Timing the Real Estate Market

I hear investors and would be investors talk all the time about timing the market. Now relatively few of them actually say “timing the market” (because most people know that it’s very challenging to do) but their description of what they’re trying to do is just that. They talk about waiting for the bottom so they can buy at the lowest price possible or they talk about waiting a little longer to get it just a little cheaper. These investors usually describe themselves as “looking” for a good deal or the right time to buy but they are really just suffering from analysis paralysis (spending all their time analyzing deals or the market and never taking action).

Let me tell you why trying to time the market or the thinking that you should way to buy at the bottom is flawed. Let’s just say, for example, that real estate prices are going to drop another 10% and that represents the bottom of the market. We have Investor #1 that is currently investing and doesn’t subscribe to trying to time the market. They will buy good deals now and buy good deals later. Investor #2 is someone that subscribes to waiting for the bottom of the market to buy.

You have investor #1 that bought a house right now at $40,000 (appraisal at $80,000) and got it rented out, he bought another house when prices were 5% lower at $38,000 (appraisal at $76,000), and he bought a third house at the bottom of the market when prices were down 10% for $36,000 (appraisal at $72,000). His net result for buying houses now and buying in the future when the market bottoms out is 3 houses that he paid $114,000 for and are valued at $216,000 (3 times $72,000). That’s $102,000 in equity plus any rental income (~$200/mo. per house) that was received during that time.

You then have investor #2 that beat the odds and was able to time the real estate market perfectly and buy exactly at the bottom of the market. Not only that but even though he hasn’t been buying houses, he had all of the systems, processes, contractors, Realtors, title agents, other professionals, and financing in place at the exact time needed to make their one move, which all goes off without a hitch. They purchase a house at the bottom of the market for $36,000 that appraises for $72,000 giving him $36,000 in equity.

Now, 10 years down the road let’s say the housing prices have increased 20% from the bottom. Who’s ahead? The investor that bought one house at the bottom or the investor that bought before the bottom and at the bottom? Well Investor #1 ends up having 3 houses that he owes $114,000 (not counting paydown) on that are now worth $259,200 giving him $145,200 in equity. Investor #2 has 1 house that he owes $36,000 that is now worth $86,400 giving him $50,400 in equity.

That leaves Investor #1 ahead by over $94,000 in equity! Not even mentioning all of the additional rental income (Close to 3 times the amount of cash flow Investor #2 received) and three times the write-offs that they will receive.

I know, I can hear you talking already. Prices are going to increase by 20% in ten years from the bottom of the market? Well, if values only increase 10% over that 10 year time frame, Investor #1 is ahead by $80,400 in equity. If prices don’t increase at all from the bottom over the next 10 years, Investor #1 is still ahead by $66,000 in equity! Plus, as mentioned above, Investor #1 will get almost three times more write offs and cash flow over that same time period. Who’s ahead now?

Whether you followed the numbers or cared to read through the analysis doesn’t really matter. The main point is that the investor that takes action now on conservative investments is always going to have the jump on the investor that tries to time the market and buy at the bottom. The investor that gains experience and assets now and in the future will have a much greater advantage by having the experience, processes, and contacts to take advantage of the market. The investor that is waiting for the bottom of the market will rarely be able to pull the trigger when they think the time is right.

Take massive amounts of focused action by working with other investors that are doing what you want to do and stop worrying about timing the market!

Be a Renegade,
Jared Pomranky
Renegade Detroit Investors

Metro-Detroit Real Estate Group
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[tags]real estate,market,timing,action,cash flow,investments[/tags]

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