Donald Trump makes billions of dollars purchasing run down or vacant properties and building fantastic structures on them. Warren Buffett makes billions of dollars buying “troubled” companies and turning them into financial powerhouses. Little ol’ me makes millions of dollars by purchasing hard-to-sell houses and making them dream homes.
There’s a theme here. If you look closely at the investing strategies of billionaires, you’ll find a single principle hiding in all their actions. On the other hand, if you look closely at the investing strategies of struggling investors, you’ll rarely find it. What is this principle and how can you profit from it?
The Law of Supply and Demand
You might remember this principle. Your high school Civics teacher probably droned on about it for hours, subjecting you to all kinds of nasty mathematical formulas and charts. If you’re like me, you passed it off as economic mumbo-jumbo and went back to sleep.
Big mistake. This one little principle is what separates the struggling investor from the successful one. It separates the bad deals from the good deals. Once I started using it in my favor, I saw my income transform from nothing into over $1 million the first year. Life was so much easier.
Foreclosures: a supply and demand case study
Example: You’ve heard that the foreclosure market is hot, right? Enthusiastically, you signed up to one of the foreclosure websites and started bidding on houses in your price range. Then you discovered something. Everyone else is doing the same thing! The clever little banker dumped you into a bidding war, driving up the purchase price and driving out the profit.
What went wrong here? You made an offer on an investment with a low supply and a high demand. Lots of gurus have popularized investing in foreclosures, leading to masses of beginners snatching up all of the lower end houses–for ridiculous prices. If you lost a bidding war, don’t feel bad. Chances are, they lost money on the deal.
Foreclosures are an example of The Law of Supply and Demand working against people. You can also make the Law work for you. If you want to buy a good investment, look for the following:
Low supply, high demand: An example of this market is Southern California. Tons of people want to move there and the number of houses are limited. Because of these factors, property is appreciating at extraordinary rates.
High supply, low demand: Sometimes, you’ll find a surplus of a kind of property. In Charlotte, NC, for example, the rental market is glutted, leading to high vacancy rates. You can buy multi-unit properties for big discounts.
Making money from low supply, high demand properties in hot markets is simple. Buy the property and sit on it. Monitor the market on a regular basis to see if supply is increasing or demand is shrinking. Eventually, it will happen. You’ll notice appreciation rates starting to flatten out. When this happens, you need to sell before the bubble bursts.
The real trick is making money from high supply, low demand investments. For example, if you try to sell them in the same economic condition (high supply, low demand), then you’ll most likely have difficulty selling at a reasonable speed at a reasonable profit. The reason? Nothing has changed.
Getting rich from high supply, low demand
We’ve all heard the secret to real estate is buying low and selling high. Well, you’ve managed to buy a property for next to nothing. How do you go about raising the price? Once again, the Law of Supply and Demand tells us what to do.
For the price to increase, one of two things has to happen. Either the demand has to increase or the supply has to decrease. Normally, you have little control over the supply of properties in your area, so we’re left with one option: increase the demand.
In the residential market, the best way to increase the demand is to make the house more desirable. Rehabbers are familiar with this strategy. They buy fixer uppers for a big discount, make all of the repairs, and sell them for a juicy profit. By making the house more livable, they increase the demand. The result is a drastic jump in price.
You can follow a similar strategy for houses that are in good condition. At any given time, in almost any market, there are oodles of good, well-kept houses that people are having difficulty selling. They’re often slightly older houses with a few cosmetic problems. Tidy them up and sell them for a quick gain.
Increase desirability on the cheap
“That sounds expensive,” many people whine. My answer is this: Would you spend a few extra dollars to sell the property three times faster? It’s also cheaper than you would think. Use the following seven tips to give your house a fast, inexpensive boost in desirability:
- Spruce up the landscaping
- Repaint the walls
- Install additional lighting
- Replace damaged or cheap fixtures with something nice
- Add crown molding
- Decorate the front door step
- Buy a nice mailbox
Take it a step further
So far, we’ve stayed inside the limits of your standard, residential investments. You can make decent returns, but if you want to make the big bucks, you need to think outside the box. The best investments are almost always undesirable properties that you can transform into the hottest on the market.
For example, my company is buying a lot of luxury homes right now. Many of them sit on the MLS for one or even two years. We buy them at a steep discount and then turn them into dream homes. When we’re done, the house usually sells within three months for twice what we paid for it!
What is the high supply, low demand property in your area? Sometimes it’s multifamily, retail, raw land, or other less common types of investments. Whatever it is, go out and survey the market. Find a property that you can buy cheap, make a few changes, and sell for a big profit. Then you’ll be investing like the big boys… and you’ll start making their kind of profit.
About the author…
Jon Morrow and his team of multi-millionaire investors work to make the big deals happen. He has helped facilitate over $20 million of real estate deals, spanning three states and multiple projects. His favorite investments are large, undeveloped tracts of land, multi-unit properties, and luxury homes. You can contact Jon at [email protected] or (704) 675-5104.