Why Timing the Real Estate Market Rarely Works Out in Your Favor

Newcomers to the real estate investing world often think the secret to making gigantic profits is to “time” the real estate market correctly – in other words, buy real estate when prices are low and supply is high, then sell real estate when prices are high and supply is low.

This idea isn’t necessarily a bad one, but timing the real estate market rarely works out in your favor. Why is this the case? And what can you do about it?

The Concept

The core concept of timing the market is sound, and you can incorporate it into your investing strategy. Put in simple terms, buying low and selling high is exactly what you want; you want to acquire new purchases at the lowest possible price, while selling your assets at the highest possible price.

Considering the fact that real estate prices can fluctuate dramatically even over a period of just a few years, a few tweaks to your timing strategy could hypothetically result in a much, much bigger profit.

This is especially true if you can time the market consistently. Getting lucky with one sale when the market happens to be at a high point is much different than consistently buying and selling real estate at the right times.

The Reality

Of course, the reality of the real estate market is much different than this core concept would have you believe. These are just some of the complications:

• Market dynamics aren’t predictable. Nobody can predict the future of the real estate market, especially over the long term. There are hundreds of different variables that can influence the market, and sometimes the market seems to perform completely irrationally. Anyone who tells you they know for sure how prices are going to change in the next few years is either lying or delusional, since even the best experts in the real estate market can’t say these things for sure.
• You’re often juggling multiple variables. Market dynamics aren’t the only variable you have to consider in your decision. You also have to think about interest rates, your current levels of debt, your current income, your current risk tolerance, your personal preferences, and of course, the qualities of the individual property you’re buying.
• Local markets vary dramatically. We can usually summarize the performance of the entire American real estate market, but this doesn’t tell us how individual local markets are performing. Even if the country is, in general, facing a massive seller’s market, there are still going to be dozens to hundreds of cities with buyer’s markets active at the local level. Accordingly, there’s always an opportunity somewhere – regardless of market dynamics.
• Emotions distort your judgment. Emotions compromise your judgment and typically weaken your decisions. And when you try to time the market, your emotions are amplified. You might be afraid of missing out on an otherwise great deal. You might be excited at the prospect of outsmarting other investors in the area. You might feel overly confident because one of your deals went the right way. These emotions aren’t wrong to feel; what’s important is that you’re able to separate your logical decision making from these emotions.
• There’s no such thing as a perfect time. It’s also important to realize that there’s no such thing as a perfect time to buy or sell in real estate. Even if you time the market somewhat effectively, it’s statistically impossible that you’re going to hit the exact peak of the market swing.
• Experts struggle and amateurs flounder. Real estate investors with literal decades of experience and genius-level tactics find it almost impossible to time the market correctly. Their predictions are often wrong and their time-related investing decisions often fall flat. If the best real estate investors in the country can’t time the market, what hope does an amateur have?
• Even near perfect timing doesn’t guarantee results. Finally, remember that even if you manage to close the deal with near perfect timing, that doesn’t guarantee you’re going to see beneficial results. If you buy the wrong property in the wrong area, effective timing isn’t going to magically make your investment worthwhile.

The Solutions

So what are the solutions? If timing the market isn’t practical or consistently valuable, what can you do to improve your real estate investing strategy?

• Treat market timing as a secondary variable. Things like buying in the right area, accurately estimating repair costs, and finding good tenants are all more important and more controllable than market timing. Market timing is still somewhat important, and you can use current economic conditions as an influential factor in all your real estate decisions. But for the most part, real estate investors benefit by treating market timing only as a secondary variable. In other words, don’t let the current state of the market or your predictions about the near future of the market prevent you from taking advantage of an awesome opportunity.
• Diversify your real estate portfolio. All investors can effectively minimize risk by diversifying their portfolios. If you buy many different properties from many different areas, you’ll be insulated from any dramatic changes related to market dynamics. In other words, you won’t have to worry as much about the timing of your decisions.
• Invest in real estate consistently. You can also practice something akin to dollar cost averaging (DCA), where an investor consistently puts a fixed amount of money into an asset at predefined intervals. The idea here is to secure assets for a fair price on average, rather than getting an exceptionally good or exceptionally bad price. To execute this, you’ll need to buy property (or REITs) regularly.

Timing the real estate market is impossibly difficult for most investors. But that doesn’t mean you can’t be a successful real estate investor. With the right strategists at your side, you’ll have a much better chance of finding excellent opportunities – and managing your existing real estate more effectively. Green

Residential is here to help you throughout the process, so contact us for more information today!