How to invest when the market is High!

[Andrew Hildebrand]

Hello BP Community! My name is Andrew, I'm 25, married and brand new to BP and real estate investing. My father and I are hoping to build a portfolio of buy and hold homes for rent. We live in Niagara, Ontario, Canada about 1 hour south of Toronto.

The market in our area is on record high right now, everything is in a bidding war with many homes going as high as $40K higher than asking price. Most homes we're considering are single either detached or semi and are listed between $200K-$300K

My question is, even if we can afford to buy a home is now a bad time to invest and should we be waiting this out? Or should we get in now before things get out of control?

[David Faulkner]

My operating philosophy is the hotter the market, the higher the market risk. The higher the market risk, the shorter the hold period I want on new acquisitions. 2009-2012 the markets were tanking, which meant that cash flow was good and there was still a lot of upside; great time to be a buy and hold investor. 2012-2015 the markets heated up, the buy and hold numbers didn't look as good but then the flippers started killing it, with shorter hold times. Now in 2016 the markets are crazy high, the margins are totally gone for most buy and hold, and the margins for flippers are squeezed as well, so it is time to be a wholesaler or RE agent in my opinion to take advantage of the hot market with zero hold time and market risk. 

The other variable that can be played with is location. If it is too hot of a market in the close, desirable neighborhoods, then a bit further out and a bit rougher areas may offer better pricing. This is a very dangerous variable to play with at this phase of the cycle, though, in my opinion, because it is typically these further out and less desireable neighborhoods that get hit the hardest in both price and rental vacancies during a downturn. I actually like to flip it and buy there after they get hit hard, then come in closer and more desirable properties (via new purchases or 1031 exchange) as the market starts to recover.

In most dynamic markets it is unrealistic to think that just one strategy or area will work at every point in the market cycle. Your just need to study your history and other successful local investors to understand the governing dynamics of how different strategies and locations perform at different phases, pick the strategy and location that works in the current phase, and always, always make sure you are prepared for the next phase be it an upturn or downturn.