Is now really the time to buy real estate?

Question

I was talking to a friend about how I think now is a great time to pick up some SFHs and small MFs on the cheap (we're talking about an average of $40K per door), and holding them for current cash flow (rents of 1.5% to 2% of cost) and long-term gain (VERY long-term).

His reply was that he thought there was still a significant overhang with a lot of real estate that needs to be foreclosed on and sold. His gut tells him that we'll see another 20% to 30% decline as all of this inventory hits the market, so he wants to wait a year, maybe two, until he sees a positive trend.

My thinking is that the lower-priced, NOO properties don't have much more to go down, and if they work for me at today's prices and I'm going to own them for 10 to 20 years, I don't really mind if I miss timing the absolute bottom by 20%. Plus, I'll likely still be a buyer in a year or two, so I'll still get the benefits of that slide, should it happen (sort of like dollar-cost averaging for real estate).

He agrees that it's impossible to time the absolute bottom, but he'd still like to wait until he sees a reversal in the price trend. I think he's applying the same philosophy to real estate that he does to stocks, which is that he's content to miss out on buying at the bottom IF he's convinced that prices are header higher. I get that, but I wonder if that strategy makes sense in real estate. Maybe it does, and I'm being too eager.

Also, for those of us who are going to borrow money, you have to consider that interest rates could be higher in a year or two...

Your thoughts?

Account Closed · Answer

I've never been impressed with the idea of timing the market.  Usually those that do miss and sometimes miss by a long shot.

IMO if you find good deals in any market, jump on them.  Knowing the market is important as I'm sure you do.  I think it is also important to be willing to change your exit strategy, though I highly recommend have a clear exit strategy going in.

Interest rates are definitely on the way up.  They have been held down artificially for a long time.  There is a lot of money that has also been held out of the market and when the market timers come back in we might see interest and real estate prices spike.

I think though that we have a good 2 years yet though of a relatively flat market (depending on your location), but there will be increasing pressure over time.  When the pressure is released we may never again see the number of opportunities that exist today.

Account Closed · Answer

i think it's always a good to buy if you know you market and what you're doing...technically speaking, i think the gurus usually say to wait for the market to hit bottom, and then buy as much as you can rigth as it starts to tick up..i'm not a numbers guy or an economic expert, so i stick to what i know..i'll continue to buy distressed assets, fix them up, and rent them out..most cashflow so well,that if they do somehow continue to drop in value, i won't even really care since it's the cashflow i'm after, and that won't be affected

Gregory Childs · Answer

We think it is a valid model. In fact, we are changing our focus to buy distressed RE, rehab the property for rentals, and once the tennant is in place, sell to investors for cash-flow with some equity.

It's a way of tapping a needed market (good quality rentals), providing a simple investing platform for hands-off landlords,  and also keeping our exposure short term (under four months).

So far it seems to be a decent approach in the "unusual" market conditions we are experiencing. As for your question.. find a market that has decent findementals (employment, income, home prices), find a product that people want to buy - make it easy for them to buy - and make a reasonable profit that is in line with the risk you have undertaken. Then do it again, and again.
Off to find another distressed property that could make a nice home for someone. Let me know when we hit bottom.. just so I can say I was there.

TTFN,

Greg

David Beard · Answer

I completely agree with buying good deals now (2%/mth in rents or better) and locking rates as long as possible.  Leveraging at 75% (3:1), every 1% increase in rates will subtract 3% from your annual ROI.

In an inflationary environment, there will be large volumes of renters, as even folks with clean credit won't be able to qualify for loans, and course the huge cohort of folks with ruined credit are long-term renters.  So the underpinning of a strong rental market over the next decade seem to be in place. Admittedly, it's hard to forecast how the two countervailing trends will impact the mkt value of your property-- more renters is good for demand and rents will rise in sympathy with inflation, but the higher rates will shut out many prospective buyers of your property due to inability to obtain financing.

