If you’ve spent any time researching investing in real estate (or stocks), you have probably heard people throw around the phrase: “Time in the market is better than timing the market.”
The old saying originated from Ken Fisher, a billionaire investment analyst and financial advisor, and while Ken was actually referring to the stock market with this now-famous quote, the same concept is very much applicable to real estate investing as well.
Many investors are tuned into cycles enough to where they find success with timing the market, but spending more time in the market is a simpler, more sustainable approach for the average investor.
Why Try to Time the Market?
The primary draw of attempting to time the market lies in the potential of maximizing the profits and cash flow on your deals. By purchasing a property at a low point in the market cycle and selling at a high point, investors will capitalize on significant returns compared to if they were to buy in the middle of a market cycle.
In addition to the upside in profits, a lot of investors are able to mitigate risk when they buy their real estate deals during market downturns. If you can successfully time the market and buy deals close to market lows, you will protect your portfolio from substantial losses.
Risks of Trying to Time the Market
For any investor who thinks they have the ability to time the market, it can come with great risk. None of us have a crystal ball, so this strategy is impossible to execute consistently.
The real estate market is influenced heavily by interest rates, job markets, and other conditions unique to local economies. Most of these factors are outside of an investor’s control and are very challenging to forecast.
To time the market successfully, you need an unemotional approach and a little bit of luck. Anybody who attempts to time the market should not expect consistent results.
To fully understand the impacts of buying at different points in a market cycle, let’s mock up a couple of scenarios. We’ll use the Las Vegas market for this example, as it saw some of the most drastic price swings over the last couple of decades.
Scenario 1: Timing the market perfectly (buying in 2012, selling in 2022)
This example represents an absolute best-case scenario, where you buy at the absolute bottom in one of the hardest-hit markets and sell at the most recent peak.
The median sales price of a previously owned single-family home in Las Vegas was $118,000 in January 2012. Meanwhile, the median sale price of a previously owned single-family home in Las Vegas was $405,000 in August 2022.
Had you perfectly timed the bottom and bought a home in January 2012, and then perfectly timed the top and sold the home in August 2022, you would have realized a 243% return on your investment over approximately 10.5 years.
Scenario 2: Timing the market horribly (buying in 2006, selling in 2012)
Let’s take a look at somebody’s failed attempt at timing the market. They bought a home at peak pricing, assuming prices would continue to go up, and then sold the home at the bottom.
The median sale price of a previously owned single-family home in Las Vegas was $315,000 in June 2006. Meanwhile, the median sale price of a previously owned single-family home in Las Vegas was $118,000 in January 2012.
Had you perfectly timed the top and bought a home in spring 2006, then perfectly timed the bottom and sold a home in January 2012, you would have experienced a loss of 62% on your investment over approximately six years.
Scenario 3: Time in the market
In our final scenario, let’s consider somebody who bought 20 years ago and who has simply held on during the waves of the market.
The median sale price of a previously owned single-family home in Las Vegas was $184,300 in Q3 2003. The median sale price of a previously owned single-family home in Las Vegas was $410,000 in Q3 2023.
Had you bought a home 20 years ago and ignored the several drastic market cycles that followed, you would have realized a 122% return on your investment over 20 years.
Time horizon is a huge factor here, as the general direction of real estate has always been up.
Looking back all the way to the year 1960, the median home price in America was only $11,900. Today’s home prices, according to the Case-Shiller Index, are about $311,000. So, buying a home in 1960 and holding on to it through 2023 would have generated a gain of over 2,500%!
For the most sophisticated investors, timing the market absolutely can supercharge your returns. But for real estate investors as a whole, each investor needs to carefully consider their financial goals, risk tolerance, and investment horizon to come up with a strategy that makes the most sense for them.
The most successful real estate investors should focus on buying real estate deals at below market value, regardless of market conditions. This way, if they mistakenly buy a property close to a market peak, they will have some equity left in the deal as they weather a downturn.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.