Should I Wait Until the Market Drops to Buy an Investment Property?

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.

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:

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

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

Envelope graph 1

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.

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.