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When is the right time to buy an investment property
Timing the real estate market for an investment property is one of the hardest things to do and one of the most asked questions, we answer that question at the bottom of this article.
When is the right time to buy an investment property?
The Hearst family was once asked how they do so well with their real estate investments and how they time the market. Their reply was that if you never sell, you don’t have to worry about timing the market. There is, of course, some truth to that, and really it goes down to one simple strategy: buy for cash flow, hope for but don’t expect appreciation. Unfortunately, there isn’t a universal answer for when the right time to buy is but it’s important that you decide what will work best for your lifestyle and your financial needs. Do your research and figure out what kind of property makes sense for your needs and budget before you jump head-first into buying real estate. Investors looking to quickly turn a property with minimal improvements or repositioning really aren’t investing in real estate; they are speculating that the market will continue to rise. After all, a rising tide raises all ships or so it would seem.
Some great times to buy an investment property are during a down market, on the cusp of a market recovery, in areas with high demand, or when there’s a lack of inventory. If you’re buying an investment property as part of your retirement plan, then it may be best to wait until you know how much money you’ll be able to withdraw annually from your pension fund or 401k before looking at making an investment like this. Smart investors will have a plan of action as to how they will increase the value of an investment. Either through repositioning or retenanting the asset, or by making improvements to the building (adding square footage, changing frontage, etc.) that will improve its desirability and increase revenue, or by upgrading systems to lower expenses.This strategy for improving value is a good one. Most real estate investments are traded on their capitalization rates (“CAP Rate”).
By improving the net operating income, an investor can dramatically increase the value of a property. For instance, if a property trades at a 5.0% CAP Rate, every dollar of increased net operating income (either done by increasing rents or decreasing expenses) will equate to a twenty-dollar increase in value. So if you, as the investor, put in $100,000 in upgrades but increased the net operating income by $20,000 for the year, this would equate to a $400,000 increase in value, a great return by any measure.
Is there a “right” time for investing in real estate?
There is no “right” time to invest in real estate. A smart investor will know when the market has peaked and then find a property that will appreciate their money over several years. For example, one might invest during a local economic boom–when unemployment is low, population is growing, and housing demand is high. If your goal is to make money, you should buy the right property at the right time. If your goal is to have an investment property with long-term appreciation potential, you should buy properties when they are relatively cheap. So timing an investment property purchase requires a lot of research and forethought. You must calculate risk if you’re going to buy an investment property or if you’re going to flip it for profit in a few years.
Investors should not worry about minor market fluctuations in pricing that one sees over the normal life cycle of an investment or about fluctuations outside their control. Instead, by focusing on properties with a stabilized cash flow, the investor mitigates these risks and can hold the property until the time is right to sell. Focusing on the cash flow, their holding timeline, and how to increase the net operating income lets an investor create a plan of action for their investment that is almost foolproof. An investor must still take into consideration the fundamentals of investing in real estate: location, demographics, area growth, competition, and demand. By doing so, it is easy to see the time to buy an investment property. It is any time after you’ve done your homework for the asset class and have a plan of action items in your control for your investment.