Real Estate Is It a Great Time To Buy?
We live in times of change as it pertains to real estate investment. We’re at a critical juncture in the residential real estate market. An accurate prediction of the future could mean thousands of dollars in savings or profit for investors.
Leaving aside the terminally pessimistic, who are pessimistic today and will stay forever pessimistic, and ditto the overly optimistic fools, what conclusions can a sensible savvy real estate investor draw today from events of the past few months in an effort to predict the prices of the future?
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Consider for a moment the absolutely dismal performance of market strategists, economists and weather forecasters. On market strategists, I speak from personal experience as I worked at Lehman Brothers for one. Strategists like Abby Joseph Cohen at Goldman Sachs stayed raging bulls through the painful correction. Each correction - according to these strategists - was yet another buying opportunity and each continued to forecast a bull market around the corner even as the market plummeted. Market strategists happened to be the poster childs of the correction, along with the infamous Henry Blodget's $600 price forecast for Amazon.
Lesson: It was a great time to buy when stocks plummeted in 2002. Unfortunately, most individual investors were selling, swearing they would never own stocks again. It was also a great time to sell in Oct 2007 when the market reached frenzied levels of optimism.
Similarly, I witnessed the director of the national weather center and others out of Colorado predicted 30+ major storms for 2006 and preyed on the fears of those living in coastal areas. It turned out their forecasts had no accuracy whatsoever. Actual major storms for 2006 – 1. Again, Max Mayfield and other so called “experts” based their forecasts on their expectations of a continuation of past events.
What can real estate investors learn from this and many similar blatant forecasting errors? Simply it is this.
The future is very different from the past and most things revert back to the mean or average over time. Most investors, however, commit the mistake of projecting current conditions into the foreseeable future.
During bull market years, the prevailing sentiment is that real estate prices will rise consistently for years. During bear markets, the prevailing sentiment is that real estate is dead and the market will not recover anytime in the next 5 years.
The truth, we submit, is somewhere in between and lies in buying soundly and fairly valued property. And the key to valuation is interest rates and rental values. When the cost of renting a property is roughly equal to the cost of ownership, that we submit is a good time to start looking to buy.
The Key To Real Estate Sales Riches
The key to successful real estate sales lies in following some basic and fundamental principles:
- Make your money on the purchase.
- Never pay more for your investment than the present value of future cash flows your investment will generate. In other words, make sure you can earn a positive return over your investment horizon.
- Invest in areas with growing population, steady economic prospects and a pro-growth legislature
- Invest in the best location you can possibly afford as long as the financials make sense
- Invest non-emotionally, investment is always about the numbers
- Invest for the long term
The Most Important Lesson Of All for Real Estate Investors
Be contrarian. Realize that the media, and the average joe on the street is always wrong. If taxi drivers are investing in real estate or the Nasdaq, it is time to sell. If others are screaming to sell, it is time to buy.
Those that buy at the peak of the frenzy will almost always have to wait a long time before they can expect to make money.
The Best Time To Buy Investment Real Estate
The time to buy is always when others are looking to sell, screaming to sell, complaining about how terrible the real estate market is and how terrible prospects are for the foreseeable future.
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