Best Way to Time the Real Estate Market

Discover the best way to time the real estate market (both on a national level and your local level) so that you can benefit from all of the major changes that may occur in the future. This is the very same method we used to win big in mid 2020 when almost every other investor and hard money lender was waiting on the sidelines in fear. This approach gives you confidence in what to do and when to do it:

 

To illustrate my method for timing the real estate market, let’s look back to when COVID first hit. What was your real estate investing activity like during that period? If you were like most real estate investors, it came to a screeching halt. Hard money lenders, which play a key role in our industry all but shut down. I didn't, but they did. So, when they stopped and I didn't, a whole lot of opportunities came my way. It wasn’t only hard money that came to a screeching halt during that period. It was also iBuyers and they left a lot of people high and dry. We picked up a ton of deals because no one else was buying.

Since then, we’ve had the greatest increase in real estate values in American history. And rental rates have exploded by over 10% as well. This is the biggest boom we've ever seen in American real estate history! Where were you? If you were timing the real estate market, you wouldn't have followed these industry leaders. Instead, you would have been buying, buying, buying in spring 2020 like me and my apprentices. So where did my confidence come from to lend money when every other hard money lender wouldn't? Why was I buying properties when iBuyers were unwilling to do so? Was it because we knew the future? Or was it a method that we followed? It was a method.
 

Don't Time the Market

 
The best way to time the real estate market nationally and locally is don't time the market at all. It's a waste of time. A fool’s errand. It's chasing after wind, and it doesn't work. We did not time the market in March through June of 2020.

The method we followed was this: As opportunities came about that fit our fundamental criteria, we did the deals. We did them because we're either going to flip a house within a month or two or hold it for long term cashflow. Either way, what's happening in the marketplace doesn't necessarily matter in relation to our decision. What matters is if it fits in our fundamental criteria.

Then as these wild aberrations occur in the marketplace, sometimes we pick off more opportunities, sometimes less. For example, we had a plethora of opportunity when COVID first hit. However, this past summer we didn’t have as many deals because of lack of inventory, although the deals we did do made a fortune.
 

Focus on the Fundamentals

 
We don't time the market because we don't see how that applies to our method. Our model is either flipping houses or holding properties long term. If you apply the right criteria, the best way to time the real estate market is not to time the real estate market. You avoid it altogether. People are terrible at predicting the future. Instead focus on the fundamentals and being consistent.
 

Fundamentals of Flipping

 
AFAP: If you're flipping the property, it needs to be as fast as possible. You should not be in a deal longer than three months. The whole purpose of flipping is that you need to get in and get out. And how do we determine a deal we're going to flip?

Buy Below Market Value: The first thing we must determine is what we think the property will sell for. In fact, I have a great video called Predicting Final Sales Price. It’s one of my favorite videos and full of wisdom. When we flip properties, we buy them below market value and then we sell at market value or slightly below market value. This strategy applies to a very brief moment in time. So, if there is a pandemic and there are less properties for sale, we know that when we put it on the market we have less competition. Or if there's a flood of properties on the market, we know that too and we price that into our prediction of the final sales price. This isn't speculative, it's calculated.

Avoid Major Rehab: We try our best to avoid major rehabs. It requires permits and involves government and you get into unpredictable, time-consuming situations. Don’t get into that mess, instead flip those to other investors.

Our approach to flipping works because we keep it simple and can usually get in and out in less than three months, which is way too short a period for fluctuations in the residential real estate market to impact our deal. And we do price in a margin of safety. Remember, we were highly successful in 2008- 2011, when the market was tanking. So, this model works whether the market is going up or down or it's just on even street.
 

Fundamentals of Long Term Rentals

 
Rentals are Long Term: The first thing I want to highlight here is that our investment decisions with rental are always long term. Yes, there are situations where you may need to sell, like a rental property didn’t cashflow as well as you hoped or there was a change in by-laws regarding vacation rentals. Otherwise, the time horizon for a rental property is long term. This means that what's happening with the market today or tomorrow isn’t of great concern.

Focus on Cash-on-Cash Return: When rentals are long term, the focus isn’t on how much the property will appreciate. Instead, I'm focused on net cash flow relative to how much money I have to put in, or what we call cash-on-cash return. That is a major component of the decision. If I put in $50,000, I'm focused on how quickly that money is coming back and how long can I continue to produce those kinds of returns.

As the property appreciates in value you could refinance, however if you make the debt service too large you would lose your cash flow. So just because it goes up drastically on paper, since my time horizon is long term, I may not pull out that equity because it might hurt my cash-on-cash returns.

NOI: With rental property your value is based on your NOI, your net operating income. So, the more you improve your rental property the more it goes up in value no matter what's going on in the marketplace. Yes, there could be differences of the interest rates, but the idea is you have some control over the value regardless of market conditions when you control rental income. The goal is to have something that has a strong cash on cash return, has long-term viability for that cash-on-cash return, and then the appreciation is just a bonus.
 

Follow the Method, Don’t Time the Market

 
It's obvious that there is no need to time the real estate market if you're a real estate investor, because you're either flipping or you're doing rentals and applying the fundamental criteria. What happens if interest rates go up dramatically in the next six months? Well, it might hurt your ability to pick off certain rentals. It might mean when you flip you price the deals a little lower when you get them under contract with the seller. You will adjust with the market and follow the model: don't time the market and consistently apply our fundamental criteria.