"Market Correction" - What's the big deal?
Ali DawoodPro Member
Rental Property Investor · Frisco, TX · Member since 2014 · 25 posts · 9 votesSellers market, buyers market, market correction, etc. I am new to investing and have read several of these terms throughout this site and others regarding when to buy, when to hold, when to invest, when not to do anything.
Am I too naive to simply ask: "What's the big deal?"
The reason I say that is my understanding of RE is that the trends go up and down every few years. Sellers market right now, buyers market in a couple years, then back to sellers market. I know we can't predict when this will happen but since we know it will happen why does it matter so much? I know there are ways to make profit in either market with varying strategies, so why are investors so worried about it?
Not looking for a right or wrong answer here, just varying views so other new investors and I can be enlightened.
If you're in the short game trying to capitalize on market fluctuations or appreciation, the risk is that you might buy at the top of the market and get stuck overpaying with few exit options.
if you're playing the (really) long game, then it matters much less.
I would bet that the majority of people who fear market fluctuations are people who are not at all, or very little invested in the market. This can cause a distorted view of it being a big deal, people who are afraid to invest will find any reason to justify fear but still make big noise about it . People who have money at stake and understand the risks I find are far less concerned. (This is all based on my anecdotal experience). If you look through BP threads of "omg when is the crash going to happen" it's overwhelmingly people who haven't done a single deal yet.
So unless you have some systemic economic collapse of multiple systems and industries, market cycles aren't a big deal. You just have to account for proper potential risk.
@Ali Dawood So a couple of things at the outset: 1.) I don't personally try and "time the market" and 2.) I don't think we're on the precipice of some massive crash. For me, personally, the ebbs and flows of the market are not a big deal.
However, for a lot of people here on BiggerPockets it can be a huge deal. Not because they got market timing wrong but because they couldn't ride a bad market out. So many people here (typically first time investors) always talk about having $xK to invest. Inevitably the are looking "x" as the 20% downpayment or much small if they want to house hack. I've yet to see someone say: "I have "x" but I'm subtracting "y" to keep as a reserve fund and planning on 25% down". On top of that they have a (somewhat) arbitrary metrics of, let's say, $100/month in cash-flow. When the market is going up everything is fine. You can raise rents, the economy is good so tenants have a greater ability to pay your rent, appreciation is chugging along, and you have your $100/month in cash-flow along with it. So, eh, who cares about the pesky reserve fund? You can built that back up...or the "worst case" is you take out a <insert form of debt here> if you have an unexpected cap-ex expense come along.
Now let's say that the market goes down. Equity (which you didn't try and have a lot of in the beginning) can evaporate faster than most people think. If it's based on an economic hiccup you'll (to overgeneralize) have 1.) trouble with tenants paying, 2.) trouble re-renting if you have to evict, and 3.) maintaining tenant quality. And if there's a cap-ex hiccup that comes along there's no equity for the <insert form of debt here> to cover that. So all of a sudden you have a decline in collected rents, your cash-flow sails out the window, you're paying 18% on credit card debt, and with lower equity you literally can't afford to sell the property because you can't afford the debt payoff and the realtor commission, closing costs, etc.
Again, that's really a little "doom and gloom" but it was way worse than that in 2006. You don't need to have a massive 50% drop in values for that to repeat itself. And even in my hypothetical pullback, most people will be fine, a lot of prudent investors will have the reserves to pull them through a 3-5 hiccup and cover those marginal losses. And some weirdos (like me) bake in a lot of "what would happen" scenarios when we're doing financial projections trying to model out a pullback and we have a bunch of money sitting in bank account earning 1% as a "just in case" reserve fund. There are others who maximize leverage, think that you can easily build a cap-ex fund over time (hint: cap-ex issues aren't linear), and don't insulate themselves.
Side note: if the market doesn't go down then those highly leveraged investor with no cash sitting in a "wasted" reserve fund will get a higher ROI based on their capital allocation. So there's no free lunch...