Two Keys to Investing Intelligently in the Current Real Estate Market: 

Key One: Remember Fundamentals 

Now that in most areas of the country the market has shifted, fundamentals matter more than ever.

If you are buying for the short term (i.e. to immediately resell either by flipping the deal to another investor wholesale or selling it to a retail buyer) then you need to be buying cheaply enough so that when you factor in holding costs, closing costs, repairs, etc., you will still conservatively make a profit.

If you are buying for the long term, make sure the property can afford to pay for itself. CASH FLOW is king! I've watched too many would be investors forget this and take marginal deals with little equity and even less cash flow just because a motivated seller was willing to deed it to them. In a tightening real estate market sellers will be willing to walk from the house, but this doesn't mean that you should take it. If you plan to keep the property, then it must provide cash flow with a cushion (or at the very least have some other plus in the deal to make it worthwhile to do, like the very low price you're buying at.)

Remember that in your local market you have to be very picky about which deals you are even going to take. If you are buying for cash, you absolutely need to make sure you really are buying cheap enough (that means 50-60 cents on the dollar, but the max you should ever pay is 70% of the "as is value".) If you are buying on terms (like a subject to deal, or a lease option deal) you need to have the property cash flow well or drop it fast!
 

Key Two: Use Debt Wisely 

There are so many loan programs available for investors now: conventional fixed rate, interest only, negative amortization, ARMs, option ARMs, etc. The key is to use any financing intelligently.

This means making sure you choose financing that truly fits your long term goals.

For example, if you are buying a house to fix and flip, then a short term hard money loan might very well be appropriate. But I recently saw an investor who intended to turn her property fast but got stuck with the home for over six months on the resale market. The high interest rate "short term" loan she got from a local hard money lender at 12% (plus 5 points up front) turned out to be a very expensive loan to use to hold the property that she wasn't having much luck selling. In this case the bottom line was that she paid too much for the property considering all the repairs she needed to do, and got into trouble on the back end.

Another example is an investor who refinanced out a lot of his equity with an option ARM (This is a loan where you as the borrower can choose three different payment options: 1. To make the full PITI payment. 2. To make an interest only payment. 3. To make a negative amortizing "minimum payment" where your loan balance grows.)

After several years of great cash flow he enjoyed from making the minimum payment, the lender ended up recasting the loan because according to the terms of the loan, if the total loan balance grows by a certain amount, the lender can re-do the whole loan and the borrower MUST pay the full PITI payment. As you can imagine, the borrower in this situation went from a positive cash flow to a big negative cash flow. And with the dip in the real estate market, refinancing his way out wasn't so easy.

The bottom line is for you to make sure your financing is appropriate to your intended plans, plus make sure that you have a built in margin of safety in your deals.