By Neil Walter
Many investors today wonder if they should wait for the market to fall before investing in real estate—but is this the best investment strategy?
In my opinion, waiting for the market to correct before buying is not the most strategic approach to real estate investing. Why? Because timing the market is extremely challenging. Most investors believe they can time the market, but just like the stock market, the real estate market is very difficult to predict. While there are some who made a lot of money buying in 2012 and riding the subsequent recovery and expansion, replicating this strategy consistently over time is very difficult.
Some investors choose to wait for the market to drop so they can buy low in the next cycle, but many have already been waiting years longer than expected. During that time, real estate has appreciated significantly while they've stood on the sidelines. Waiting too long results in missed opportunities, regret for missing upside and an inability to reach long-term financial goals.
Help investors evaluate some of the challenges with timing the market and investing after a correction in real estate prices by encouraging them to consider the following:
- In a recession, investors have less money to invest, and it's more difficult to raise capital.
- Lending standards typically tighten, making it harder to borrow.
- While the broad market may have corrected, your local market may not have seen a correction.
- The trough of the correction may still be higher than price levels just a few years prior.
- Most investors aren't disciplined enough to save aggressively in an expansion and invest aggressively in a recession.
- When asset prices are falling, it's as hard to call the bottom as it is to call the top when asset prices are rising.
The good news? As a trusted real estate agent and valued advisor, there are ways you can assist investors in creating value without waiting on the real estate market to adjust. Here's how:
Highlight the Benefits of a Consistent, Long-Term Investment Strategy: Because of market timing challenges, advising clients to adapt a consistent investment plan with a long-term view is the right approach.
Focus on Overlooked Properties: A concern I often hear when the market has gone up is that all the good deals are gone. It's common for new investors to feel they need to find something that hasn't come to market in order to buy. While there are opportunities with off-market deals, some of the best investments are properties that have been overlooked due to being on the market a long time. Counsel clients that updating the look and feel, making improvements and repositioning a property in the market can all make a big difference. Their investments should be based on fundamentals, not speculation.
Encourage Value-Added Strategies: Updating, improving and repositioning a property are all considered value-added strategies. These are great ways to build equity by improving an asset. Let clients know that this is a strong approach to consider when investing in real estate because the investor is buying an asset that requires their individual vision and/or hard work. The investor must see something the broader market doesn't see, or have a capability that's unique. Other things to share with clients when encouraging value-added strategies include:
- "Fix and Flips" vs. Cosmetic Updates: "Fix and flips" are properties purchased with the intent of fixing and selling quickly. The strategy requires agents helping hopeful investors find a property that will appreciate more than the required investment it takes to fix it up. Although investors may see extraordinary renovations with high return rates on TV, simple changes often get the best results. Updating carpet, paint, appliances, landscaping, bathrooms and the kitchen can all have a big impact without tearing down walls or fundamentally changing the floorplan. Help your client determine what's best for them financially and time-wise.
- Establishing Realistic Expectations: To make a value-added strategy work, agents should set expectations and advise that it's not realistic to buy a home, duplex or small multifamily property and then simply resell it for a profit. Investors have to buy well then improve the property in a way that makes it more valuable and creates margin.
- Holding Properties: Although less talked about, buying, fixing and holding is also a great value-added strategy for building equity in a longer-term investment.
- Avoiding Strategy Mistakes: The most common mistakes I see investors make are 1.) underestimating the cost of improvements and 2.) paying too much upfront. Successful value-added strategies reposition the property for immediate increases in market value or additional rental income. For example, when debating whether or not to upgrade a property's bathroom, agents can advise investors to ask themselves, "How much will my cash flow increase as a result of this upgrade?" If it's enough to justify the incremental investment, then an investor should consider it. Also, warn investors about paying too much upfront for an asset, whether single- or multifamily. While the seller wants to benefit from the potential upside, the buyer can't afford to pay it without jeopardizing their investment opportunity.
Real estate offers great investment opportunities and remains an effective way to build wealth. As a trusted agent, showcase to investors the value of long-term investing, keep an eye open for overlooked deals on the market and leverage value-added strategies to set your clients up for success without waiting for the next market correction.
Neil Walter is CEO of ERA Brokers Consolidated, a real estate brokerage infused with proprietary real estate technology. With nine offices between Las Vegas and Salt Lake City and more than 400 agents and staff, the firm operates a proprietary technology platform, ARTI®, publishes monthly market research and manages over 1,600 property management units for its clients. Additionally, Walter has taught at Dixie State University.