Why You Are Most Likely Going to Miss the Bottom of the Market

[Ashley Wilson]

Everyone is talking about timing the market to buy at the bottom. Great in theory, but difficult in practice, let me explain.

1. Historically, the average closing time was 75-90 days. In other words, if a deal closes today, it is actually a reflection of pricing 75-90 days prior.

2. While sometimes sales prices are reflected immediately, sometimes there are reporting lags and sometimes prices are not even reported. These reported sales prices impact the trading cap rate. In a volatile interest rate environment the cap rates have significant lag time in reflecting the interest rate at which the property can secure. Thus, the speculation of the trading cap rate (the most common way multifamily real estate is valued) is just that speculation.

3. The traditional closing period lag time coupled with the delay in knowing the true market cap rate due to steep interest rate hikes creates a major, present day, market uncertainty. This is the ultimate reason why the bottom will come and go without most capitalizing on its arrival.

So what do you do? Speculate! Haha, jk, I just wanted to make sure you were paying attention. The real answer is you go back to the fundamentals. Here are just a couple questions you can use to determine whether or not it is a good buy: Does the deal make sense (cash flow) with the current interest rates? How far can you stress test the investment before it would break? Focusing on what makes sense for you and your business plan while factoring in market conditions will land you good buys. While it may not be a bottom of the market acquisition, investments can still be good buys if fundamentals are met!

[Arn Cenedella]

@Ashley Wilson

Nice post.

The top or bottom of the market is only known 6 months after the fact. 

And once the market turns, it turns quickly.