The fascinating paradox with long term real estate investors

There is this fascinating paradox I encounter regularly in our real estate practice. The overwhelming majority of real estate investors I have the privilege to help, fall on the conservative end of the investing spectrum. They are driven by unbiased logic, need empirical evidence and have a long term focus. If you haven’t left this site yet after reading an article or two, you can probably relate.

But with all that focus on logic, numbers and the “long game” they still succumb to doubts that run counter to all those things. See, we like to think of ourselves as rational beings driven by unbiased logic but the truth is we are hard-wired to respond to certain impulses and fears.

Cute little confused student shrugging his shoulders has no answer, thinking, puzzled

Let’s look at two related misgivings I hear frequently from our clients:

1. “I wish I had met you in … (2008, 2010, 2012 – you name it) so property prices would have been more favorable.”

2. “Shouldn’t I wait to acquire investment properties since we’re in a Seller’s market and prices are high?”

These statements indicate valid concerns but they’re paradoxical in that they run counter to the very core of the conservative long term investor.

Silly Rabbit … Market Timing is for traders

Real estate prices in most markets (Texas included) were substantially lower in 2008-2013 than they are now. Furthermore, most investors that purchased during that time were able to lock in quite a bit of equity and very favorable price/rent ratios. That’s especially true if you consider the increase in rents during the same amount of time.  Those are facts that no one can dispute. But our investor clients forget a couple of critical issues when they express the wish to have invested earlier.

First, investing in 2008-2013 seems like a given now that we know “how the movie turned out”. However, at the time, it didn’t seem as such a no-brainer to most investors. I know because I was on the phone with them trying to get them to see it. When the whole nation was curled up in a fetal position waiting for financial Armageddon, it was hard to think about investing for even the most visionary of investors. When you drove into a neighborhood and saw 15-20 foreclosure signs back to back on the same street, it  was hard to imagine the time when they would be worth so much more.

But most importantly, that wish disregards a critical truth: The long term investor is fundamentally not an opportunist.

A long term investor invests to achieve financial independence regardless of the market he’s dealt. That doesn’t mean that a long term investor cannot or should not take advantage of an especially advantageous real estate market. – They absolutely should.  However, they should NOT invest only when there’s “blood on the streets” and “going out of business” banners are aplenty. So ask yourself this essential question: Are you a long term investor or an opportunist and then act accordingly.

Seller markets come with the territory

The average Blueprint plan we devise for our clients entails an investment timeframe of 7-20 years (depending on the resources and goals). Take any 7-20 year period and look at the market conditions over time. It’s not only highly likely that market conditions will change over time – it’s to be expected! As a matter of fact, a scenario in which market conditions remain the same over a decade is almost implausible.

But there’s another fear at work here – no one wants to be the sucker that invests at the top of the market only to ride it downward –  That’s understandable. But did you know that the Houston area has been in a “Seller’s market” since the Spring of 2012? What if the investors that purchased properties during that time had succumbed to the same fear and waited for a price drop? They would find themselves wishing they had invested in 2013 when prices were lower. Sometime in the future, investors will speak of 2015 as the ideal time to have purchased because conditions may be less favorable then (read: interest rate hikes).

As long as property valuations are supported by economic fundamentals and we are not in a real estate bubble, the long term real estate investor keeps her focus on the main goal (financial independence) and executes her Blueprint plan regardless of the market. Sometimes the market is extra favorable, other times it is not. Over the long term, the market will do what the market will do and our goals are still there for us to accomplish so accomplish them we will.

Comments

  1. Erion,
    I’ve been thinking a lot about this topic lately too. It’s sort of like dollar cost averaging in the stock market except with real estate. If you’re in this for the long run, you keep buying (with a strategy) through up and down and don’t time the market.

    You always make good points. Thanks for taking the time to share.

    • Hey Chad. Thanks for your kind words.

      Mainly, I try to make the point that most slips happen when people try to “beat the market” (no matter what market it is). The results are often much better if you work with the market in a disciplined manner.

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