How can you tell if the real estate market is too hot to enter?

Question

Hi There!

I am a new BP member, but had been an avid listener since last year. I have a couple of buy and hold properties in Las Vegas and wanted to add one more in my portfolio. In my research this question had been lingering in my mind for quite sometime, since Las Vegas home prices and other popular metropolitan area had been steadily going up. I want to seek some help as to what kind of metric or data to look for to find out if the market price is way over priced for buy and hold investment.

Also, if I am generating positive cash flow and I'm not seeking for much appreciation should I even need to consider this question.

Thanks in advance,

Eric

David Thompson · Answer

Hi Eric,

I would review your original reasons you invested in Las Vegas and see if they are still valid, especially if you are a long term buy n hold investor.  Las Vegas does not come up on my radar screen when I was researching threads on best markets for apartment investing a few months back. What is the population and job growth trends for Las Vegas?  Is it above national averages, rank in top 10 nationally?   Is the job based diverse?  I always think of Vegas as a place to go when I have discretionary income (entertainment).  If the economy goes south I think Vegas suffers more than the average city.  You'd have to do your own research to validate that assumption.

Secondly, you mention you are a cash flow investor.  If you look at top cash flow markets around the country, would Vegas be there?  I can think of several cities that are more cash flow oriented, where there are diverse, stable industries (leading employers in Health care, financial services, food industry, colleges) providing a stronger economic underpinning that may hold up better in a down turn and do not have a history of getting frothy.  Since you are already comfortable investing in another state, why not take this opportunity to research and diversify across other geographies?

My coach taught me 7 things to look for in a market:

1) Job trends

2) Rent trends

3) Vacancy trends

4) Diverse industries

5) Population growth

6) New construction present

7) Natural resources contribute to local economy

Some websites I like to gather this data:

1) www.irr.com

2) www.newgeography.com

3) www.bls.gov

4) www.census.gov

5) www.google.com (seriously good for unemployment / pop trends)

Wish you the best !

Eric Chiu · Answer

@Russell Brazil Yep I totally agree that no one can predict the future. All we can do as investor is to minimize our risk.

Michael Lam I plan to keep my properties for more than 15 years. Yeah you are right I shouldn't need to worry about this question at all.

Michael Lam · Answer

@Charlie Fitzgerald and @Eric Chiu

This becomes more relevant if your looking at an even larger plan.  The question may not be relevant should you enter now since your not looking at appreciation to help answer this question.  However I would ask, "with my current assets/liquidity, is it best to enter now or is there a likely hood of a correction which my assets/liquidity would be better leverage?"

As investor you look for best deals, as a data driven investor, you look for signals that reduces your risk.  With so much data and information out there, why not leverage this information

I agree that you can't "time" the market,  that is like playing stock market.  But with information you can make sound analysis.  (not same as "sound premise")

Charlie Fitzgerald · Answer

What's your cut strategy?  If you are buying and holding for at least x years to meet your investing goals, where the market is dies not really factor.  You will never time it perfectly...

Michael Lam · Answer

Hi @Eric Chiu

I love this question and I get this all the time.  I'm actually going to write a blog about this on my external blog site along with a derivative of it here in BP.

Yes the market is hot, in yy area, Silicon Valley, its insane right now.  I won't go into much details because its a lot that I review and analyize, but I do make my deciison base on 4 factors

1.  Local market

2.  US Economy

3.  World Economy

4.  Sentiment of the Buyers.

This might be a little too much or to some, "over" analyzing, but I do come from a software engineering background, so its ingrained in me to look at all possibilities to make the best decision.  Its a trait engineers are conditioned to have in school.

One quick way, is to compare local market regions, one area that is "less desirable" and another that is "desirable" by general public opinion.  Less desirable homes are area's that have bad reputation.  Generally these area will have a demographic of "low income" people living.  Lots of renters. If you do simple comps to look at historical pricing in that area, and compare that to "desirable" well known areas.  If the two comps gap in pricing are smaller, its a good sign your in a market people are desperate.  Which means to me its "too" hot.

Right now, in my opinion we are at this point in Bay Area.

Hope that helps :)

Russell Brazil · Answer

There is no predicting the future. The market may be hot....but it may just get hotter...or not, it might cool down.  The point here is if you could predict that, you would be a multi-billionaire hedge fund manager.

How can you tell if the real estate market is too hot to enter?

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