Prices are rising, rents are stabilizing, and the ROI just does not seem to be what it used to be. Gee, did I wait too long to start investing? Not if you remember the cardinal rule of real estate.
True investors know that it is always a good time to invest in real estate. So how do they do it when the market heats up?
Simple, they invest as they always do, with the basic fundamentals of real estate. This is (say it with me) “location, location, location.”
It is interesting how many questions that I find myself answering with this same basic reply.
You may hear some sales people nowadays claim that you should “time the market,” hinting that you should be waiting for years at the time for market conditions to change before flinching and getting in the game. While that might work for part time or hobby investors, that is no more practical for professional investors than a stock market investor to sideline themselves for years at the time, waiting for the stock market to crash or rocket. In reality, professional investors make their living in real estate, regardless of market conditions. Instead of “timing the market” professional real estate investors simply find prime locations where the time is now.
The basics of real estate investing
Seasoned investors will invest in strong emerging markets and they ride the economic wave of prosperity for that market. After the wave peaks they sell and reposition to the next emerging market. In certain areas today the markets are petering out, while other locations are representing better market conditions.
Market statistic areas
The country is made up of 381 MSA’s (market statistic areas) which are essentially large cities and their surrounding areas. Each of these markets have their own distinctions and knowing when a market is about to transition from a hold market to a seller’s’ market will be essential to know when not to buy.
Another item of key importance is whether you already own a property in a transitioning market; you may want to consider selling and positioning your assets to the next emerging market.
Knowing what market cycle your investment city is in is paramount to riding the wave of prosperity and knowing when to get in and when to get out is key. Watch for these distinctions within your city.
The Hold market:
· Unemployment is low and still shrinking
· Housing inventory is rapidly selling
· Rental prices are still rising
· DOM (days on market) for home sales are short
· Speculators are buying everything in site
· Home prices are still rising
This hold market (also considered the wealth market) is where people realize great equity growth. Following a hold market is a sellers’ market (the pendulum reaches the top and begins to swing downward). This is perhaps the most complex shift to notice. Hello Denver, I am looking at you.
This is the market where people are making lots of money and tell everyone else about their successes. Everyone wants to get in as the highway to real estate investing is full and looks appealing to everyone else.
Take notice of the changing distinctions
As many markets in the U.S. are currently in the hold cycles, taking notice of the changing tides is important. Headlines often can suggest this change is about to occur so reading between the lines to uncover these distinctions will protect you from investing in the wrong markets or holding onto properties too long within these markets.
Here are the dynamics to watch for which may suggest a transition to the sellers’ market:
Seller’s market follows…
· Housing inventory starts to increase
· DOM (days on market) time begins to increase
· Speculators are still buying but only those newbies who are not monitoring the markets
· New construction is becoming abundant with a likelihood of overbuilding
· Price of construction is rising
· Businesses and jobs shows signs of slowdowns
Your strategy in these markets now of course is to not buy!
If you already own in these markets that is great! (See Forbes Booming markets list). You rode a nice wave forward, and now may be a good time to sell, do a 1031 tax deferred exchange out from this overheated market and re-invest into the next buyers’ market while sales are still strong.
Consult with your real estate power team
If you are not certain what you should do, remember real estate is about buying and holding real estate long term. This does not mean you must hold the same property forever. If you suspect that you are in a market that is overheated and about to enter a seller’s market consult with your real estate power team and consider a move on the next emerging market.