How to Profit From a Cooling Real Estate Market

All over the U.S. there are stories of a rise in real estate foreclosures.
Many people who took those exotic mortgages -- borrowing 125% of home value or
choosing adjustable-rate mortgages -- are struggling to make their payments, and
some aren't making it.

Also, a glut of new property supply, especially condominiums, is coming on
line. A friend of mine, a very seasoned real estate investor, says in San Diego
County, once one of the hottest real estate markets in the country, thousands of
new condominiums are getting ready to come to market -- just as the market
softens. He estimates that over 12,000 new units are coming on line, and the
market, at the best of times, can only absorb about 1,000 condominiums a year.
If he's correct, that means 12 years of supply will be ready for market in the
next year.

As interest rates rise and the number of eager new buyers begins to diminish,
adding supply to an already bad real estate market for sellers may mean a very
good market for buyers and for property investors.

Hungry Alligators

The people who are in the most trouble are flippers -- people who aim to buy
low and sell high within a short space of time. Many were buying condominiums
off the plans, which means the projects were yet to be built, in the hopes that
when the homes were completed, they would sell for a tidy profit. The trouble is
many of these flippers, lured into the market by stories of people making a huge
killing earlier with a similar strategy, are now the ones to be slaughtered.
Now, they either lose their deposit or have to cough up the money for the
purchase in the hopes there's a greater fool than they were somewhere out there
real estate.

If you recall, the same thing happened around the year 2000 as amateurs
jumped into the stock market, buying up tech stocks or any IPO with a dot-com
after the company name.

In the coming months, I predict we'll see an increase in people dumping real
estate they can't afford. They'll be forced to sell because they'll be eaten
alive by a phenomenon known as negative cash flow. Investment properties that
you have to feed money to every month are fondly known as alligators -- if you
can't afford to feed the property every month, it eats you.

I know of one so-called real estate investor (and I prefer to call people
like him speculators rather than investors) who has three homes he thought he
could flip for a profit -- but he priced them too high. Now, $7,500 comes out of
his pocket every month to feed the negative-cash-flow alligators. The problem
is, he and his wife don't earn that much a month. Their three alligators are
literally eating them out of house and home, consuming the profits they made
from other flips -- and their savings.

To add more pain to the misery, they still have to pay the capital-gain taxes
they made from their previous successful flips. They're toast. The alligators
are eating them alive. They can't afford to feed them, and they can't afford to
sell them because the prices they paid for these alligators are more than
they're worth today. And this is only one story -- out of who knows how many.
Over the next couple of years, keep your eyes open for some great bargains.

It's Time for the Pros

Some people say we're now entering a bad real estate market. I disagree. I
think we're entering a great market. A bad one is when amateur investors become
real estate experts and they bid up prices. They make housing expensive for
homeowners, often adding little to no value to the property. They simply muddy
the waters and make a valuable investment, a home, expensive.