Overcoming Fear of the Market

14 Replies

We have been reading consistent posts for four years now regarding "it's a bad time to start", "the recession is near", "I can't find good deals", "the market stinks", and similar posts.  I suspect that we need to understand the following:

  1. The market has been good (not bad) for real estate investors...we should be celebrating.
  2. 2010-2014 was the anomaly, not now.  REI has historically been very competitive.
  3. Cash is not king in real estate investing...deal flow is (lots of it).
  4. If you don't start now, you will have no experience or relationships if a correction occurs.
  5. If a correction occurs, lending/capital sources can dry up.
  6. Investors over-estimate their ability to pull the trigger when prices are crashing and there is no end in sight.
  7. If you can generate even a small positive IRR from real estate during an economic recession, idle cash is the risky choice (and is very costly over long periods).
  8. All properties and markets will not loose significant value in the next down cycle (real estate is local and good locations will always perform well).
  9. Investors can add as much or more value to a property than the potential loss of value in a downturn.
  10. If we have capital that we have to put to work, prudent real estate can be the flight to safety.

I don't like investing into a hot market but sitting on the sidelines for years is not a viable strategy...just have to be really careful.

If you are a market appreciation only investor, ignore this post...that can require some market timing.

Interested in everyone thoughts.

Originally posted by @Mike Dymski :

We have been reading consistent posts for four years now regarding "it's a bad time to start", "the recession is near", "I can't find good deals", "the market stinks", and similar posts.  I suspect that we need to understand the following:

  1. The market has been good (not bad) for real estate investors...we should be celebrating.
  2. 2010-2014 was the anomaly, not now.  REI has historically been very competitive.
  3. Cash is not king in real estate investing...deal flow is (lots of it).
  4. If you don't start now, you will have no experience or relationships if a correction occurs.
  5. If a correction occurs, lending/capital sources can dry up.
  6. Investors over-estimate their ability to pull the trigger when prices are crashing and there is no end in sight.
  7. If you can generate even a small positive IRR from real estate during an economic recession, idle cash is the risky choice (and is very costly over long periods).
  8. All properties and markets will not loose significant value in the next down cycle (real estate is local and good locations will always perform well).
  9. Investors can add as much or more value to a property than the potential loss of value in a downturn.
  10. If we have capital that we have to put to work, prudent real estate can be the flight to safety.

I don't like investing into a hot market but sitting on the sidelines for years is not a viable strategy...just have to be really careful.

If you are a market appreciation only investor, ignore this post...that can require some market timing.

Interested in everyone thoughts.

 My markets (Arizona, Texas, Washington) are doing very well right now, thank you very much.

I saw a chart that basically Vancouver, Toronto, Seattle are too hot to handle. Why buy at the height anyway when there are so many other options. 

I'm a little bit different, I don't use banks, I don't worry about ROI, I usually get built in equity when I buy, I always get $500 or more per door monthly cash flow, and I don't have to worry about Cap Ex or deferred maintenance. Even with all of that, I watch what the Chinese economy is doing and I watch Fed Interest rates and the Russell 3000. I'm not worried.

But when Deutsche Bank blows, it's gonna hurt. :-0

@Mike Dymski - I am a fan of dollar cost averaging. Buy a cash flowing property once every 12-18 months consistently over a long period of time 10+ years. That way you mitigate any market risk by buying when it's low, buying when it's high, and buying in between.

As long as the property cash flows, I really don't care what the value of the home does. 

Originally posted by @Craig Curelop :

@Mike Dymski - I am a fan of dollar cost averaging. Buy a cash flowing property once every 12-18 months consistently over a long period of time 10+ years. That way you mitigate any market risk by buying when it's low, buying when it's high, and buying in between.

As long as the property cash flows, I really don't care what the value of the home does. 

"Laddering" is a great approach.  It's just less feasible in the commercial world with larger deals and large inflows and outflows in certain periods.

Well said on the cash flow and value.  Many investors' portfolios cash flowed right though the last recession.  I can't relate to ever purchasing a property in a location where I am concerned with extended vacancy or a large reduction in rents....that's not a market problem, that's a strategy problem.

Seems like Every week a chicken little comes on here and says the sky is falling . A recession is nothing to fear , in fact it is a great opportunity to buy and increase your portfolio *if you are prepared

Originally posted by @Dennis M. :

Seems like Every week a chicken little comes on here and says the sky is falling . A recession is nothing to fear , in fact it is a great opportunity to buy and increase your portfolio *if you are prepared

Well said.

I was born in Erie, PA.  Somewhere around 30 years ago + or - a few dog years...

One of the markets to be most fearful is Multifamily, which is my focus. Even having said that the time to get into the market is now. Why would I say that? That does not mean buy a bad deal it just means its going to harder to get a deal right now. So Why say start now? When the market corrects in multifamily you want to be poised to take advantage of it. If you wait until the correction you will not have spent the time to know the market or develop the broker relationships so you can take advantage of an opportunity when it shows itself. You will be trying to break into the market and may be too late while those that stayed in from a knowledge perspective have an edge over you.

hey @Mike Dymski , thanks for the post, good perspective. I have read a lot of your stuff here on BP, thanks. I'm curious though what you think when you say, "If you are a market appreciation only investor, ignore this post...that can require some market timing." 

