You all sent me several hundred questions recently and many of your questions focus on making money in today's market in real estate. Is there a way to make money? If so how do you do it? What do I suggest?

Some of you asked me specifics, such as what you should do with condos you own but can't sell. Or properties you are rehabbing and which you see no market for.

Let's explore how you make money or don't make money in today's market.

Strategies that work in real estate tend to be long term because real estate is a long term investment.

Contrast this to the stock market which is so liquid. You can instantly buy and sell and there are tons of companies such as quants and hedge funds that constantly analyze the market and try to discover even the tiniest ways to make money. They then focus on these tiny money-making ways until more folks discover them and at that point the profit disappears so they look for something else.

Real estate is not very liquid. It prices itself community by community so it is highly local. And each property is different, unlike shares of stock, say, in a given company that are the same.

That said, real estate money-making strategies change over time because they are highly responsive to long term trends in the credit markets. If you try to buy and flip today, you will end up very sorry indeed. If you try to buy and hold today, you will end up sorry also, most likely, because the market is heading down and may head down for several years.

I bought my first house to live in in 1987. It doubled by 1990. And it fell to less than what we paid for it by 1994. That was Southern California real estate for you. Then the market crashed only in Southern California and parts of Texas. Now the same issues are unfolding nationwide and I think will engulf the United Kingdom, Spain and Australia as well as other parts of Europe.

And the reason for real estate falling all over, if real estate is really so local? It's simple.

When people buy real estate they do so using credit. Easy credit increases real estate prices. Difficult credit causes prices to drop. It really is that simple. Now we are in for some tough times ahead, with credit being hard to get. In the "old days", like in 1987 when I bought my first house, 20% or 25% down payments were the norm. And you had to have really good credit to buy a house. Credit got ridiculous after 2001 because the Federal Reserve tried to stop the economy from deflating after the stock market crash in 2000. They wanted to pump the economy up.

Today's credit is easy or hard to get based upon things like what the central banks are doing and what big investors in the Middle East and China are doing. It was easy to see a year or two ago that the subprime loans would get people into trouble. It is easy to see today that there are a lot more storm clouds on the horizon with regard to credit. So as credit becomes harder to get, real estate prices will fall.

As real estate prices fall, people will let their houses go because they never had a lot of equity to begin with. In 1987, when I bought my house, everyone had significant equity. Now, most people have either purchased recently with little down or refinanced all their equity out. So fewer people have equity than ever before.

So let's look at the long term value of residential real estate:

 

And even though homeowners become richer from their real estate going up in value, as they borrowed more, their debt increased and their equity actually fell:

And this is why today's real estate prices are falling and will fall for awhile longer. Today's homeowners have much less equity and when people's equity falls to nothing or becomes negative, there is little to keep them paying their mortgage. They prefer to walk away.

So back to the original topic, how do you make money today? Long term buy and hold is inappropriate when prices are falling unless you can buy in your area and rent out with a positive cash flow.

So one way to make money is to buy with little or no money down and rent out your properties and hold. The difficulty with this is that rents have to be going up, not down. Although inflation is much higher than it seems, rents are subject to immediate supply-and-demand factors and if a lot of folks can't sell their condos and houses, they will try to rent them out. So the rents can actually fall for awhile. You can insulate yourself somewhat by doing long term leases and getting quality tenants, but this only goes so far.

Nevertheless, in some areas you could end up with a lot of properties and a little dribble of cash flow and eventually, inflation rescues you, and you make a lot of money when you sell the properties.

I wouldn't do this now. I think the market is still too treacherous. I notice a lot of people still trying to get rich in real estate. Sentiment is still too good. It's when everyone throws in the towel and "everyone" believes real estate is a total loser — that's the time to start scooping up properties and renting them out and holding on. Right now I think is too early.

So that leaves another way to make money and this is the way I would do it. That is to use today's market to lock up properties through options and then market them. It is still possible to sell a house today even in areas with "no buyers". The prices have to be right. The marketing has to be good. You can be very selective as to what you put your energies in, and focus on using the method of sell your house in nine days.

It doesn't pay to buy and hold when prices are falling. And it's hard to call the bottom. So I recommend you take the low risk or no risk strategies of making money through options, buying with no money down no qualifying and no credit, and take your time sorting through deals. Only do the extraordinary deals that are real giveaways and don't get too wrapped up in one property or one deal. If you do, you will lose a lot. If you are careful and cherry-pick, using options and subject-to financing, you can do extremely well in today's market.