Dollar-Cost Averaging Applied to Rental Property Acquisition

[Steve Smith]

I've been listening to @Scott Trench's new book, Set for Life, recently. Scott discusses the concept of dollar-cost averaging a bit as it relates to investing in index funds. This makes a lot of sense to me and I've been doing this for years through the traditional routes of 401(K) and Roth IRA. However, now I am considering how this applies to purchasing rental properties. Here's an example: If an investor plans to purchase 30 rental units over the next several years, would it make sense to just systematically (as mush as possible) purchase 3 or 4 units per year? Similar to dollar-cost averaging with index funds, sometimes units would be purchased at higher prices and sometimes units would be purchased at lower prices (depending on where the market was at the time). In theory, the investor could then spend less time attempted to time the market, trusting in dollar-cost averaging to end up in a good position 10 years down the road. I'm still kicking this around in my head, but wanted to see what others thought of this. Thanks!!

[Johnny Kang]

@Steve Smith

I was in finance for 8 years and had my series 6, 63, and 26. Essentially, you're comparing apples to oranges. When you dollar cost average (DCA) using the typical 401(K)/Roth IRA in which mutual funds are used as the investment vehicle, you're doing it pretty much within the pre-determined investment strategy a particular fund manager is obligated to abide by, outlined in the prospectus. Hence, when you DCA, the performance of the chosen investment does not change; just the price you bought it at.

The performance of a property, however, can differ depending on how you operate it as an investor. A property purchased at a low price does not necessarily mean you'll be profitable, nor does a property purchased at a high price mean you won't be profitable. Each property's performance differs, as does the investor's performance running that property. 

So to answer your question, "would it make sense to systematically purchase 3/4 units per year," the answer is no. Each property has to be looked at individually, while you continue to increase your ability to get the best rate of return as an investor.