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Anyone who turns on a TV, or listens to the radio, or reads a newspaper these days would be hard pressed to find any good news related to the real estate market. Much less find any of the stories of quick riches and easy profits that filled much of the social zeitgeist for the last several years. Two years ago everybody knew of somebody who had made tens of thousands of dollars in a matter of months flipping houses. Yet today, it seems that everyone now knows somebody who is stuck paying mortgages on houses they flipped and can’t sell. So, the obvious question is: Is there anyone who is able to make money investing in real estate in the current market? The simple answer is, of course, yes; but knowing the types of people these are and the strategies they employ provides insight into the current market and guides those of us who are interested in investing.

The singular fact universal to all of real estate is that “Real Estate is Local”. This also applies to investing in real estate. There are some areas of the country where real estate is just not worth the time or money right now. If you are in an area where prices were overly inflated and are now falling like a brick, then the chances of you being able to turn a quick buck are small (though not impossible). And at the same time there are regions where housing is in such high demand that you can’t help but make money even if the economy slides into an extended recession.

So which people are making money now? Mainly those that have money. Given the scarcity of 100% financing and tightening of lending standards it is becoming more and more of requirement that investors put some of their own money down. This only has to be 10 to 20%, and given the lower prices due to foreclosures and depressed markets that isn’t much. The lenders just want the investors to “have some skin in the game” so that you are less likely to just abandon the property and walk if times get tough. The current successful investors also have good credit and a track record of success. If banks are lending less money, the money they do give out is going to be to proven winners.

Even if a proven investor can get banks or private partners to lend money, we are currently experiencing a swing in the market that will separate the real smart investors from those that just rode the wave during a time of prosperity. How is this so? The current market requires a change in investing strategy and the best investors will be the best at adapting. From 2003 through 2005 the fast money was in flipping houses. This was a perfectly viable and profitable strategy, but it worked best in a seller’s market where holding times were minimal.

Now, when buyers are relatively scarce and loans are more difficult for buyers to get the residential landscape has shifted. Since it is hard to buy, many people now need to rent. In markets such as parts of the Midwest and South that didn’t experience as much of an increase in purchase prices, houses can still be bought at rates that allow for rental income to exceed the mortgage payments and expense netting a monthly profit. This strategy does require land lording which can be a hassle without guidance regarding structuring a good lease and screening tenants, however, so it’s not for everyone. But, in addition to the monthly income and principle pay down, if the house is held for more than 12 months while the market rebounds, all the profits are taxed as long term capital gains which can make a sizeable difference in final yield.

For the new investors without a track record, or those without much starting capital, or those who just don’t like to be land lords, investing in real estate right now might not be the best idea. That doesn’t mean that investing in real estate will never be accessible to those people though. Now would be a great time to pay off existing debts, repair damaged credit, and save cash. All markets are cyclical and those that prepare best now will be the most prepared in a couple of years when the housing pendulum swings back towards the seller’s favor.