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.

[Ed Matson]

My experience has taught me that it is extremely difficult to time the market.  If the deal meets your criteria today, do it.  If not, keep looking.  The value of the same deal in two years is an unknown despite what the pundits say. 

[Greg Scott]

The common phrase I've heard over the years is the best time to buy real estate "was 10 years ago".

If you buy with cash flow and have financing that doesn't have a short-term balloon, you should be able to ride out any storm and be positive on the other side.

[Tyler Kastelberg]

@Sanjoy V.

A deal that produces healthy returns with long term debt in this market shouldn't give you valuation trouble in the future. Stay conservative with your underwriting and act when it makes sense. Inflation will play in your favor over the long run. 

The most simple proxy for profitability in the real estate market is the spread between valuations (cap rates) and borrowing rates. The current spread is at all time lows, so finding deals is very tough.

If you find a deal, hedge your long-term risk by keeping your loan to purchase low and using long term (10+ year) debt.

[Scott Nidell]

Is this in Austin? I don't see property losing almost 2 percent of its value in 2 years in that area. 

[Jordan Moorhead]

@Sanjoy V. on an asset that size you also may be able to get 10-12 year terms with 30 year amortization.

Buy for cashflow with long term debt and you'll most likely be in good shape.

[Sanjoy V.]

@Scott Nidell It’s not austin, it’s DFW area

[Corby Goade]

There are way too many assumptions made in your numbers. Don't buy based on what you think the market might do in the future, buy based on your own investment criteria and long term personal goals. Deals will come and go based on the market and your sources, but as long as you understand your market and don't change your criteria because there "aren't any deals," you will be fine.