As a current or potential real estate investor, you may be tempted to try to time the market. I have made this mistake myself in the past and I believe it is a common mistake for many. Trying to be cleverer than everyone else is only human nature. After all, there is a phenomenon known as hindsight bias or creeping determinism which explains this tendency. Hindsight bias is exactly what it sounds like: someone looking at past events and saying to themselves, “I knew it all along, I should’ve done ‘x.’”
Realistically, timing the market has been proven to be a fallacy and an expensive one, at that. According to research done by the Schwab Center for Financial Research, “the cost of waiting for the perfect moment to invest typically exceeds the benefit of even perfect timing”. And timing the market perfectly is nearly impossible, so the best strategy is simply to make a plan that supports your investment thesis and get investing as soon as an appropriate opportunity is identified.
Here are 5 reasons why you should NOT rely on market timing:
1. There Is No Guarantee That Tomorrow’s Price Will Be Lower Than Today’s
Many investors make the mistake of waiting for the next dip to buy when properties might become “less expensive.” But the reality is, there is no assurance that properties will become any cheaper because it is impossible to determine at what time or to what degree the anticipated market high or low will be.
2. Interest Rates Could Worsen
When considering the “cost” of owning an investment property, the loan payment is a major factor. If interest rates happen to rise during your waiting period, even the payment on a smaller loan may become equal to or possibly even greater than what your loan payment would have been if you hadn’t waited.
3. Real Estate Markets Are Generally Not Volatile
Real estate markets are relatively stable in nature, so timing the market becomes less important when investing in real estate than it might for more volatile investments like crypto or the stock market.
4. The rewards of real estate investing come over the long term.
While projecting the future price of real estate can be difficult, we do know that the price of real estate will continue to trend up over longer periods of time. This can be attributed to the inflation of the dollar. According to the chart offered at www.officialdata.org, it takes roughly $16 of today’s money to equal $1 from 100 years ago. This trend will continue into the future naturally increasing the amount of dollars that are required to buy real estate and everything else. This is one of the many reasons why investors in real estate benefit by just owning real estate over long periods of time.
5. Waiting Only Robs You Of Yield
Obviously, in order to experience the financial benefits of real estate, one needs to actually own it. Those who choose to sit out of the market and wait, will miss out on all of the appreciation, tax benefits and cash flow produced by their supposed investment. Generally speaking, the benefit of waiting and buying at a lower price sometime in the future is dwarfed by the lost yield that could have been realized over the waiting period.
Let me give you a couple of examples from my own experience that will help demonstrate this. I bought my first apartment complex with a partner in 2016, about 18 months before the Great Recession hit. Looking back, we really bought it at the peak of the market. Property values steeply declined for several years. But, because we bought the right kind of real estate (Multifamily) which provides ongoing cash flow, we were able to hold on to the property through rough times. When the market had turned around, the buildings were sold for a considerable gain. If I had somehow knew the recession was coming and decided to wait for the market to dip, I would have missed out on one of the most profitable deals I’ve ever participated in.
On the flip side, during 2010s, the local market really started to heat up and I thought that people were paying outrageous prices for properties. I decided to sit on the sidelines and wait for the market to settle down before jumping back in. I continued waiting for several years for the market to drop, but it never happened. Prices continued to elevate and as I look back, I regret not taking action. As it turns out, I missed out on one of the greatest buying opportunities.
The bottom line is, if you are looking for the best time to buy real estate, the answer to that is always “You should’ve bought 20 years ago!” The second best time to buy real estate is today.
Real estate investing is less about timing and more about finding and investing in actual deals. There are a lot of properties for sale, but there are few actual deals to be found. That being said, there are deals to be had at every point of the market cycle. The most important thing to consider is will the investment property help you achieve your investment goals? Is the real estate well located, conservatively underwritten and thoroughly vetted? Does it have favorable financing? If it does, then you have nothing to worry about. If the market does turn, the property should continue to cash flow until the market rebounds at which point, you can sell the property for a profit or hold onto it for ongoing passive income.
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