The biggest question we get asked by our friends and people we meet at networking events is: “Do you think now is a good time to buy real estate?”. It’s actually a question that makes us feel a bit awkward. Do people expect that we have a crystal ball? Or, worse, do they expect us to know something they don’t? The truth of the matter is that we don’t have a crystal ball, and we probably know about as much as you do about what the real estate market will do. So, we always feel a little weird answering this question. But, then again, we do have an answer and it’s almost ALWAYS the same answer.
“Yes – now is a good time to buy real estate. NOW is ALWAYS a good time to buy real estate if you find a good deal and plan to hold onto it for the long term”.
A good deal today is as good as a great deal tomorrow because your tenants will start paying the mortgage down (and mortgages pay off quicker as time passes by), and you will start growing your equity immediately. You also may never find that GREAT, or perfect deal, so you shouldn’t wait.
Ask any veteran real estate investor what their biggest real estate investing regret is, and we bet that person will tell you either about a property they didn’t buy or about a property they sold too soon. Rarely will they tell you a story of a property they did buy, and regretted.
That is NOT to say you can’t lose money in real estate. Nor is it to say that real estate is generically always a good investment. We’ve certainly demonstrated that you can lose money when you don’t set your objectives or do enough research. But, we do firmly believe that a good property purchased in an area with strong fundamentals that meets your real estate investing objectives is pretty darn close to a guaranteed way to make you very wealthy.
What I am about to say is a pretty big confession.It’s not a secret; my friends and family know this about me. But, it’s definitely a confession.
I have an MBA in real estate and finance (from the Schulich School of Business in Toronto). I also did an undergraduate degree in business at the University of Calgary/Mount Royal College. That’s not the confession part – I am proud of completing both of those programs. The confession is that I struggled through any course with numbers. I took Calculus and Stats twice in my undergrad… I prefer to tell people that I liked them so much I took them twice, but the reality is that I was failing the first time around.
In my MBA, I made myself take a handful of finance courses because that is an area I knew I was weak in. I hated them. I kicked butt in the personal finance course I took because I love budgets, and I love planning and problem solving. But the other finance courses were not so pretty. I wasn’t good at financial modeling. The only reason I even got C’s and B’s in those courses was because I had gifted and brilliant friends and 50% of my grade was from group work. The exams weren’t pretty – even though they were open book.
Why I am telling you this? Because, I don’t like things that are complicated. And, what I figured out during that whole self-torturing period was that there are so many variables in those financial models that one assumption gone wrong throws it all off.
Analysis is important, but often using simple tools and techniques will do the trick. That is why I love real estate! Sure, you can do a big discounted cash flow to figure out what a property is worth or what it will be worth, but it’s just another model with assumptions and variables that could all change in a flash.
In residential real estate investing, thankfully, simple analysis and basic numbers are really all you need. The simple addition of expenses (mortgage, taxes, insurance and maintenance) subtracted from the total rent gives you a lot of information.If that number is positive, and it’s in an area with strong economic fundamentals, including job and population growth, you’ve got a bit more due diligence to do, but you can feel comfortable that you’ve potentially found a great investment.
It doesn’t matter what the rest of the world says about buying real estate. It doesn’t matter if the market is at the bottom yet or not. If the property will carry it’s costs, and the location it’s in assures you of a strong demand from a big pool of renters, then you’ve quite likely found a good deal. The only thing you have to do is hold onto it for at least five years…preferably longer.
I read something about Warren Buffet a few months ago. He’d been buying up stocks like crazy and somebody asked if he believed stocks were at the bottom and he basically said he had no idea but that he was buying undervalued stocks and that he planned to hold onto them for a long time. If they go down a bit more before they go back up, it’s ok because he knows he bought them at a discounted price.
I think that the same goes for real estate.If you are buying property to hold it for the long term, you only buy properties that meet your objectives, and you only own neutral or positive cash flow real estate, then the exact timing of your purchase really doesn’t matter.
Now, I could start talking about the fact that we’re experiencing the lowest interest rates we’ve seen in the last 50 years, that sales are slow, and sellers are motivated as further reasons to get out there and start shopping for real estate, but hopefully I’ve made my point without getting into all of that!
If you want to read more, I had an article published in a blog last week on the same subject called What Every Real Estate Investor Should Know about Timing the Market. Please click on over to Must Know Investing and check it out.
Published December 22nd, 2008