Buy low, sell high – That’s the general idea of earning a return on any investment including real estate.
But like any investment, the challenge comes from knowing when to buy and when to sell. Buy at a high price and it can take years to recover your position if the market turns. Sell too soon and you risk losing out on significant capital gains.
If you’ve done any kind of investing, then you’re likely familiar with the phrase “timing the market”. It’s an investment strategy that entails buying or selling financial assets based on future movements. Let’s use stock trading as an example. If you believe that a company’s position will move up based on an earnings report or a new product reveal, you buy stocks and sell for a profit if it increases. Likewise, you can also short positions if you believe a stock will drop.
Timing the market sounds great in theory and you may even be able to pull off some major wins. But doing so consistently is difficult even for seasoned investors. If you’re looking to maximise your capital gains, then this investment strategy may not be in your best interest.
Here we’ll look at why it’s difficult to time the real estate market and a better investment strategy instead.
The Difficulty of Timing Property Prices
Real estate markets are incredibly unpredictable.
Even if you buy at the low end of the market, there’s no telling when the market will suddenly shift. A downturn in economic activity or increase interest rates are both factors that are completely out of your control. Yet either could decrease the demand for housing and bring prices down.
Now you’re left with an asset that depreciated from the time you bought. It can months or even years for the market to swing upwards.
You’re left with two choices – Cut your losses now and recover what you can or wait. The latter ultimately means holding onto a property for longer than anticipated. Holding costs like property taxes and insurance will also take a chunk out of your profits.
Either scenario presents a tough choice and time is certainly not on your side.
Alternative to Timing the Market
Investors like to think they can beat the odds. Timing the market can certainly work for those with the time and resources. But there are still considerable risks involved given how unpredictable the market can be.
So what are your options then? It’s clear that the longer you deliberate the more you risk lowering your position or missing out on gains.
An alternative to timing the market is with dollar cost averaging – A strategy where you invest a fixed amount at regular intervals (e.g. $1,000 a month). It allows you to reduce your market risk and build your investments over time.
With real estate crowdfunding, you can leverage dollar cost averaging and pool your funds with other investors into development projects and even generate a passive income.
They may be smaller amounts but regular investments lead to steady gains over time. They also take the stress out of timing the market and worrying about whether you entered at the right time. It may sound dull but time and the power of compounding interest are still one of the best investment strategies.
Kym Wallis, the founding director of Higher Ranking has over 15 years of advertising sales, digital strategy, and business development experience. He is currently working as Digital Adviser for Vergola NSW.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.