Market Timing

6 Replies

Recently I have been torn with my decision on execution and I'd like to hear what BP has to say.

I currently don't own any properties and I am looking to purchase a multi-family unit so that I can get my first property, rent it out and start building equity.

I have heard from multiple friends about how the market is on peak and I should probably wait to purchase a property.

What opinions do you guys have with this topic?

@Eric Raio Number one rule by famous investors including Kevin Oleary. Do not time the market. You make most of your money from the initial buy(The deal). If you get a property that will give you a positive cash flow after calculating all your overhead and gives you at least >10% ROI. You are good to go. If you keep waiting to time the market you will never be able to indulge in the benefit of real estate!

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Here in the appreciating areas of California it's tempting to buy a deal that has a negative return and rely on appreciation to make your profit.  It's been working well the last few years so it will continue, right?  Well I don't see it dropping tomorrow, but who knows longer term.  

If you get a deal where you have positive return, then you are somewhat insulated.  Even if prices go down you are still making money every month.  Sure it would suck for the value to decline, but not nearly as much as a decline when with negative cash flow.

@Eric Raio ....Welcome! I would worry about timing the market for sure. Anyone could see what was happening in 07/08. Like the others have said as long as cash flow is good and you are willing to hold in the LONG TERM in the event of a 20 or %30 market correction and you feel rents are a touch flexible then go ahead. I heard that same crap back in 08 "rents will never go down" boy did they as people were scrambling to fill vacancies. There are deals out there in areas that are not insanely priced allowing for an exit if you need or want one. Look for a bargain or an area that will not be so prone to a correction. Just my two cents.

There are some good points made above. Timing is a concern but trying to time the market is extremely difficult. If you can time the real estate market then you should not be a real estate investor. You should borrow all of the money that you can and invest in stocks. In other words it is fairly pointless. We are closer to a peak than not. If you wait to try and time the market you will always be waiting. That being said keep in mind the following.

You make money when you buy, and you also mitigate your risk when you buy. If we are closer to a peak then you make sure that you buy right. Your risk is greater at peak and you need to calculate that into your returns. If you are worried about a deal then analyze it at break even and at your required rate of return. How much can my ARV drop and I break even or how much can market rent drop and I break even? You can also stress test your deal by looking at outliers. Run your analysis through a stress test model that looks at extreme situations and see how the deal performs.

Money is made in all market cycles. You don't have to know what the market is going to do, you just have to know what it is doing, what it could do, and plan accordingly. 

BTW this is not 07/08 that was a different story. Not being able to refinance caused a lot of issues. Lending is still pretty heavily regulated and the purse strings have not been loosened all that much. Your greatest risk is getting involved in hard money. Conventional financing is not an issue. A property would have to have some astronomical returns to use hard money during a peak market. Getting caught with high carrying costs in a market correction is like trying to run with your pants falling down.