- The cycles associated with real estate markets and interest rates have a direct effect on a your ability to make a profit. High prices and high interest rates mean you're less likely to produce positive cash flow on a property. Also, if a property is purchased at market value at the height of a seller's market, your exit strategy could be delayed as you wait for the property to appreciate. You should consider your exit strategy for a property before buying it, even if the property is to be held for long-term appreciation.
- When the market shifts and buying opportunities arise, astute investors find ways to acquire bargain properties that will provide cash flow as rentals and appreciate when the market turns around. Bargains are found by searching bank-owned, or REO (real estate owned), and HUD properties, purchasing properties through a short sales, buying from wholesalers, probate properties, sellers facing divorce and bankruptcy, and properties for sale by owner.
- You should know your investment strategy, such as buy and hold, lease-option or fix and flip, before purchasing a rental property. Properties purchased for long-term appreciation should be held in a separate company from properties that will be sold in under a year to avoid issues with the IRS. Run-down houses in declining neighborhoods might be cheap to acquire, but tenant stability is often an issue. Look for investment properties in solid neighborhoods with low crime rates and neighbors who show pride of ownership.
