We would all be better investors, regardless of the type of investment we choose, if we understood two foundational truths about when is the optimal time to risk our hard earned money.
#1 – Sow seeds of success in the downtimes
A wise man once said, “The season of failure is the best time for sowing the seeds of success.” I have found that when the real estate market is in a season of failure (recall the downturn that happened in 2008 and 2009), that is when you need to sow your seeds of success. Looking back, the Great Recession was a golden age for CRE investing.
In the summer of 2009, I was approached by a real estate investor about teaming up with him in purchasing a recently foreclosed apartment. Even during the recession, this property had remained fully occupied. The bank had an asking price of $39,000 per unit. Yes, the property needed modest amounts of renovations, but on paper it appeared to make a lot of sense. Like almost everyone else, though, my emotions were saying no. Fortunately, I didn’t listen to my emotions. I, along with a group of other investors, purchased the property. Today it is conservatively worth $125,000 per unit. Over the years, my owner distributions have more than tripled my original investment in the property, and the property continues to cash flow beautifully.
Understand this important truth: Those who buy when everyone else is selling usually end up the big winners. This is true of all types of investing, but it’s especially true with commercial real estate. Individuals who bought real estate at the bottom of the market cycle during the tough years made out like bandits. As the saying goes, “You make your money when you buy, not when you sell.” In other words, to be a successful investor requires buying commercial real estate at the right price, and the best time to find bargain prices is at the bottom of the market when it’s the scariest time to invest.
#2 – Avoid sowing seeds of failure in the good times
But the corollary of this truth is unfortunately also true. It’s during prosperous times that many investors sow seeds of failure. They do this when they act as if the good times will last forever and then make foolish investment decisions. They forget the tough times and the hard lessons they should have learned. They say during the bleak times, “Never again will I …” only to have selective amnesia when the market turns around. Always remember what you learn, especially the lessons learned the hard way. And then live and invest according to those lessons. This approach will grow success in life—personally and professionally.
Three Questions before You Decide to Invest
So when is the right time to buy real estate? You need to start by asking yourself these questions:
- What is my time horizon? Do I have less than ten years before retirement? If so, it may be best to invest in assets that are more liquid than commercial real estate and therefore easier to sell.
- What is my risk tolerance? Can I afford to lose money if the real estate market goes in the tank? If not, it may be prudent to invest your money in lower-risk investments.
- Will I need the equity I accumulate in my real estate portfolio for other more important pursuits within the next few years? Or can I leave it alone and let it work for me?
How you answer these questions will largely determine the correct course of action for you to follow.
Here are some reasons that may help you decide whether you should buy investment properties:
Good Reasons to Buy
- Ideally, the best time to buy is when it’s a buyers market—that is, when the “herd” is selling.
- Buy when you’ve identified a replacement property for a potential 1031 exchange that has more upside than the property you currently own.
- Buy when you find a property with rents that are significantly below market value.
- Buy when you find a property that is being poorly managed resulting in a significantly higher vacancy rate than the overall market.
- Buy when you have a vision to improve a property that the current owner does not see.
- Buy when you see the property’s neighborhood is in the path of growth.
Good Reasons Not to Buy
- Don’t buy because everyone else is buying. Fight the urge to follow the herd. Don’t be a lemming. Be patient. Those who buy when it’s a sellers market are forced to pay top dollar for acquiring the property.
- Don’t buy if your investment analysis shows the return on your equity is unacceptable. Don’t assume that rising rents over time will bail out your poor return.
Even with all the cautions I’ve shared, finding good real estate deals is always possible. There will always be sellers who poorly manage their properties. There will always be sellers who don’t know the real value of their properties. Often it just takes an investor who can bring the right vision and new management to the property to raise its value to the next level. And there isn’t any good reason why that real estate investor with the right vision can’t be you!
Those are my thoughts. I welcome yours. Is now a good time to be purchasing CRE? Why or why not?
Want more CRE investing tips? Check out my book!