by are now available. Trades are also likely to be more competitively priced and you should be able to find exceptional deals for quality work.
PHASE: RECOVERY
Stage: Beginning
At the beginning of the recovery, strategic investors start to use the momentum of the cycle to their advantage for equity appreciation, albeit not at boom-like proportions. There are still good deals in the real estate market and trades are accessible. Know your target customer before you buy and don't over-renovate for the neighbourhood: it will cost you valuable time and it can eliminate all of your profits.
Stage: Middle
Mid-recovery starts to see the negative attitude toward real estate softening. It will become a bit harder to find the great deals as vendors have a bit more confidence in the market. Look for diamonds in the rough, such as run-down houses in appreciating neighbourhoods. While appreciation still isn't at boom-like proportions, it can be a good time for strategic real estate investors who want to live in the home while they renovate to take advantage of this time. This tactic lets them get their feet wet and learn the ropes while the market is moving at a slower pace.
Stage: End
Here, strategic real estate investors are assembling their renovation teams and getting all of their processes in place before the pace of the market hits boom proportions. They know their target neighbourhoods and are looking for properties they can add value to (i.e., extra bedroom or garage). Trades are still reasonably priced and still accessible at this stage of the cycle.

Chapter Summary

Putting Tactics into Action

Strategic real estate investors are clear on their goals. They invest for cash flow and equity.

They are equally clear on their strategy. They plan to make money and protect their portfolios at every phase of the real estate cycle. And they put that strategy into action by adopting the appropriate tactic. That is, they buy-and-hold, lease-to-own or fix-and-flip property based on which tactic will most efficiently support their strategy and goals.

Since tactics are where the action is, the next two chapters zero in on tactic fundamentals. That is, how different tactics can help the strategic real estate investor manage risk and ease financing.