NEWS: The Ups And Downs

A big part of the reason real estate investing appeals to many investors looking for good long-term returns is that there are great benefits to be found in both up and down markets. It isn’t always easy to see how a down market or better called a buyer’s market can be great for investing, but perhaps you even already know and haven’t thought it all through why it is often the best time to be buying your next real estate investments?

Investing in an Up Market
Well it is easy to see how you make money when real estate prices are increasing. Typically you buy and watch the price rise. As great as that is, there are downsides to hot real estate markets. What are the downsides to investing in an “Up Market”?

1 - Chances are the rental market is softening. Average days to rent a home increase and sometimes rental rates decrease. Nobody seems to mind if appreciation is high enough, but it sure makes it hard to cover the mortgage when it takes three months to rent out and then only rents for 80% of the mortgage.

2 - In a hot market, you don’t have time to be real choosy about your investments. As one of my Phoenix associates said when the real estate market got real hot in 2005, “Things were so crazy, potential buyers were like cowboys shooting at anything moving”. You didn’t have time to make a great purchase, because the first day, eight offers were in and you were just praying you were the one picked. We didn’t get quite that crazy here in New Mexico (it took us three days to get eight offers). When the market gets real hot, the best time to buy may have already passed. That doesn’t mean you can’t catch it early on, but don’t be late to this party.
Last, when things are going way up, many have a hard time gauging whether they are buying when prices are peaking. They could potentially buy and have their investment home worth less than what they paid for it within just a few months.

Why Investing in a Buyer’s Market Makes Great $Cents$
1 – Time is on your side – Typically there are more great deals to pick from and you can find one that fits your particular goals much easier. This doesn’t mean that you sometimes don’t have to act real fast to get the deal, you just don’t have the pressure because general prices aren’t rising as fast.
2 – Since (generally speaking) the goal is to “Buy Low and Sell High”, it is much easier to buy low in a buyer’s market. Your real estate agent should be looking for deals as he or she goes along in their normal day’s work where there is the right motivation on the part of the seller or builder and you can pick up deals with some good built in equity.
3 – Buyer’s markets generally turn around to seller’s markets. I can’t talk about every market, but the major markets of the southwest are very cyclical. A graph showing home price appreciation in the greater metros of New Mexico, Arizona, Utah, California, and Nevada would look more like a staircase than a straight appreciation line. If you pick up some good deals in a buyer’s market and hold them at least to the seller’s market you can do very well. I would even try to show you that you need to hold them longer, but atleast for that duration.

Perhaps this is old news to you, or maybe it is analysis you haven’t ever heard. In all, I hope it is a good reminder not to sit on the sidelines during a buyer’s market. That is one of the biggest regrets some of my investors have had, was not taking enough advantage when the markets were slow.

Jared Murphy
Real Estate Advisor