Real Estate Deal Analysis & Advice

Should I Wait Until the Market Drops to Buy an Investment Property? (Hint: It Depends on Your Strategy)

1 Article Written

According to a recent article in The New York Times, based on data from the Bureau of Economic Analysis, the United States officially entered into a recession in February. Some economists believe this will be a very short recession—only lasting months—and some believe it will last for a couple of years. Either way, this downturn ends the longest U.S. economic expansion on record.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

Oh, and there’s still the coronavirus, mass protesting, and an impending presidential election.

With all this going on, the biggest question I am getting from investors is, "Is now a good time to buy an investment property or should I wait until the real estate market drops?"

Anyone asking this question is really asking a different question in disguise. The real question is, “Will I make money or lose money if I buy a real estate investment now?”

The answer depends on whether you have a long-term strategy or a short-term strategy in place.

Long-Term Strategy

If you have a long-term strategy, I believe now is always the right time to buy, as long as the fundamentals of the purchase are sound. By that I mean:

  1. It cash flows.
  2. It is a good product in a decent location.
  3. You’re not over-leveraged.

Related: Flipping vs. Buy & Hold: What Are the Pros & Cons And Which is Best for Me?

Here’s my back of the envelope representation of the real estate value graph I show people when they ask this question.

There are cycles, yes. But over the long run, values almost always go up.

I touched on this briefly in a previous article I wrote on the benefits of buying and holding. Let’s look at the actual data to see if it supports my claim.

According to the Federal Reserve Economic Data graph below, the median home price in the U.S. has risen from $17,800 in 1963 to $327,100 today. The shaded areas in the graph represent recessions. You can see that prices do go through temporary adjustments, but over the long run, values rise.

The two main ways investors make money on real estate over time are through appreciation and rent growth. We can see the property value will go up over time, but what about rent growth?

The graph below from Apartment List, based on U.S. Census data, shows the median rent growth in the U.S. since 1960 along with the median income growth.

The red line on this graph shows the rent growth. Median rent nationwide is up roughly 165% since 1960. Adjusted for inflation, rents are up 64% since 1960. As you can see, rents go through periods of growth and periods of remaining flat. Over the long run, they go up. Rarely do they go down.

The blue line on this graph shows the median income. As you can see, incomes have not been keeping up with rent increases, putting a greater burden on renters to pay their rent and leaving little money to pay for everything else. This is a general indication that you can expect rents to rise at a slower pace or remain flat over the next few years.

Of course, all of these numbers are taken on a national level and local markets vary widely. Make sure you understand the numbers and trends for any specific market you plan to invest in.

Related: 10 Ways Recessions Impact Real Estate (& How to Dodge the Worst of It)

Short-Term Investing

If you are looking at doing a fix and flip or a new build and planning to sell out in the next three to 12 months, you need to have a good grasp of the current supply and demand dynamics of your local market.

We entered this recession with a shortage of supply for both new construction and rental property in most markets of the U.S., and people still need a place to live.

Since the 2008 recession, building (supply) has lagged demand in most markets, propping up prices. Since February, my local market, Denver, has seen even fewer properties on the market and prices continue to rise.

What could lead to an increase in supply?

Foreclosures. Over the last few years, couples have been buying homes with as little as 3-5% down, while relying on two jobs to make ends meet. We could see more distressed properties coming to market in the next six to 12 months if, for example, one person loses their job and they are not able to make their payments.

But foreclosures don't necessarily mean deals. Banks will still seek the highest and best offers for properties, so if there are 10 buyers for every foreclosure, there won't be any fire sales.

The bigger question when looking at short-term values is the demand. Demand is driven by people's willingness and ability to buy. If there are still people with good jobs and loans are available at decent rates, then there will still be buyers.

In the 2008 recession, there were very few buyers because lending requirements tightened and people couldn't get loans. So far, that hasn't been the case with this downturn. There are people who can no longer qualify for a loan based on job loss, but it hasn't reached the proportions of the last recession.

Bottom Line

If you have a long-term strategy, now is always a good time to buy and you will do well over time. If you are looking for short-term gains on flips or developing new builds, then you need to keep a close eye on the current supply and demand dynamics of your local market.

You may want to hold off temporarily until the economy has somewhat stabilized. Then you will be better able to determine how demand for what you want to sell has been affected. We’ll have a better picture when we get the third quarter reports on jobs, the economy, and corporate performance.

Are you looking to buy right now or putting your purchases on hold?

Share your thoughts in the comments below.

