Newbies Beware: Failing to Adjust to Market Tides Could Leave You High & Dry (or Underwater)
Most of us have experienced the fun of the beach and ocean. Maybe you’re in the water, playing with kids, or enjoying a drink in your favorite floating tube. You look up, and the next thing you know, the under current has pulled you 500 yards down the beach and away from shore. The slow but powerful currents and tides of the ocean are easy to miss if you don’t pay attention.
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And just as the tides of the ocean are cyclical, so are the financial markets, including real estate.
The Danger of Being Laser-Focused
In the ocean, if you get too focused on floating and playing and do not pay attention to the tides, you will either end up being pulled out to sea and be in serious danger or washed up on the beach lying in the wet sand. Similarly in real estate, if you do not adjust for the market cycles, you may find yourself underwater on investments or sitting on the side watching the current opportunities the market affords go by.
Not paying attention to these market cycles is not limited to the unsophisticated investors. I often hear very successful investors advise beginner investors be laser-focused, to specialize in one and only one investment strategy. I do agree you should have a main focus; it should be something to strive for, and your efforts should assist in some way to help you achieve that focus. However, the path will not and should not be a laser straight line. Instead, always keep your focus in sight and head in the right general direction of that focus, but do so while also keeping your head on a swivel and executing on the opportunities the market presents.
The Advantage of Pivoting Focus as a Newbie
To be clear, this article is written to the investor who is climbing their ladder to success. For those who have built a sizable business within one strategy, the ability to pivot and adjust strategies is restrained due to the size and operational difficulty that would bring. However, I believe the beginner and smaller scale investor has a huge advantage to pivot and adjust to the tides of the market. They can maximize their ability to reach a higher level by executing on the opportunities at hand.
Since starting our real estate investment company, our main focus has always been to buy apartment communities to hold and manage for predictable, consistent cash flow. In my opinion, it is the best way to build wealth. We started our company in 2010. This was likely one of the best times to do so, as prices had bottomed out and tides were just beginning to move in the recovery direction. I remember going and looking at 10-15 properties a day listed on market. We put every bit of cash we could into purchasing buy and hold real estate. Back then, I used to think, “Why would anyone have any strategy besides buy and hold?” We were achieving phenomenal returns and oftentimes were able to pull all of our cash back out within one year, making our cash-on-cash return infinite. But the tide of the market that we were benefiting from was also forcing prices of our acquisitions up and our returns down.
From Buy and Hold to Flipping, Wholesaling & More
In 2015, we noticed significant increases in prices coupled with decreases in inventory. We were spending 5-10 times the amount of hours we used to in order to find the same quality opportunities. But rather than being laser-focused and sticking to one and only one strategy, we used what the market had given us and capitalized on it. We began flipping houses in 2015. Our main focus was still to buy and hold apartments, but while the good opportunities were fewer and farther between, we were filling those gaps by flipping houses, which was only better preparing us with capital for when the good buy and hold opportunities did arise.
As we watched prices, inventory, and cost of labor continue to climb into 2016, we realized margins on flipping were being squeezed and this strategy was becoming too difficult to capture and assist us in our main focus. Rather than letting the tides of the market have us sitting on the side watching and waiting, we kept moving forward, always keeping our eyes and majority effort on the main goal of apartment investing, but capturing the opportunities that the market was giving us. We began buying the houses we would have flipped to immediately resell without fixing them up (wholesaling). And most recently, we have been wholetailing to achieve maximum returns given the current market state.
Not being laser focused allows investors shift with the undeniable tides of the market and better prepare yourself for the long-term main focus.
Right now, wholesalers who can find quality deals are killing it. Anything they get flies off the shelves because they have 10 hungry buyers looking to do their next deal since inventory is so low. That’s good for them, but they should also be asking themselves, “If there is a change in the market, if the tides shift, how can I use what I have done to capture the value most effectively?” For example, those who were wholesaling in 2006 were doing well, flipping was cool, and houses were flying off the shelf. But in 2009, banks were trying to dump foreclosures so fast that the open market had tons of low hanging fruit, and wholesaling was not the most effective strategy.
Know Your Market
Even simply being unaware of the market shifts can have you sitting stagnant for too long. If we only ever did buy and hold and deployed capital only if we could achieve the returns equal to what we were achieving in 2010, I would never be buying. I would be washed up was the tide went out. Or on the other side of the coin, if we continued to buy and hold at the pace I was in 2010, I would be at major risk of being underwater when the tide came back in.
The point is that the small, beginning investor has a huge benefit in keeping their head on a swivel and pivoting to the tides of the market as they adjust. This will help put them in the optimal position in a transaction. Being too laser-focused and not being aware of the shifting tides can leave you underwater or never doing anything.
Have you had to pivot to stay profitable during recent market shifts?
Let me know your thoughts with a comment!