Buy now? Or wait for the next crash? The math may surprise you.

Should you wait for better market conditions before you buy your next investment property?

Should I wait until the Real Estate market crashes before I buy my first (or next) rental?

This is a question we often get from Real Estate Investors. Or oftentimes, investors will share that interest rates are too high right now and that we need to wait until rates come down.

Or when rates were below four percent, we often heard investors state that the market was too competitive and there was not enough inventory, so we were going to wait until there were more homes for sale.

When you study each of the above questions, they boil down to one underlying concern: the current market conditions are not what I want them to be, and therefore, I will wait until market conditions improve.

The truth is that no one can predict future market conditions with absolute certainty, and indeed, no one can predict when or if the real estate market will crash. From being investors and helping other investors buy and sell rental properties, we have noticed that the investors waiting for the subsequent significant correction or perfect market conditions are most often the least successful.

Here are three main reasons why timing the real estate market does not work.

More Favorable Conditions On One Aspect of Real Estate Lead to Less Favorable Conditions in another

Let's say you want to buy an investment property but think the rates are too high. So you wait until rates drop. But then, when rates fall, everyone is looking to buy, so inventory becomes low. When inventory becomes low, this typically drives up prices. So now the rates are appropriate, but there is nothing to buy, and everything you can buy seems too expensive.

On the other hand, when rates are higher, properties are priced more appropriately, and you have inventory to choose from. But because the rates are too high, you don't buy.

If you are waiting for perfect market conditions, you will likely never buy real estate. An advantage in one aspect of real estate leads to a disadvantage in another and vice versa.

The Opportunity Costs of Not Investing Is Higher Than Buying at the Perfect Time

The highest costs of real estate investing are not investing in real estate. What do I mean by that?

The opportunity costs of not investing in real estate are tremendous.

For example, let's take compare two Real Estate investors. Contemplative Tim and Agressvie Tom.

Contemplative Tim is an investor waiting for perfect market conditions, and Aggressive Tom is looking to buy two rental properties a year. Both started their journey in 2017.

As a quick review, the four values of real estate are cash flow, appreciation, tax savings, and mortgage paydown. Now let's say that from 2018 to 2021, Aggressive Tom Buys one rental property at the beginning of the year, and contemplative Tim buys four at the begging of 2021. At the end of 2023, both Tom and Tim will have the same number of units, but we will compare who had a total value added to their wealth.

As you can see in the chart above, consistent Tom has $111,000 more in total value from his real estate investing than contemplative Tim. Now, this chart assumes a few variables, such as consistent appreciation. However, it also assumes that rents will never go up and cash flow will stay the same and assumes that the mortgage paydown is the same year over year. We also know that as the loan matures, the more you pay down the principal.

This chart illustrates the importance of time in the market, not timing the market. The issue with timing the real estate market is that the only value you consider when timing the market is the price you pay for the asset. If you sit on the sidelines, you lose the opportunity on the tax advantages real estate provides, the cash flow you earn, and the mortgage paydown.

The 20 Mile March

In Jim Collins's Book, Great By Choice, Collins researches why some companies thrive in uncertainty and why some people despite it. Based on nine years of research, one of the findings Collins has is Companies that thrive in uncertainty set their annual targets and hit them year after year. They don’t blow their targets out of the water but don’t miss them. A steady growth year over year yields a higher return in the long run than a company with high variability growth. Below is an excerpt from Collins's Book Great by choice. You can find the full version here.

Imagine standing with your feet in the Pacific Ocean in San Diego, California, looking inland. You’re about to embark on a three-thousand-mile walk from San Diego to the tip of Maine. On the first day, you march 20 miles, leaving town. On the second day, you march 20 miles. And again, on the third day, you march 20 miles, heading into the heat of the desert. It’s hot, more than a hundred degrees, and you want to rest in the cool of your tent. But you don’t. You get up, and you march 20 miles. You keep the pace, 20 miles a day.

Then the weather cools, and you’re in comfortable conditions with the wind at your back, and you could go much farther. But you hold back, modulating your effort. You stick with your 20 miles. Then you reach the Colorado high mountains and get hit by snow, wind, and temperatures below zero—and all you want to do is stay in your tent. But you get up. You get dressed. You march your 20 miles. You keep up the effort—20 miles, 20 miles, 20 miles—then you cross into the plains, and it’s glorious springtime, and you can go 40 or 50 miles in a day. But you don’t. You sustain your pace, marching 20 miles. And eventually, you get to Maine.

Now, imagine another person who starts out with you on the same day in San Diego. He gets all excited by the journey and logs 40 miles the first day. Exhausted from his first gigantic day, he wakes up to hundred-degree temperatures. He decides to hang out until the weather cools, thinking, “I’ll make it up when conditions improve.” He maintains this pattern—big days with good conditions, whining and waiting in his tent on bad days—as he moves across the western United States. Just before the Colorado high mountains, he gets a spate of great weather and he goes all out, logging 40-to 50-mile days to make up lost ground. But then he hits a huge winter storm when utterly exhausted. It nearly kills him and he hunkers down in his tent, waiting for spring. When spring finally comes, he emerges, weakened, and stumbles off toward Maine. By the time he enters Kansas City, you, with your relentless 20-mile march, have already reached the tip of Maine. You win, by a huge margin.

Collins found this to be true with large companies, and we find this to be true with Real Estate investors. The investor that tries to wait until perfect market conditions to buy rentals has a lower return on investment than the investor buying one or two properties year-over-year. Over time you will develop a portfolio of excellent properties paying you and your family dividends for decades to come.