Market appreciation, i.e. buy and hold real estate is my current strategy with a focus towards market appreciation..My idea is that long term buy and hold would be a "safeguard" against recessions.

Hey @Michael Randell .  A lot of investors are having a tough time with appreciation plays penciling out right now because (1) they feel that prices are elevated (2) their prediction for future appreciation is not as high or as predictable as it has been for them in the past and (3) the cash flow is low.

Real estate is local though and there are opportunities at every point in the cycle (#7 above).  I am re-allocating capital from appreciation plays into more cash flow plays but there are lots of ways to make a profit in real estate and only time will tell.  And I agree that real estate can be a flight to safety when there is concern over elevated prices in all asset classes (#10 above).

Originally posted by @Mike Dymski :

Hey @Michael Randell.  A lot of investors are having a tough time with appreciation plays penciling out right now because (1) they feel that prices are elevated (2) their prediction for future appreciation is not as high or as predictable as it has been for them in the past and (3) the cash flow is low.

Real estate is local though and there are opportunities at every point in the cycle (#7 above).  I am re-allocating capital from appreciation plays into more cash flow plays but there are lots of ways to make a profit in real estate and only time will tell.  And I agree that real estate can be a flight to safety when there is concern over elevated prices in all asset classes (#10 above).

 Thank you for the response!

Great thread as always @Mike Dymski .  I just heard a NPR podcast today stating that most Americans are still overly cautious due to the GFC.  The indicators given were a historically high amount of equity in primary residences, employers using bonuses to reward employees vs. salary increases, and college students choosing STEM degrees vs. liberal arts degrees.  The equity indicator was particularly interesting to me.

Given the ecomony is doing so well, it's curious to see the risk-adverse indicators above.  Though my gut tells me that we are approaching phase 3 / 4 of the market cycle, there is no glass ball.  I think your advice to continue to invest in a careful manner is the most prudent methodology going forward.  Avoid over-leveraging and ensure decent cash-flow is the advice I hear over and over on BiggerPockets.  

I will say that, when you start to see smart investors changinging their investing philosphy to make deals work, it gives me pause.  Nonetheless, this may just be a necessary correction of course given the black swan event proceeding the GFC causing unrealistic unexpections.  Again, as you have stated, the key to this game is deal flow.  

Personally, I will continue to invest and will stick to good / great locations that provide properties that cash-flow.  

Thanks again for the post!  Outstanding stuff!

@Mike Dymski I agree. When I started looking for my first home during the end of 2016, it seemed like the market had exploded over night. I couldn't get my hands on a property I thought had value. If it wasn't for the big boom in prices, I probably would have never had the investor mindset to begin with. It gave me an opportunity to look for the best deals possible, where I could add the most equity. So far its worked out great, and when I bought my second property I made sure I could add a significant amount of equity also. Deals are hard to come by, but they are there if you want them bad enough.

Originally posted by @Craig Curelop :

@Mike Dymski - I am a fan of dollar cost averaging. Buy a cash flowing property once every 12-18 months consistently over a long period of time 10+ years. That way you mitigate any market risk by buying when it's low, buying when it's high, and buying in between.

As long as the property cash flows, I really don't care what the value of the home does. 

 Craig this is great great advice. I always try to think of real estate investing in terms of stock investing.  You buy a property you like...values go down...well go out and buy another property and dollar cost average it down.  If I liked it at $200k, I probably like it a lot more at $180k.

Other easy parallels are connecting the dots from cashflow to a dividend.  We can look at a low dividend stock like an insurance company, versus say a telecom with a high dividend.  That dividend difference is a reflection of the risk of the two stocks and or industries, with insurance being a relatively low risk company or industry versus the higher risk in a telecom.  The same thing goes to the cashflow of a property.  Typically a lower yield property is the market determining that that property is lower risk than some huge pro forma cash flow property, which likely has that proforma cash flow being so much larger because the market views it as a higher risk asset.

Originally posted by @Mike Dymski :
Originally posted by @Craig Curelop:

@Mike Dymski - I am a fan of dollar cost averaging. Buy a cash flowing property once every 12-18 months consistently over a long period of time 10+ years. That way you mitigate any market risk by buying when it's low, buying when it's high, and buying in between.

As long as the property cash flows, I really don't care what the value of the home does. 

"Laddering" is a great approach.  It's just less feasible in the commercial world with larger deals and large inflows and outflows in certain periods.

Well said on the cash flow and value.  Many investors' portfolios cash flowed right though the last recession.  I can't relate to ever purchasing a property in a location where I am concerned with extended vacancy or a large reduction in rents....that's not a market problem, that's a strategy problem.

 @mike dymski 

laddering is a great idea

:)