Investing in commercial real estate has a lot of advantages. Compared to other investment assets, commercial real estate allows you to capitalize on financial leverage, generate consistent cash flow by charging rent, and take advantage of long-term gains – with plenty of tax advantages along the way. And if you work with a commercial property management company, you can take care of most of the day-to-day responsibilities of managing property in a totally hands-off way (while still collecting revenue).
Many new commercial real estate investors think the secret to success is timing the market. Historically, it’s easy to see that commercial real estate prices fluctuate. If you could buy at the bottom of a dip and sell at the top of the growth curve, you could make a massive profit – but is it wise to time the market this way?
The answer isn’t so simple.
Timing the Market – National or Local?
First, it’s important to realize that the “real estate market” isn’t one gigantic entity. While there are certainly national-level trends in real estate to watch, every local market is different. While the nation, overall, experiences a wave of rising prices and conditions that favor sellers, there may be a local neighborhood or a specific business niche that is ripe with opportunities for buyers. Similarly, in the midst of a national real estate depression, with sinking prices and ample buying opportunities, some local markets are still going to be overpriced.
Because of this, it’s possible to find a good deal on commercial real estate no matter what’s happening at the national level.
Key Variables to Consider
What is the “right time” to enter the market, assuming you could time it perfectly?
Most people would answer “when prices are at their lowest,” but there’s more to the equation than that.
– Prices – Of course, prices are worth considering. When prices drop, conditions for buyers are more favorable. You can get the same powerful asset for a lot less than you would have just a few months prior.
– Demand – But you also have to consider demand. Oftentimes, prices rise and fall in direct correlation with demand; prices are falling because there are fewer people interested in this commercial property. If you can’t find a tenant to rent your property, its value is going to drop – even if you got a good price on it.
– Future – Current prices aren’t a good indication of the property’s growth curve. You can get a good deal on a property only to see its price fall further. And you can technically overpay for a property and still substantially gain from further growth in the future.
– Interest rates and loan availability – You also need to think about the current availability of real estate loans (and the interest rates available to you). If you can get a cheap, easy loan, it may be worth paying a bit extra for a property, or even buying at the top of the market cycle.
There are also some personal factors you’ll need to weigh.
– Risk profile – How much risk are you willing to take on right now? Could you tolerate a massive loss if the real estate market heads in a direction you weren’t expecting?
– Available cash – How much cash do you have to work with? Can you afford to buy a property in all cash? How much of a loan would you need to take out otherwise?
– Time and flexibility – What is your investment time horizon and how much flexibility do you have in buying and selling properties in the future?
Unpredictability in the Market
It’s also worth noting that even the best, most experienced real estate experts have difficulty predicting the market. Housing bubbles emerge and burst without experts proactively identifying them, and we’ve seen widespread predictions of impending doom followed up with years of subsequent growth before a downturn. Don’t overestimate your ability to predict what will happen next.
Is Timing the Market the Best Idea?
It’s definitely possible to experience a big win from timing the market. If you get in at the ground floor and see a skyrocketing rise to a new peak, you can multiply your investment many times over. But it’s also possible to see a catastrophic loss from market timing – even if you’ve done all your due diligence. The truth is, real estate markets are next to impossible to predict, even for experts, and if you put all your faith in market timing, it could work against you.
Instead, it’s better to come up with a solid real estate investment strategy and stick to it as consistently as possible. Diversify your portfolio, pay attention to the ebb and flow of the market, and keep a steady hand if you want to see the best and most reliable long-term results.