Thinking through the Math...does it make sense

[Sanjoy V.]

I apologize ahead of time for reposting it from a other thread but I am curious about everyone’s thoughts on this one below? If a property that is worth 5.3 million today at 6% cap approximately, can be bought at 5% interest rate; if the same property I could get at 4.3 millions in 2 years if the market falls, then interest rate possible at 6-7%, my cash on cash may be better but still not significantly better due to the higher interest rate, plus opportunity costs of sitting on capital for 2 years (1.3 million investment earning 1% bank interest instead of 7% COC if invested, loss of tax break depreciation, total loss may equal 200k loss in profit), plus increase in the rents and some value add could increase the cap from current 6 to 6.7 or so in 2 years. Unless, I find another source that can give me a COC of 7%, sitting on cash for 1.5-2 yrs for market to correct may itself be a loss. I know a lot of speculation, but if I have multiple exit strategies including possibly holding the property for much longer up to 5-7 years then it may not truly matter; although going in on higher cap may always be better because you have a greater chance of lowering. I don't know, just feel like, I am talking myself into it, buying now. Best time to buy may be brief period when the cap eventually goes high with market crash or adjustment and eventually the interest rates will need to be lowered to revive economy! Just want to see your experienced minds thoughts on the scenario?

[Brian Burke]

If you search through the forum threads you'll find hundreds if not thousands of posts going back 5 years from people wondering if they can wait a year or two for the market to crash so they can get a better deal.  Market is up, still no deal.  Worse, if the market crashes now their best case scenario is they buy now for the same price they could have bought for then, but they missed out on the investment return and tax benefits in the mean time.

The overall economy at large is pretty strong right now in many areas.  So even if rising interest rates and fear of a market drop cause cap rates to rise, the economy and wage growth are likely to push rents higher...two competing forces that when netted out could result in no drop in value.

So to wait or not to wait?  Usually those who try to time the market don't see the highest returns.  But tell that to people who bought in 2005.

There is no correct answer until after the fact.  From where I sit I see signs for caution but not signs of running into a bunker.  Your risk/reward tolerance might differ.