Owning and managing a rental property gives you the opportunity to collect regular income from paying tenants. You’ll be responsible for continuing to pay for your mortgage, property taxes, insurance, and maintenance, but you can usually collect more rental income than you spend in ongoing expenses.
Hypothetically, this can be a very profitable investment – and a passive one if you enlist the help of a property management firm.
That said, much of your success in the real estate investment game depends on your ability to time the market – at least, according to some sources. But is that really true? And if so, just how impde ortant is your market timing?
Fluctuations in the Real Estate Market
You don’t have to be a veteran real estate investor to understand that the real estate market goes through frequent and sometimes unpredictable fluctuations. Housing prices fluctuate in response to hundreds of different variables, including mortgage interest rates, consumer demand, the rate of new home construction, and neighborhood variables like school quality and crime rates. From one day to the next, prices could spike or plummet, meaning savvy investors have hypothetical opportunities to maximize their investment dollars.
In a perfect world, an investor would be able to swoop in and buy houses at their lowest possible price, then turn around and sell them when the market rebounds and hits a new peak. But this is much easier said than done, and the average real estate investor can’t begin to consistently time the market this way.
Why Timing Isn’t Everything
There are several different reasons why timing the real estate market isn’t everything.
- Unpredictable changes. For starters, we need to remember that real estate fluctuations are rarely consistent and almost never predictable. Economists may speculate on the future of the housing market, both in the near future and in the long term, but even the best predictions by the most experienced economists can sometimes be wrong. Even if all of the quantitative data is in your favor, you may still be blindsided by some unforeseen variable.
- The long-term potential for growth. One of the reasons real estate is heralded as one of the best investments you can make is because it has a long history of reliable growth if you measure in the long term. Given enough time, real estate prices have been shown to rise, despite volatile fluctuations from year to year. Because of this, the timing of your purchase isn’t as significant as you think – as long as you plan on holding your assets for many years.
- Local differences. It’s also worth mentioning that there are often significant differences between individual locations. Just because the overall real estate market is booming doesn’t mean that housing prices in every city are at record highs. There are almost always buying opportunities and selling opportunities, if you know where to look.
- Personal risk tolerance and individual goals. Individual investors have different goals and different levels of risk tolerance. This means that timing investment decisions affect them differently and should be considered differently. An investor with a high risk tolerance should be much more willing to make a bold timing prediction than an investor with a low risk tolerance.
- The role of portfolio diversification. Portfolio diversification is one of the most important concepts for new investors to learn. Within your real estate portfolio, you should be investing in many types of properties at many different times throughout your investing career. Within your overall portfolio, you should be investing in assets other than real estate. Because of this, no single property buying decision should impact your portfolio disproportionately.
Tips for Better Market Timing
With all that said, there are some tips you can follow to practice better market timing.
- Pay attention to a variety of factors. Don’t assume that prices are going to rise or fall because of one isolated variable. You always need to pay attention to a wide variety of different factors, since housing prices fluctuate in response to innumerable economic changes.
- Keep local conditions at the forefront of your decision. When considering a new rental property to purchase, always keep local conditions at the forefront of your decision. Broader, nationwide trends are important, but citywide and neighborhood trends are even more important.
- Always have some cash on hand. Depending on who you ask, you might hear recommendations to keep 4-6 percent of your investment portfolio in cash at all times – but if you buy properties regularly, you might want to save even more in reserve. If you always have a bank of additional cash available, you’ll always be ready to buy properties if the market suddenly tanks. There’s no guarantee of a crash, but if one comes, you’ll be prepared for it.
- Try not to sweat it too much. For the most part, try not to sweat your timing too much. It’s much more important to buy fundamentally good properties in fundamentally good areas and practice good investment habits that lead you to long-term success.
As we’ve seen, timing the market isn’t that crucial when buying a rental property. It’s an important factor you’ll have to consider, and your timing can significantly affect your eventual return, but as long as you pay attention to other important investment fundamentals, it shouldn’t have the potential to make or break your strategy.