Last night at my multifamily meetup (now on Zoom!) the topic was—you guessed it—COVID-19. Shocking, I know.
We had investors from Austin, San Francisco, Los Angeles. Lots of little face squares filled my laptop screen, all discussing how to weather the current chaos in the real estate market.
One new investor announced he’s making offers because now seems like a good time to buy. This sparked a lively debate about timing.
Timing as an Investor
Timing is essential to investing, despite what anyone says.
Sure, you can use a dollar-cost averaging approach and invest at consistent intervals regardless of what the economy is doing. But most really successful real estate investors try to time the market.
They do this for one reason: Because you can.
Wait. But it’s impossible to time the market, right?
Of course! Nobody has a crystal ball.
But the real estate market is cyclical, and each phase of the cycle follows predictable patterns of economic causes and effects. Having a strategic response to these phases (and the shifting between them) is key to your success.
Seeding Your Garden
It’s like gardening.
Your goal is growth, so you plant seeds and water. But there are forces beyond your control that have a big impact on your success.
Luckily those forces follow patterns. And understanding the patterns allow you to anticipate them.
For example, your garden is probably on Earth (unless you’re Matt Damon self-fertilizing potatoes on Mars). During Earth’s annual orbit, it tilts away from the sun, causing shortened daylight and colder temperatures. This causes your garden to stop growing and go dormant, conserving its resources until better conditions present themselves.
Gardeners have gotten good at timing this. They’ve had 25,000 years to figure it out. So the good news is that in 25,000 years, real estate investors should have a better handle on timing market cycles.
Gardeners still can’t predict the weather on a given day or even when spring will arrive (due to the massively complex environmental system). But the underlying causes of spring are still there. And gardeners use this knowledge to anticipate the changes and be successful.
Gardeners don’t dollar-cost average by planting a few seeds each month hoping to participate in growth but not risk too many seeds at one time. (Maybe some do. I actually don’t know many gardeners. They’re way too wild for me.)
But their understanding of natural cycles, though imperfect, allow gardeners to increase their success.
Real estate cycles are the same.
They’re based on economics and consumer behavior rather than biology and physics. But investors can learn how the cycles change, what causes them, and how to prepare for them.
Our Zoom meetup turned into a lively discussion of whether now is a good time to invest, a horrible time to invest, or somewhere in between.
Lessons From 2008
In 2008, I had eight years of investing experience, a good-sized multifamily portfolio, and had seen nothing but constantly escalating prices. So when the economy hit the rocks and multifamily prices slid 20%, I saw the buying opportunity of a lifetime.
And jumped in.
No, not shrewd. It was too soon.
The market continued to drop another 20%, and it was two years before it recovered.
The 20% drop I jumped at seemed like an incredible discount in the context of the prior eight years—the boom market paradigm. But we had shifted to a recession paradigm, which decided 20% off was still overpriced by 20%.
Does that make sense?
I held that property and ultimately rode out the recession. It was a good learning experience.
But am I glad I went through it? Not at all.
But I did come away obsessed with learning about market cycles and recessions and how to navigate them. Because it’s during these seismic shifts that massive transfers of wealth occur, which is a fancy way of saying that some investors lose fortunes and others make fortunes.
All because of timing.
We’re in the middle of a market shift. Real estate assets will be re-priced over the next six months or so, as the new economic realities get priced into the market. And what seems like a great price now may not be a great price six months from now.
Over my years of investing, I’ve found that, like getting a loan on a property, timing is something you can leverage to amplify your returns.
Here are some other things I’ve learned.
1. It’s much harder to nail your “sell” timing than it is to nail your “buy” timing.
Trying to sell before a market decline is much harder than trying to buy at the beginning of a recovery.
That’s because the selling process is slow. It can take six months to sell a property. But you can buy a property (get it under contract) in a day.
So how do you know when you’re at the beginning of a recovery? My rule of thumb during 2008 was…
2. Buy as soon as you see two consecutive quarters of GDP growth.
I had to wait through 18 months of declining GDP before it ticked upward in 2010. But it accurately reflected that the worst was over and the recovery had begun.
For those who are more economically wonkish, other indicators to track are:
- Consumer spending
- Bank lending
- Consumer confidence
- Business investment
- Business payroll growth
As these improve, it’s a sign that the worst is over and there’s growth ahead. But are you too late by then? No, because…
3. The illiquidity of real estate helps you.
Most of the time, we’re all frustrated that real estate is such an illiquid asset. Stocks, on the other hand, can be traded with the click of a button. And the stock market reacts to economic events in real-time. It’s fast and efficient at pricing value.
This makes it pretty much impossible to time the stock market. On the other hand, the real estate market moves at a glacial pace. Not only does it take months to sell a property, but it’s also a pain in the neck.
The real estate market is slow and inefficient. But that’s a good thing.
This transactional difficulty makes real estate inherently more stable and slower to react to economic shifts. This allows you to get ahead of the shifts and essentially time the market.
So here’s the advice I gave to the newbie investor, a friend of mine, at our meetup. It’s now in writing, so future me can be humiliated if it turns out to be wrong.
If you’re new, now is not the time to jump in. If you’re learning to swim, you don’t jump into the ocean during a hurricane.
At the time of writing, unemployment is growing, incomes are falling, tenants are unable to pay rent. Some lenders are canceling purchase loans after contingency removal, putting buyers in a real bind.
It’s a mess.
The real estate market is in a state of flux, trying to process what just happened.
Welcome to the recession. You’ve got a front-row seat for an amazing learning experience. The real estate market you’ve known for the past eight years no longer exists.
The early stages of a recession are like a tornado. Fascinating to watch—but don’t get sucked in! Keep your distance.
It’s one of the biggest existential threats to real estate investors.
But if not now, when?
My recommendation: Don’t learn by losing your savings when you can get the same education just watching, paying attention, and then profiting once our economy digests and metabolizes the trauma it just experienced and begins its journey toward recovery, then expansion again.
I know you’re eager. You’ve overcome your fears, developed skills, and are ready to flex those muscles.
But the most important muscle to flex at this moment is restraint.
My Advice to Investors Amid Coronavirus
Wait two or three months. Sitting on the sidelines is not going to hurt you.
I sold 20% of my multifamily portfolio, about $16 million, in late 2019. I have 1031 exchange funds sitting in an account that need to be placed.
But I’m not buying. Yet.
What I’m doing is watching the economic indicators. I want to see:
- Unemployment claims declining, not increasing
- Business activity resuming
- Incomes stabilizing (I don’t need to see them increase, just not be in a free-fall)
- Rent collections stabilizing
- COVID-19 under control
When these signs appear, it’ll be time to buy. For a newbie investor, it’ll be a great time to get your first deal. You’ll ride the recovery and next expansion until we have another one of these economic blowouts.
But until then, do this.
- Digest the daily economic and real estate news. Give yourself a crash course on recessions, economic cycles, and how everything is interrelated.
- Sharpen your buying criteria.
- Shore up your funds.
- Watch Monty Python (I just like Monty Python).
Showing restraint will make you a better investor and help you master one of the keys to real estate investing: timing.
In the meantime, enjoy spring. It’s a good time to start a garden.
Good luck, and be safe!
What lessons have you learned from past economic downturns?
Share in the comments.