Is Now A Good Time To Buy?

Sitting here in late 2018 the real estate market seems a bit overheated.  Prices have been steadily increasing, the supply of properties to purchase seems to have been decreasing and the numbers of people chasing after those properties seem to get more and more frenzied. The exuberance is definitely there.  Understanding this the question then becomes is now a good time to buy? Should we wait until this exuberance passes?

I say buy now if you can, but on one condition.

What is that condition?  The condition is to buy now only if the numbers make sense.  If after looking at a property the numbers make sense even in today’s exuberant market then pull the trigger and make the deal.  I just bought a property and the deal should turn out well.

The Problem In Today’s Market

The problem with an exuberated market like ours is that it can become difficult to understand exactly what the numbers should be.  The numbers just keep going up, up, up.  Rents, it is assumed, will continuously rise and therefore prices will follow.  Unfortunately, some of us tend to forget that what goes up must at some point come down.  The numbers can become misleading thus tricking us into thinking something is there when it is not.

Those of us who have been around a while have seen it before.  We saw it in 2008 when anything that came on the market was bought sight unseen within hours.  We heard then that real estate prices always go up, that this time was different, etc, etc.  Some folks out there learned a very hard lesson.

Rents Are The Key

In order not to repeat learning that lesson, we landlords need to keep focused on the fundamental thing that drives renal property value.  Rents.  Always look at a deal by working backwards from the rent.  Stay focused on rental income and attuned to what it will likely do in the future.  If rents are going to keep rising as they have over the past few years then prices of properties will likely keep rising also.

Rents are affects by many different things.  Supply and demand is perhaps the most important factor.  And supply and demand is often driven by jobs.  If there are increasing numbers of jobs, there will be increasing demand for works to fill those jobs.  Those workers will need a place to live and they will drive up demand for rentals.  Eventually however, entrepreneurs respond to increased demand and build new units to meet that demand.  Those units take time to get on the market but once they do, demand can lessen and push rents down.

The flow of money is another important factor.  The money that has been pumped into the system by the Federal Reserve through QE has flooded the market.  That money is now drying up and interest rates are on the rise.  That means a slowdown is in our future for sure.  When?  Who knows.  But when it happens rents will be impacted.

What Numbers To Use?

The best bet today is to be conservative or even perhaps a bit negative.  In other words, be cautious.  When the downturn comes, jobs will be impacted.  That will impact rents and property values as will rising interest rates.  Do not bet on the ability to increase rents in the future at this time unless you are in a rapidly expanding market.  Do not fudge your numbers and pay too much now thinking you will receive increased income in the future.  You may not and timing the market can be very difficult.  By being conservative now, you can withstand a bit of a downturn in the market when it comes along.

Remember, the numbers do not lie, but operator error when imputing them can affect your outcome.  Try to contain your exuberance.  Let the other guy bet on rent and price appreciation right now.   Be conservative so you can remain standing when the buying opportunities present themselves.  Trust me, they will.