What Every Real Estate Investor Should Know About Timing the Market
In today’s post, Julie Broad of RevNYou is going to share what every real estate investor should know about timing the market.
Christmas gatherings at the Broad household always mean at least one competitive game of Monopoly is on the agenda. We’re a family of real estate investors, and it’s not just about pride, it’s about proving our real estate investing prowess.
Monopoly, the game, holds few similarities to real estate investing in the real world. But, the big secret to gaining a serious advantage in Monopoly is the same secret to winning in real life real estate investing, and it has everything to do with timing.
You want to buy as much real estate as you can, as early on in the game (or in your life) as possible . . . which means, the best TIME to buy real estate is ALWAYS now.
Here’s the caveat though – when you play Monopoly, what do you do? You open up the box, and read the starting line which states “The Objective of the Game is to Become the Wealthiest Player Through Buying, Renting and Selling Property”. Then, you probably pick your playing piece, roll the dice and get going. If this is how you play, you’ve skipped some critical steps in the process. You may succeed, but your chances of failure are higher than your chances of success.
Similar to Monopoly where you shouldn’t start the game without reading the rules, in real life investing you shouldn’t start buying houses without first figuring out a few things. In particular, you should sit down and think through your real estate investing objectives. Then, do some research to find a market with good fundamental economic conditions, and finally find and evaluate a property to find one that meets your objectives.
Once you’ve done that, you start buying. And you hold onto your property, covering your costs and funding your other investments with the money you make from the rent. You make adjustments as you go… you might add houses, or take money out of one property to fund an appealing opportunity.
This doesn’t mean you take days to read the rules, but you read them. It also doesn’t mean you take years to figure out what market to invest in or what property to buy. Know what you want to get out of your investing and learn enough to be prepared to reach your goals. But then, get started. You shouldn’t wait out time until you find the absolute perfect market condition AND the absolute perfect property. You will never find it.
A player, who travels around the board in Monopoly hoping to land on Boardwalk, may never land on Boardwalk. That same player will lose to the other players that settled for buying a lesser property at the beginning of the game. Sitting on the sidelines waiting for the perfect property or the perfect market doesn’t get you in the game.
It’s not about luck…not even in Monopoly. Luck plays a little role in all our lives, but nothing is really THAT random. Just as you can make money in a downward moving market, you can lose money in an upward market.
The secret every real estate investor should know about timing the market, is comprised of two parts. The first part is that now is always the best time to buy real estate IF, and here comes the second part, you can find properties that will carry themselves through bad times.
I haven’t even talked about the fact that market conditions, right now, are great for real estate investors to find deals in. Interest rates are low, prices have come down, there is a ton of inventory on the market AND homes are very slow to sell. It’s really the perfect time… but I am not even trying to convince you of that. I just trying to convince you that, even if the property you buy today goes down in value tomorrow, you will still be successful as long as you buy one that brings in enough rent to cover its costs. If you can find deals like this, NOW is ALWAYS the best time to buy.
I’m sure you’re still not convinced, so I will take a real life example from my husband’s first ever real estate investment. In this example, interest rates were higher then AND they bought at the peaking of the market. In other words, if timing mattered, they picked the absolute worst time to buy.
So here’s the numbers:
In 1992, they bought this property which was a house with a basement suite for $132,000. They put 25% down and got a mortgage for $99,000 at 8% amortized over 25 years. Their monthly payments were $755/month, and they collected $1,110/month in rent. In less than a year, property values started tumbling down. Within about three years their house was worth about the $110,000.
But, they still made money on this property! It took another 6 years for the value of the property to return to what they’d paid for it, but in the meantime, their tenants paid down $20,442 on the mortgage.
By 2007, their property was worth $300,000, and had a minimal outstanding mortgage balance of $59,628* which works out to a 14% annual return on investment over the 15 years!
(*Assumed interest rates of 8% for the first five years, then 7% and then 6% for the last two five year periods)
But, let’s pretend market values didn’t increase so dramatically. Instead, let’s assume there was only an average increase in value of 2% per year (the average historical increase is actually 4% or so). In that case, the property would have been worth $177,654 in 2007. That means that they would have made $177,654 – $59,628 = $118,026 or a 9% annual compounded return on their original investment of $33,000.
This property was cash flow neutral the entire time they owned it, but if it had given them extra money each month that would also be part of their return on investment!
It’s a simple example, and it doesn’t account for inflation, but I just wanted to show you that good properties bought at the wrong time will still make money if you hold onto them.
Real estate investing is not as much about timing the market as it is about finding a good deal in an area where there will always be strong demand for rental units. If a property commands a high enough rent rate that you can cover your costs on the property and its area has a strong foundation of job and population growth, buy it. You don’t know for certain if the market is going to go up or down, but you do know for certain you’ve found a good property. Besides, the sooner you buy, the sooner you start paying that mortgage down and building equity!
The failure to take action will result in loss. And simply rolling the dice and cruising around the Monopoly board hoping to land on that perfect property will guarantee that you don’t win the game. So, get clear on what you need to do, and do it. There really is no time like the present.
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Julie Broad, and her husband Dave Peniuk, publish a free real estate investing newsletter where they share their secrets to becoming millionaire real estate investors. You can sign up for their newsletter and view past articles at: http://www.revnyou.com
Tags: real estate investing, Real Estate Investment Buying Strategies, timing the market
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Patrick Riddle:
Dusty Keefe:
[...] December 17, 2008 by Julie Everyone always asks Dave and I if now is a good time to invest in real estate. Today, I am pleased to present an answer to that question in my guest post over at Patrick Riddle’s great blog Must Know Investing: What Every Real Estate Investor Should Know About Timing the Market. [...]
Wow so much to think about! It will be really difficult to step out right now in these terrifying times. But I am very optimistic about the future. Thanks!
Hi Julie
I stumpled across your site and have found it extremely informative. I’ve subscribed to your newsletter and look forward to your future writings!!
Jeff
[...] 2. What Every Real Estate Investor Should Know About Timing the Market [...]