Once you learn how to analyze where your market is and the direction it’s probably going, then you can plan your investment attack.
Certain strategies work well in a rising market, others work better in a flat or falling market. Many strategies work in any market, as long as you know your market and adjust your investing accordingly.
Here are some of your options:
Flipping works in every market. Frustrated investors often complain that specific real estate techniques such as flipping (buying low and selling quickly for a profit) won’t work in their market. We call this the “not in my market” myth. The reality is this: Flipping works in any market, depending on how you do it.
For investors who buy distressed properties, rehab them, and sell them quickly, the market appreciation or decline isn’t relevant to profit because the holding period is typically only a few months. If your plan is to flip houses, you only need to know what the resale value is for that type of house in that neighborhood and approximately how long it will take to sell (days on market).
If you’re in a hot market, you can sell properties faster or, if you keep them, you can ride inflation — that is, realize gains from inflation over the years. Flipping in a hot market means you won’t find as many incredible bargain properties, but you’ll be able to get top dollar on any resale. If you time it right, the property may appreciate in the few months you’ve owned it.
Market timing. Without a doubt, price inflation is the easiest way to make money in real estate because you don’t need to struggle to find a super bargain; you only need to hold on to the property long enough to ride the market. Markets generally go up and down in price cycles, about every seven to ten years from bottom to top to bottom again, with the next top being higher than the last. There are two problems with using this approach:
- Your local market may move inconsistently with your retirement plans — your retirement age may end up in the middle of a bad market trough and you won’t be able to sell or rent your properties for what you anticipated.
- You may be wrong about the top or bottom of the market.
While there is no crystal ball, educated investors can make some good investments in places other than their own backyards if they’re armed with the right information. However, keep in mind that market timing by itself isn’t enough. You must learn how to make an investment within a particular market that makes sense.
Long-term investing works in any market. If you buy and hold property for the long term (15 years or more), you’re not likely to lose. Real estate values go up and down in cycles, but they generally go up in the long run, with few exceptions.
The same is generally true of the stock market in the long run, but there’s one problem: You have no guarantee that a company in which you invest will be in business in 15 years!
Therefore, if you try to time the market in the short term and make a mistake, you may end up doing just fine if you hold on to your investments long enough. Historically, median real estate prices outperform inflation over the long haul. At the risk of beating a dead horse: Be a defensive investor. That means have a solid plan as well as a good backup plan with an exit strategy if the first plan doesn’t work.