There are many investors who decide to wait until the market crashes before purchasing real estate. After all, some investors reason, if the market is down, then prices are probably at their lowest point, and any investment is sure to show gains. The problem is, that philosophy just doesn’t work for multiple reasons.
Reason 1: You need to be an active player.
If you’re sitting on the sidelines waiting for the market to tank, you won’t be tuned in to the players who are making deals. In fact, you won’t hear of deals at all. It’s not a matter of deciding to jump in when you feel the timing is right; you have to be playing all along just like everyone else is.
Commercial real estate brokers and syndicators like to offer deals to those people who always show an interest in what they are offering. If you’re not around because you’re waiting for the market to slow, you could be out of the proverbial loop.
You’ve probably heard the old proverb “He who hesitates is lost.” Simply put, swift action leads to success, while self-doubt is a prelude to disaster. This is especially true when it comes to finding killer investment deals in real estate. If you can’t commit to a decision when one is quickly needed, you’re going to miss out.
Another problem determining that the market has actually “tanked.” Different investors have their own takes on what defines a bottomed-out real estate market, so there really isn’t a barometer that accurately measures a market’s low point. Certain properties may be available at reduced prices for a multitude of reasons, but this can happen even when the market is booming.
I am not saying that you should buy at any price and overpay for a property — in fact, I never overpay. What I am saying is that investors should adjust their expectations based on the stage of the real estate cycle. For example, a few years ago, 20% internal rate of return (IRR) was common for multifamily properties. Today, however, we have adjusted our model to look for 15–17% IRR. It doesn’t mean we’ll overpay and be fine with 9% IRR, but we are satisfied with 15% IRR, which is still a solid return. And if and when opportunities present themselves in a downturn, as active players in the market, we’ll be there to take advantage of those opportunities.
Reason 2: Financing may be a problem.
In a distressed market, banks and other lenders might not be motivated to finance a property — especially if they have to adjust mark-to-market values. Mark-to-market is a type of accounting practice where the value of an asset is recorded to reflect its current market level. However, problems can happen with the market-based measure doesn’t accurately reflect the asset’s true value.
The last time this happened was during the financial crisis of 2008-2009. At that time, the mortgage-backed securities held as assets on banks’ balance sheets couldn’t be valued efficiently because those securities had disappeared. This issue was eliminated when the Financial Accounting Standards Board voted to allow the valuation to be based on a price reflective of an orderly market, instead of a market that would force liquidation.
The bottom line is that in a down market, banks won’t be interested in financing a “fire sale” property, because they won’t necessarily need to get rid of those underperforming loans. That’s why many investors prefer to invest in a strong real estate market. So the best course of action is to not sit and wait for the market to tank before trying to acquire and finance a property. You simply may be out of luck.
It’s important to remember that real estate is a cyclical business. It has historically had its peaks and valleys, and investors are always looking to “buy low and sell high.” Unfortunately, it’s hard to predict when a property is at its lowest point before buying, or its highest point if selling is a consideration. The real estate market is simply too volatile to make such predictions.
Summary
It really doesn’t pay to wait for the real estate market to “tank” before investing, as history shows there is a lot of money to be made as a real estate investor regardless of when you invest in a project. You can’t sit on the sidelines and wait for your turn to play, because the game just doesn’t work this way. Lastly, don’t expect banks to be motivated to sell properties at a deep discount, because regulations can help them avoid such a drastic step, just as it did before. As long as you adjust your expectations and are comfortable with them, you’ll still be around when and if great opportunities arise.