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Why Waiting for the Market to Tank is a Terrible Idea

by | Oct 28, 2020 | Real Estate Investing

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What you’re going to read about: 

  • Why timing the market is a fools game 
  • Why it’s not as simple as lower prices
  • Past low prices are not assured to come back
  • New up and coming markets will continue to be popular and grow
  • Why you’re better off making money and building skills in any phase of the market
  • Why It’s much more difficult to make money in a down market 

 

The upward trend of the housing market in some parts of the country is astonishing. The Pueblo housing market is seeing record high prices and demand. I am fortunate to talk with a lot of investors and would-be investors on a daily basis. I hear a common complaint followed by a simple solution quite frequently. It sounds something like this: “Prices are out of control. The market can’t sustain this level of upward growth. I am going to wait until the market tanks and then start investing.” 

 

On the surface, it seems like a logical solution. Prices are way too high, real estate is cyclical, you can just wait it out and prices will have to drop, right? Well, yeah — kind of. It’s far too simplistic though. I’m going to go over a few reasons why I think waiting to invest is a big mistake and why you need to jump in the market no matter the phase of the real estate cycle. 

 

Timing the real estate market is very difficult. Sure, you can forecast real estate demand using formulas like absorption, days on market, vacancy rates, employment, population growth, etc. but there’s always going to be wildcard factors that influence the market. In 2020, we’ve seen political unrest and a viral pandemic cause serious concern for real estate investors. Nobody saw that coming

 

Ask any investor that went through the last market downturn why they didn’t buy more real estate. It’s partially because when the market is down, nobody knows when it will pick back up. You’re too close to the forest to see the trees. It’s not just that demand is lower, the entire economy is in a stagnant or declining state. 

 

Focusing on price prevents you from identifying value. The bigger point that I want to make is that when you’re overly concerned about price, you’re preventing yourself from seeking great value. You can’t control the timing of the market. What you can control is the amount of risk you take and the quality of the asset you acquire. There is great value to be had in any phase of the market cycle. The value I’m referring to is beyond the physical and financial aspects of a property. There is value to be created through the relationships and skills you build through the real estate investing process. 

 

It’s a lot more difficult to make money in a down market. We need to address what a down market really is: low investor confidence in projected investment performance. That’s what a down market is in a nutshell. Prices are down because investor confidence is down. There is less demand for space. There is higher vacancy as a result. If you want to invest in a down market, consider purchasing an urban office building. At the time of this writing (Fall 2020), investor confidence is very low for the future of office space. Office buildings in large markets like New York and Los Angeles are experiencing record high vacancy rates. Values are plummeting. And investors are skeptical to acquire office buildings because things might get worse before they get better. 

 

You need to adapt your investment strategy to meet the phase of the market. The trend is your friend. Real estate investing requires entrepreneurial talent. You have to be able to identify opportunities and adapt your investing strategies to fill the market demand. The market is not yours for the molding, instead you must mold your approach to the market. In an appreciating market, it’s a great time to make huge profits fixing and flipping houses, developing commercial assets, buying and selling apartments, and making big profits. Don’t be afraid to take a risk. Be confident in your entrepreneurial ability to fill the demands of the market. 

 

Previously untapped markets will continue to be in demand during a down market. Colorado has experienced a tremendous amount of growth over the last 10 years. I started college in Denver in the fall of 2010. I remember each lease renewal my rent rate increased by 15-20%. Then it hit a point where renewals were no longer offered because landlords could maximize the building’s income by forcing tenant turnover, making improvements to the unit, then marketing for a significantly higher rate i.e. repositioning

 

There are a lot of investors that are very confident in the long term potential of the Front Range in Colorado. Even if the market does take a dive in the near future, I believe Colorado will continue to be a desirable place to live and invest. The days of buying $50,000 houses in Pueblo are over. We had our chance. The market has grown and those days are over! 

 

Last point: real estate investing requires hands on learning, you can’t just jump in when prices are down and expect to profit like a pro. The real estate investment process is learned by doing. I’ve completed well over one hundred transactions in the past four years and I’m still learning. When prices are down, lenders want to know they’re financing an investor that has an established track record of successful dealmaking. You’re much better off getting in while the market is hot rather than sitting on the sidelines till it cools down. It’s a better time to learn the trade, make some money, and build your skills and relationships. That way when the market does turn, you’re ready to go!

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