Buying and selling real estate works like buying and selling anything else. If you’re going to profit, you must buy low and sell high. However, predicting when the real estate market will be at their lowest is a difficult task even for the most seasoned pros.
That said, there are definite signs that real estate prices in any given area are trending lower or higher at any given time. The difficulty lies in predicting when those trends might reverse.
3 Types of Real Estate Markets
There are three types of real estate markets: Buyer’s markets, seller’s markets, and neutral markets.
When there are more properties than buyers, this is called a buyer’s market. Market conditions favor buyers because there is less competition for good deals. In such a market, it is easier to find lower prices and good deals. However, sellers can still hold onto their properties until they get the price they want.
A seller’s market is when there are more buyers than properties on the market. In this environment, prices are likely to be higher. Therefore, you are less likely to find good investment deals.
Neutral markets favor neither buyers nor sellers. The number of buyers on the market equals the number of homes and interest rates are stable and affordable. It’s possible to find good deals in a neutral market, but you have to hunt for them and likely negotiate for them.
Why It’s Difficult to Profit From Timing the Market
Real estate investing is about earning the highest return on investment as quickly as possible. If you buy at the low end of the market and want higher returns, you’ll have to wait until the market swings upward. Unfortunately, it can take months, or years, for real estate markets to change. Even if you could predict when it happens, you’re likely to hold onto your property for longer than you want to and your holding costs will eat into your profits.
Investing in neutral markets could be riskier than at any other time. That’s because prices are just as likely to go down at any time as they are to go up depending on any number of unpredictable factors. Buying for investment purposes in a seller’s market is risky because you are likely buying at a higher price. If prices are already high, they are more likely to go down than up.
If you could have predicted the Case-Shiller Home Price Index drop in December 2008, right in the middle of the housing bubble burst, and purchased real estate on that day virtually anywhere in the U.S., it’s still likely you would have held onto your property for several years before you could have sold it at a profit. Housing prices hit their lowest level in 2012. Timing the markets should be left to experienced investors.
The Alternative to Timing the Real Estate Market
Instead of trying to time the markets, a better way to invest in real estate long term is to use a strategy called “dollar cost averaging.” With this strategy, you invest the same amount into debt loans on a regular basis regardless of market conditions. To learn more about how debt investing can be a better hedge against time markets click here.
Thanks to real estate crowdfunding, real estate investors can use dollar cost averaging to earn passive income over time. For instance, you can invest $1,000 a month and see respectable returns without having to wait for a market turn. Even in seller’s markets, you can earn decent returns. They may be smaller, but regular investments in vehicles that are performing well have proven that passive income investments lead to fewer losses and more steady gains over time.
