Michael,
That is the question, and good one. I would concur with the majority of commentators, including numerous lenders I work with, that we are likely somewhere in the 7th inning of the market cycle. With that, I wouldn't venture to guess what that means...i.e. a year, two years, or many years more until we enter a market correction. However, as a history major and former economics instructor, there will be a market correction. When that "market correction" will occur, to what effect, and the causes and implications are all very different questions. No one can know for sure. But the smartest investors know it is out there...like fishing when you can see the fish but nothing is biting. Eventually, the fish will get hungry, and the biting will start. And when it does, if you're sleeping, you'll be out of luck.
So, how to prepare? Most pundits offer very little here in my opinion. Some say put money in bonds, get conservative, to even stop investing. I disagree, and concur with many of our fellow BP contributors including: John Warren, John Blackman, Jordon Moorhead, Andrew Syrios, and Paul Bryzek. The culmination of their comments offer a good position to take in preparation for an incoming market correction.
When it comes to real estate, always buy for cash flow first, next appreciation, then principal reduction and tax advantages. With that, I concur to a great degree with Ben Leybovich (from prior threads) that investors typically make the largest gains through appreciation in typical 1-4 unit residential investments. However, cash flow must always be the first target. If a property cash flows little and the market dips, you're now in the red. Or as Warren Buffet says, when the tide goes out you'll see who is naked.
Cash flow is king for a reason. So, if you are concerned about the real estate market where you invest (i.e. there are around 400 markets within the U.S.), then definitely ensure you have healthy cash flow. But then again, if you're in this business for any length of time, you already know that.
Cyclical markets like the East and West coasts, and Sunbelt states are typically the most volatile. Midwest states historically have been more "boring" and less volatile. Then, within these larger regions, certain counties and cities offer different opportunities. The bottom line is that you have to know your market cold - like the back of your hand, so to speak. A superficial knowledge of your market could leave you in a precarious situation when the market corrects.
Wealthy and prudent investors are building up their reserves for when the market takes its turn. Then, when "their is blood in the streets" they will swoop in to purchase at rock bottom prices. [from Baron Rothchild 18th-19th Century British nobleman. He made his fortune following the Battle of Waterloo and the panic that ensued in the early 19th Century. The Rothchilds have maintained that wealth through the centuries and some estimates rank their family wealth near 1 trillion plus.] This is nothing new. It has been around for millennia. The modern family offices, i.e. wealthy families with tens of millions, are doing this now. But, alas, for the average investor, we can do the same on a smaller scale. We should continue to invest as long as it makes sense. But we should also be ready with cash reserves to purchase when the market takes a down turn.
As to other investments, like stocks, bonds, etc. that is also an important, but altogether different topic. I'll stick with real estate with this thread...
Thoughts?
My best!
Rick