Income real estate as a hard asset (particularly if financed by long term fixed debt) is something of an inflation hedge, versus financial assets which will get crushed by Fed money printing and debt monetization.

Sharad M. · Answer

I think for people who are looking to acquire rental properties, it is truly a great time to buy. If your goal is to hold the property for at least 10 years, then you should buy more.

I think dip of 10%+ in the prices will be a great problem for people who are speculating. People who are in the market for appreciation in the next 3-5 years. Those are the people who could get hit big time with another drop, if there's one.

I don't know about the OP's friend, but sometimes people are afraid to make a commitment as big as buying a house, they tend to look for reasons to stay on the sideline. I am not saying the OP's friend is doing this, but there are people who try to look for reasons to not invest.

Nick Henson · Answer

The answer is yes. Everything is in the favor of the buyer in the current market. Right now some areas have over 2 years worth of inventory. Prices have begun to stabilize and the interest rates are at 50 year lows.

Bryan Hancock · Answer

Great thread and responses!

I don't really have much else to add as JScott alluded to because everyone touched on most everything.  The point above is an important one IMO.  It is hard to imagine the cost of debt is going to stay as low as it is very much longer.  Hopefully it will, but it is hard to imagine it persisting.

Others that have mentioned timing the bottom being a fool's errand are correct IMO as well.  If the numbers work...they work.  Buy and watch the cash flow in.  If the market dips some more buy some more  :mrgreen:

Joel Owens · Answer

The whole country will have a Macro turning point and then each sub-market will have a Micro turning point.

To track and learn the cycles you need to be an avid student of your area you are investing in.

Interest rates,supply,ease of loans for purchases,appreciation or still declining,employment levels,etc. all paint a picture of the local area. If you have read any cycle books and studied data over history everything will cycle.

The question is the cycle will last longer at some cycles. You have a stability,and increase,and then a decline and then it starts over.

By the time you hear about the market is recovering you are already buying on the upcycle.

Say you wait 2 years and that 40,000 property went to 32,000.Interest rates went up 2 percent and qualifying for loans is twice as hard.

Did you really gain anything?? My answer would be NO.

The other answer is you don't know if you will even be alive 2 to 3 years from now or you might not have the cash to outlay then that you do today to acquire properties.

You could get sick and deplete all your money.What we know today is that values are great for long term holds.

I don't buy the stock thing either.As soon as you see on TV or hear that a stock is doing great you are buying at the peak as a sucker. All the people who bought right are cashing in on you just like the real estate cycle.

I will say if you saw my other post that currently there are 1 million foreclosed residential properties that banks are holding in the United States.Only 300,000 are on the market.That's 700,000 properties of shadow inventory.

Another 4 million foreclosure filings are going to be in motion soon.

Banks are releasing in small amount as to not devastate the market.If they all put on now recovery would be faster but banks couldn't handle it.

They need to dump say 100 properties at a time and make xx number of healthy loans to keep margins.

On California I have read of a new tax law that could devastate investors there to help balance your states budget.I would have to dig up that article but it is recent.

John C · Answer

If the numbers crunch jump on it!!! There may be more foreclosures, I hope there are so I get more good deals. People that wait for bottoms miss bottoms. Long term you will get rich!!

Kel S · Answer

I think now is a good time to buy. 2 years ago we bought our first 2/1 SFH REO at $30k. We thought that was a great buy back then. Fast forward to this year and we've purchased 2 SFH's, both 3 bed/1 or 2 bath SFH REO's for less than that. So we are seeing prices continue to fall. The deals are definitely a bit better than they were 2 years ago.

Now, who's to say how much farther prices will fall. But I have a prediction that eventually we all are going to face hyper-inflation at some point and mortgage rates will go back up. So I will be happy to get my hands on as many SFH's (that we can manage) now, but of course we'll continue buying in the coming years as long as there are deals to be found that make sense.

Is now really the time to buy real estate?

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