Timing the Market - Is It a Good Idea?
Renters Warehouse Blog
Timing the market: it’s what every investor aims to do, right? Especially when it comes to the housing market, where we all want to secure a great deal.
But is timing the market strictly necessary?
When it comes to rental property, it may not be as essential as you think.
Rental properties are one investment that is especially suited for uncertain market conditions. This is because that the cash flow stability that they offer, combined with the long-term nature of the investment means that there’s less risk, and the chance to produce an income, even if the market conditions aren’t exactly booming. Unlike fix-and-flip properties, where a great deal of your return is based on the market’s performance within a few months’ time, with rental properties, you’re in it for the long-term, so it’s less crucial what happens in the short-term.
See also: Why SFR Offers Long-Term Stability
Now, just because you can’t always predict the market, doesn’t mean that you shouldn’t try to read the current market conditions. It’s vitally important to pay attention to what’s happening –both on a localized and national level, and to know what you’re getting into. Being aware of driving factors that are behind increasing, or decreasing housing prices will help you to spot a good deal when you see one, and will help you to ensure that you’re not overpaying.
So what does all of this mean? How can assessing the current state of the market show you where it is going? The answer: it can’t always. The market is a tricky beast, and it can be impossible to tell what it’s going to do next. However, you can set yourself up for success by doing your research. Brush up on what’s currently happening so that you can make informed investing decisions and end up with a solid, income-producing asset.
If you’re thinking of investing in property, here are some tips for success that can help you to come out ahead.
Identifying Different Markets
Trying to time the market, and predict the future, may be challenging; but assessing the current state of the market before buying a property is always a good idea. Knowing if you’re purchasing during a buyer’s market, seller’s market, or neutral market (yes, that really is a thing) will show you what you can expect to pay for a property, and will also give you a good idea on whether a property is undervalued, overvalued, or just about right.
- A Buyer’s Market (A cool housing market)
A buyer’s market is exactly as it sounds: market conditions that favor buyers overall. It’s said to be a buyer’s market when there are more houses on the market than buyers, meaning supply is greater than demand. When this happens, there are more options for buyers, and the prices fall. These market conditions also mean that there’s a higher chance of a seller accepting your offer, as there’s a good chance that the property will have been on the market for a while.
- A Seller’s Market (A hot housing market)
A seller’s market, meanwhile, is when the market conditions favor sellers. This happens when there’s limited inventory, that can’t keep pace with demand. This competition drives prices higher, and deals are harder to find. Most major metropolises tend to be in a seller’s market year-round.
- Neutral Market
A neutral market, as the name suggests, is when supply and demand are balanced. During a neutral market, while there are some deals available, they’re a bit harder to find. This type of market can be difficult to read, as housing prices could go any direction.
Time of year can also impact market conditions to a certain degree. In most cities, it tends to be more of a seller’s market in the months of April to August. This is when most people tend to move, and houses tend to fetch a higher price. Meanwhile, if you’re looking to buy, the fall and winter months are usually a good time to secure a better deal.
Assessing the Market: Calculating Months of Inventory
So how can you tell what type of market you’re in? While there are often clear indicators, one especially good way to assess the state of the market is by using the metric “months of inventory.” With this calculation, you determine how long it would take to for every house on the market to be purchased, giving you a clear idea on saturation levels.
Here’s the date that you need to find these figures:
- Total number of active listings on the market during previous month
- Total number of sold/closed transactions during previous month
Now, divide the number of total listings by the number of total sales. This will show you how many months of inventory are on the market.
Six months’ worth of inventory is considered neutral. More inventory indicates that it’s a buyer’s market, while less means that it’s a seller’s. So, for example, let’s say there were 5,643 listings last month, and 782 sales closed. That represents around 7.2 months of inventory, meaning it would be a buyer’s market.
House Flipping Vs. Rentals
One type of investment where timing the market is especially crucial is when it comes to house flipping.
One of the main differences between house flipping and rental property is the level of risk associated with each. With house flipping can be a great way to grow your wealth faster, profit with this type of investment is very much contingent on the market.
Popularized by HGTV shows like Fix or Flop and Masters of Flip, house flipping involves finding a property that’s below market value, fixing it up to a good standard, and selling it for a profit. While there is money to be made if you know what you’re doing, it’s also risky. Profit is made through both repairs and rising housing prices, which means that timing the market is essential.
Rental properties, on the other hand, apply a slow and steady approach to investing. Far from a get rich quick strategy, with rentals, you’re usually in it for the long run. This means that your returns are spread out over a longer period of time, and less contingent on current market conditions. Sure, timing can help you to jumpstart your investments, but it isn’t crucial. In the longterm, taking that first step and actually investing is what counts the most.