Brad Uhlig is a real estate broker and property investor in the Denver Metro Area. He has been investing in real estate for over 20 years—currently specializing in buying and holding—and has been a...
Read more
    Barry H. Investor from Scottsdale, AZ
    Replied about 1 month ago
    BRAD Great succinct article which hits on the critical points for short and long-term markets/investing. Investors with analysis-paralysis on long term buy/hold are telling me they are gonna wait. I sell completely remodeled turn key tenant occupied SFH in Kansas City MO. Business has been booming during COVID because when your annual ROI is 20%+ and you wait 2 years to buy a Turn Key cash flowing SFH for 20% less than you can buy it today, you already lost 20%. Ecperienced investors understand this, as you have laid it out in your article. Thanks for a good reminder about the basics of long term vs short term investing.
    Aaron Robertson Real Estate Broker from Redding, CA
    Replied about 1 month ago
    If the deal is right, the deal is right.
    Ismael Gomez Investor from Miami
    Replied about 1 month ago
    exactly! 100% agree.
    Dennis Cosgrave
    Replied about 1 month ago
    It can be argued that past history is no indication of future performance. Let's face it; we are in uncharted territory. Since the financial crisis in 2008, the world has added another $100 Trillion in debt. Interest rates have gone to zero and in some countries they are actually negative. This has never happened before. In the meantime, the central banks have been printing money in the trillions which has resulted in inflation in asset prices. Yes, the US and most of the world is currently in recession, but is this your typical recession with all the other variables in the mix? I suspect the answer is no. There are major political shifts occurring which is going to create demographic shifts. A deal may look right at the moment, but when considering all the variables, is the deal still right? That is not an easy question to answer. I do not know what the future holds but the risks are significant. As such, I would proceed with caution and invest conservatively.
    Cameron Tope Property Manager from Katy, TX
    Replied about 1 month ago
    Agreed - for the long term investors just buy the deals that make sense (regardless of the economy), and over 20-30 years, you can't help but create wealth!
    Susan Maneck Investor from Jackson, Mississippi
    Replied about 1 month ago
    To me the biggest challenge is finding new tenants at this point. It is not a good time to be showing a house and meeting people. I'm striving to keep my tenants in place regardless of their ability to pay right now if there is any hope they will become solvent soon.
    Jimmy Hodges from Mesa, AZ
    Replied about 1 month ago
    I believe that a long term strategy to wealth creation and buying right helps to reduce risk but I also agree with @Dennis Cosgrave that taking an extra conservative approach in these unprecedented times is a smart move.
    Matthew Terry Rental Property Investor from Mesa, AZ
    Replied about 1 month ago
    Even with a long term buy/hold strategy, I feel investors need to modify their strategy slightly. A deal is a deal and there is no better time to invest than now. However, there may be a higher risk of tenants not paying, which can be more expensive than vacancy. There is also the risk of market rents dropping. If you are going for appreciation plays with low cash flow, keep larger reserves than you normally would so you can keep your investment of times get tough. If there is a substantial increase in evictions and/or foreclosures in your market, supply will go up and potentially make your property less competitive. Keep cash on hand to improve your property if this happens.
    Jared Bigman New to Real Estate from Irvine, CA
    Replied about 1 month ago
    Great article. As a rookie investor evaluating BRRRR deals OOS, I feel as though the risk of finding tenants who can stop paying rent and cannot be evicted due to our pandemic outweighs the benefits of jumping into REI today.
    Ricardo A Perez from Hollywood Florida
    Replied about 1 month ago
    @Brad uhlig thank so much for the article. As a new investor I been asking myself the same question. I agree if long term is the strategy it give the best results. In the area I looking to invest in western Massachusetts. It’s a sellers market and deals are become harder to find but, I am keeping my eye open and trying to create the deal !
    Brad Uhlig Real Estate Agent from Denver, CO
    Replied about 1 month ago
    There are some great comments made on this thread! Thanks to those that have taken the time to give their thoughts. I purposely didn't dive into the specifics of what is happening in the world today in my article because I wanted to show that through the turmoil of the 60's, the inflation of the 70's, the savings and loan debacle of the 80's the great recession of 2008, rents stayed relatively stable on a macro level and housing prices have gone up over the long run. Pay attention to the fundamentals of the deal I outlined in the article. I personally have owned property through the tech crash in 2000 and the 2008 recession. I weathered the storm because I had nice units in places where people wanted to live. They also had good cash flow and I didn't borrow too much money to buy them. I had room to adjust rents if needed and was at least break even on cash flow until the market improved. Every market is unique. My market in Denver still has strong rental demand and a relatively good job market so the vast majority of tenants are paying their rent. It appears the people writing in this thread know their local market well enough to know if they need to hold off right now.
    Kevin McGuire Rental Property Investor from Seattle, WA
    Replied about 1 month ago
    Good article. For stocks, the stats show that staying out of the market is the biggest risk to returns. I've accept the fact that I have no ability to time the stock market and instead have taken a more steady-handed strategic approach with long term goals. Same with real estate, I can only invest for the long term. All markets converge to the mean over time but we have to accept not knowing in the short term. Sudden moves usually end up being detrimental, as does inaction due to fear. Make a plan, find a deal that fits that plan, don’t fit the plan to the deal.