Buy Low, Sell High

I am always amazed at how the real estate market seems to demonstrate a certain level of fervor during the upswings and panic during the downturns. Although the magnitude and length of each particular cycle may vary, the cyclical nature of real estate is one of its fundamental traits.  Given the illiquidity of property, however, real estate cycles typically take place over a number of years. It has been my experience that an entire real estate cycle can last 5-10 years. Given this timeframe, there is usually sufficient opportunity to prepare to take advantage of the idiosyncrasies of each section of the real estate curve.

 The old stock market adage: "buy low, sell high" can serve as a strong guiding principal when creating a real estate strategy that will yield success throughout the real estate cycle. Almost contrite in its simplicity as it applies to equities, "buy low, sell high" is a great way to describe the recommended counter-cyclical behavior of a real estate investor. Buying low essentially means that purchases should be made in a down market and sales should be made in an up market. The challenge with counter-cyclical investment however, is that it goes against market conditions. Buying in a down market can be challenging, as that is when lenders tend to be wary of additional exposure to declining price and credit becomes scarce. It is, therefore, important to have capital available for purchases in down markets. Solid valuation is also key in a down market, as purchasing too early can result in acquiring an asset at a price point at which the asset will take a substantial amount of time to recover through appreciation. The fear of overpaying, however, should not paralyze investors into inaction, but should be seen as requiring a higher level of diligence and discipline. Opportunities are generally present in the down market, but must be scrutinized.

In order to sell in an upmarket, one must exercise two types of discipline. The first type of discipline is the discipline to store away or obtain access to capital that will allow for purchases in the down periods and period of flat appreciation. The second type of discipline requires that investors resist the urge to buy into the feeding frenzy that inevitably accompanies upward markets. Although acquisition at the beginning of an uptick is not unheard of,  acquisition in the late stages of an upward market is not a winning strategy. This being said, the possibility to acquire real estate at a great value may present itself at anytime and should be seriously considered.

The peaks and troughs of the real estate cycle are difficult to identify until they have passed, but to the extent that one can identify that either a peak or a trough is approaching, conventional wisdom states that one should acquire as much as possible when in a trough and sell or save as much as possible when approaching a peak. Special attention should be paid to market indicators at these times, such as mortgage rates/defaults, average time on market, construction starts, building permits applied for/issued and treasury yields/spreads, to ensure that the market has not progressed into another part of the real estate cycle.

Coupled with the proper level of discipline, counter-cyclical real estate investing can lead to success in any real estate cycle.

Maybe I am stating the obvious. What do you think? Please feel free to leave your comments below.