Tips for Making Smart Investments
While timing the housing market can be difficult, there are a number of things that you can do to set yourself up for success with investing. One crucial strategy is to assess the viability of each potential rental investment, to make sure you find one that’s worth buying. Generally, the best approach is to dial in your research at the local level. This means familiarizing yourself with market conditions and assessing the health of the housing market.
Let’s break this down now:
- Consider the Local Market Conditions
Housing markets vary considerably from region to region, with some areas –like major cities, experiencing year-round hot property markets. Meanwhile, others –many places in the Midwest, for example, tend to see cooler housing markets much of the time –especially if they’re located far from any large towns or cities.
When it comes to finding a rental property, location matters, perhaps more than any other factor. You’ll want to start by narrowing in your search to areas that are expected to experience economic growth. Get specific, look for places that might be experiencing a boom in population, strong job growth, or that have signs of development nearby. One trend to look for is signs that Amazon’s moving to town. When an Amazon distribution center starts going up nearby, you can be certain that there will be plenty of jobs. This type of development will put upward pressure on property values, and rental values as well.
- Look at Historical Housing Trends
One important step when considering where the housing market is going is to see where it’s been –on a local level. Dial in your research to the local area and do a deep dive back as far as the data is available. See what happened year-over-year to housing prices. Did they hold steady? Dip temporarily? Slump but then rebound? On a national level, housing prices tend to recover and have always continued their relentless march upwards. On a more local level, though, things often look different. So take a look back at what has happened to house prices over the last decade or so to see what you can learn about the strength of the local housing market.
Tip: Head over to the Renters Warehouse Research Center to get institutional-level data on historical localized market conditions including housing prices, population changes, unemployment rates, and more. Put that powerful data to work today!
- Have a Backup Plan
If you’re planning on buying a fix-and-flip, consider doing so with a contingency plan in mind. This approach will help you to ensure that you won’t lose out if the market doesn’t go the direction that you’re expecting. For example, say you’re planning on buying a fixer-upper, making repairs, and selling it in 3-4 months’ time. But what happens if the market experiences a downturn during that period, wiping out all of your profit? In this case, you could potentially rent the property out while you wait for the market to recover. This approach will allow you to generate cash flow while you wait for market conditions to improve, rather than being forced into selling during a cool market and potentially facing a loss. Just be sure to run the numbers for both options before you invest in a property, to make sure you buy a property that should perform well as either a fix-and-flip or a rental. Giving yourself options is key.
See: Why Investors Are Flocking to SFR
- Focus on Finding the Right Investment
While timing the market can help to give you a one-time bonus in terms of savings, it’s far more crucial to focus on buying the right asset in the first place. When it comes to rental properties, look to purchase a solid asset that’s going to generate cash flow, and experience long-term appreciation. Then make sure you structure your purchase right.
- Look to Reduce Your Risk
Income property is a long-term strategy, and it’s important to set up financial buffers that will help you to weather any cycles in the market.
If you’re able to, making a sizable down payment is a good way to add a layer of protection to your purchase, helping to protect you against uncertainty in the market. A down payment of 30% means that you’ll still have equity in your home, even if the market dips temporarily, preventing you from ending up with an underwater mortgage. You’ll also want to consider opting for a fixed-rate mortgage, rather than a variable interest rate loan. If interest rates go up, you won’t be caught out by an unexpected increase in your monthly payment.
Finding the right investment will carry you through any temporary downturns or fluctuations in the market. It’s also a great way to diversify against a stocks-and-shares-heavy portfolio. With income property, you’ll be able to generate cash flow, even when other investments stop paying dividends, and when housing prices recover, you’ll be in a strong position to sell if you choose to do so. As long as you hold on, and don’t sell during a slump, it makes little difference what happens temporarily with house prices.
Property markets vary considerably across the states, with some experiencing growth, and others facing lower rates of appreciation. Instead of focusing on timing the market perfectly, look to buy the best investments that you can and remember that you’re in it for the long-term. With this approach, even during a downturn, you’ll still be able to generate decent returns –and experience capital appreciation when the market recovers.
Remember: booms are temporary, so are busts. Don’t be caught off guard: future-proof your investment strategy with long-term assets like rental properties and you’ll be set –no matter what the economy –and the housing market, decide to do.
If you’d like help with your investments or want to see how rental properties can help you to find financial freedom, visit Renters Warehouse today. Be sure to claim your FREE guide: The Stability of the Buy and Hold Method to see how you can find success through income property investing.
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