Taking a Cash Position and Awaiting the next Dip?

[Debbie Holland]

I invest in Southern California, more specifically the Perris, Moreno Valley and Hemet areas of Riverside County. This area is one of the most volatile real estate markets in the entire country.  Median home values in this area went from $80k in '00, to $400k in '06, to $140k in '09, to 320k today. Due to it's volatility, this market has been extremely good to me. However, I am seeing the writing on the wall and have taken and am currently holding a cash position. I wanted to see what other investors thoughts are about the market.   

[Neil Henderson]

All real estate is local. The Perris, Moreno Valley, Hemet markets are VERY different from the Birmingham, Huntsville, Indianapolis, Cleveland markets. 

I don't know anything about the Riverside County market specifically, but from the limited information you've given us, it certainly sounds like a classic cyclical market. I would say you're wise to maintain a cash position, if you plan to keep investing in those markets. 

For me, I'm not a fan of trying to time markets as it's burned me in the past. I'm a big believer in the 3 immutable laws of real estate investing:

1. Invest for cash flow (not appreciation) - Positive cash flow allows you to hold on to a property no matter what the market is doing and not be put in a position of being forced to sell when it doesn't make sense.

2. Invest with long-term, low-leverage debt - Leverage is a fire, it can accelerate your wealth building, it can also burn it to ashes. If you have properties purchased with high loan to value (greater than 20%) and short terms (under 20 years), you could find yourself in a world of hurt if the market drops right when your loan comes due.

3. Go in with sufficient cash reserves - don't use every dime to get into a property and leave yourself with nothing left to survive a major cap ex issue or a prolonged vacancy. 

Good luck!