Real Estate Investment based on how the market IS, not its up-ness or down-ness (aka Timing)

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I read several posts lately about the dire nature of the real estate market with questions about whether now is a good time to invest based on the “badness” of the market. These are sensible warnings and no one can be faulted for calling a spade a spade. However, the assumption that someone is in denial if they claim now is a good time to invest might be a little too sweeping as generalizations go.

I agree that anyone who has his head in the sand and is pretending all is well is treading on a thin mindset, but there is something else to consider. The market is what it is. In a way, an investor’s impetus to invest is outside comparative market analysis, except in the sense of predicting time frames for turnarounds. In other words, an investor’s main concern is not if the market is up or down, but rather does a particular real estate investment make sense in the context of where the market is and the future prospect of where the market might go.

Hardly anyone will ever time the market perfectly, and it’s not necessary. The main thing is to take each investment and judge by it by numbers. Right now may be the best time to buy if the numbers work and if your prediction of turnaround time is fairly accurate. Of course no one knows if the market will get drastically worse, but when the market is good no one knows if the market will get drastically better, so we take chances that extremes will be avoided. There is risk involved in investing.

Investors are a different breed who live by risks. An investor weighs risks in an up market just as he weighs risks in a down market. The risk in a down market is that the market will continue downward further than expected, so getting the best price and establishing cash flow are important. If you decide to buy in a down market, you are betting the market will not go down further (or much further) than the price reduction you negotiate and that the cash flow will help offset what further downward movement there is until the market turns upward again. In an up market price is still important although you may have to pay closer to asking price, but you are betting the market will continue to rise until you get to a point where you can sell for a profit.

If interest rates are following the heat then rates should be lower in a down market and higher in an over-heated market – this is if we are going by rational actions. But whatever may be the case, an investor need only judge by how the market IS, not by its “goodness” or “badness”.

If you have judged this market for what it IS and looked at the numbers that have to materialize for the investment to make sense, then now is as good a time as any to invest. It’s a matter of knowing your market and predicting the future fairly well. If you are in a market where the economy is diverse and the only thing holding it back is a national slowdown, then it’s pretty safe to say your market will rebound and probably won’t sink into oblivion.

At any given time markets are in flux, but you should be able to predict fairly well if nothing major has changed locally. If you are trying to time the market and waiting for a bell to signal the absolute bottom, you will most likely miss it because there are no bells, just investment judgment.

This is what investing is about. This is what separates investors from normal buyers who buy when they think every is good and is going to get better. It will take more number crunching and you have to use discipline to stick with a plan of action, but if you’ve made a plan based on the numbers that have to make sense, then the rest is the risk an investor takes.

This may not make sense to some people, but it does to me.

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4 Comments

  1. Clifton Pape on

    This article touches on key points about what to do in any given market in a simplistic way the writer is to be commended. The main thing any investor must look at when investing is time horizon and what are they defining as the “market.” To many people put to much of thier attention on the national market instead of focusing on the specific sub-market they are trying to make an investment decision in. Of course you must always consider the back drop of the macro-economic environment when considering any investment decision but, the bulk of your consideration should be the market you are investing in.

  2. This guy is on to something but just didn’t define it well. It depends on the asset class. Let’s focus on single family homes. Regardless of the price right now, if you are in an area that has experienced significant price declines and want to buy for a primary residence then do so. You’re at the low end of a cycle that usually lasts for about 15 years. Timing is critical and now is a once in a generation opportunity. If you’re an investor buying single family homes and the price is down to the point you can generate good cash flow then buy. You will be able to buy, rent and hold and take advantage of the same real estate cycle alluded to above. If you want to buy other asset classes, apartments, office or retail then go to my website and you’ll se a post this weekend on why you need to wait and keep your powder dry.

    If Joshua would let me write here, you wouldn’t have to go to my website but we’re feuding. Kind of a geek cage fight.

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