The Right Time to Buy: An Investor Perspective

by Cooksquared

Real Estate Investor

Author website

As we considered when to restart Cook Squared Enterprises, one question we had to ask ourselves was if it was the right time to buy. With interest rates creeping up and home values creeping down, is now the time to make a large purchase? Additionally, in my spare time I dabble in a little econometrics. For those of you who are unfamiliar with the term, it is essentially taking a lot of past factors and trying to predict something in the future. In this case, I look at past real estate value indicators and trying to predict future trends in real estate. For those of you who think this is getting ready to get technical, don’t worry, it is definitely not (sorry to those of you who thought it was). I only do this to see if there are clear markets I should avoid, markets like Las Vegas and Florida that have shown obvious signs of over building and over investing.

Back to the topic at hand, when should you enter the market? First and foremost, it is always a great time to start investing. There is always value in the market, though some times it is harder to find that value than other times. There is always a house or building that has not been taken care of properly, with motivated sellers. These are great properties to buy, just about anytime. More importantly, the real estate market is cyclical. Predicting cycles can some times be like predicting the weather. Since many of the greatest economists cannot seem to do either, it is not worth trying to jump in at the trough and get out at the peak. If anyone tells you differently, ask them if they have any swamp land they can sell you as well.

Buy and hold investors almost always make money because of the nature of real estate price increases. Even if you get in at a peak and hold, real estate typically comes back to bail the hold investor out. Established investors who only work in certain markets have even more of an advantage because they have seen peaks and valleys. They can read signs much better and know when it’s a great time to buy. Better still, they know what properties to buy because they are so familiar with the hot (and cold) spots in the area.

So how can this information help you? First, I encourage strategy diversification. It helps you to ride the wave of investment feast and famine. If you are a flipper and you find a great opportunity to hold, do it. That cash flow will come in handy when the flips dry up, or worse, when you make a major mistake and have to hold a non-performing property. Additionally, if you are a hold investor and you see a great opportunity to sell, take it. If you live in a market where there is sudden, unwarranted price escalation, prep your property for sale.

A quick caveat all sellers should consider. Sellers often feel regret when they sell their property before the peak. The problem with that thinking is that sellers are making an assumption that if they held the property they would have some mystical knowledge of where the peak would have been. Sellers don’t, but if you do, please email me ASAP (I am not in the market for swamp land, so don’t bother). Focus on your return. If you have an early opportunity to get a 25% or better Internal Rate of Return (IRR), take it. Furthermore, when you get that return, reinvest it into another property you can improve and hold. These quick wins can help you stack properties quicker than if you held them for the cash flow.

Lastly, it is important to consider the market when you decide on property types. A quick example will make this clear. If you only invest in apartment buildings, then you want to watch out for housing prices and interest rates in your area. If rates get low and prices are still reasonable, people will flock from apartments to houses, leaving you with high vacancy. Doing some easy math (Net Operating Income falls) will show you that prices of apartments buildings will decline. Once this happens however, it might be a good time to buy apartment buildings. Why? Inevitably, housing prices will begin to rise and price people out of the market. As new home buyers enter the market, they will not be able to afford homes, but might be willing to settle for an apartment while they save. Thus, the cycle begins. Every property type has its own cycle. Make sure you are familiar with yours.