Housing prices have been going up and up in many areas of the country. For some people in the real estate business, that is a good thing, and for others that is a bad thing. The question many people are asking is if now is a good time to be in the real estate business, or should you want until the market drops. I have been an agent/broker and real estate investor since 2002. I have seen many markets go up and down, and I have my opinions on whether others should be entering the business. To give you a hint, I never try to time markets or make my money by predicting what will happen. Many experts have tried to predict what the real estate markets will do, and very few are ever correct. Personally, I think there is an opportunity to make money in any real estate market, but at the same time, you have to be careful in every real estate market.
Why don’t I predict real estate markets?
A lot of people ask me what I think the real estate market will do or what I am going to do when the next crash happens next year. They assume that the crash will happen simply because prices are high now. I do not try to predict real estate markets because much smarter people than me try to predict them all the time without much success.
I have to admit I saw the last housing crash coming, or at least I saw something coming. I knew something was wrong when banks were loaning people 120 percent of the value of their home. There was absolute craziness going on before the last crash, and while I didn’t know exactly when a crash was coming, it did not surprise me either. There are some who claim they predicted the last crash, and you can also see they predicted a crash for 30 straight years to promote their silver business. No surprise: they finally go it right. After the last crash, there was also a lot of very smart people predicting a double-dip recession and another housing crash even worse than the first. That crash never came. In fact, the opposite occurred.
A lot of people have predicted we will have a crash for the last 5 years because prices were increasing. Yet no crash has occurred. Here are my very quick thoughts on a possible crash:
- Prices cannot go up forever, but it is really hard to know when they will stop or how much they will go down. It could be in one year or seven years!
- The market is much stabler than it was prior to the last crash. Banks are not making crazy loans. There are many more cash buyers, investors have to put much more skin in the game, and credit scores are much higher.
- The reason prices have gone up is because there are not enough houses for people. Building is nothing close to what it was before the last crash. Over-building was one of the main reasons the last crash happened.
- Every market is different. We have seen crazy price increases in Colorado, while other markets may have seen very little price gain the last 7 years. One market may crash while others may be just fine.
I wrote much more on the housing crisis in this article if you want to see more data and reasoning behind why a crash is not imminent.
Is now a good time for house flippers?
I flipped 26 houses last year and 26 the year before that. I flipped through the housing crash, and flipping is one of the main sources of my income. People always ask me what I do differently now that a housing crash is coming. I already talked about how I feel about the imminent housing crash, but assuming we do have one, here is what I will do differently:
Yes, I will do nothing differently from what I normally do. This is not because I don’t think a housing crash is coming but because of the way we do business, we always prepare for the worst and hope for the best. We build plenty of profit into each deal, try get jobs done as quickly as possible, and do not invest in crazy projects. I use the same principals no matter what the market is doing. I never assume prices will go up no matter how good the market is.
You can make money flipping houses no matter how good or bad the market is. A lot of people made money flipping houses right after the housing crash, but that does not mean that was the only time to make money. It was easy to find deals with thousands of foreclosures, but do not assume that scenario will ever happen again. Even if we have another crash, the banks sell houses much differently now, and there are many more investors waiting for those deals.
The good news is that there are always deals in every market if you know how to find them.
Should you wait to buy rentals?
Another question I always get is how do I buy rentals when prices are so high! I agree it is tough to find cash-flowing rental properties when prices are high. Again, it was easy to buy rentals that were amazing deals right after the crash. I bought 16 of them, and they have all been great properties. I stopped buying residential rentals in 2016 because prices got so high and it was really hard to make money. I did not stop buying rentals completely. I bought commercial rentals instead, which have been an even better investment.
If I could not find commercial rentals in my area, I would have invested in a different market. Real estate is an amazing business to be in, but that does not mean it is easy! It takes hard work and doing more than other people are willing to do to make it big.
One of the biggest advantages of real estate is using leverage. You buy a great property with a mortgage or loan; it makes money every year; you slowly pay off the loan; and the property should go up in value as well. The sooner you buy properties, the sooner you can take advantage of these… advantages (Austin Powers reference).
If you buy rentals that have cash flow and are great deals, you should do okay in a crash. The biggest risk of having rentals in a crash is the possibility of having to sell them at the bottom of the market. If you are making money with them, do not sell them! In many cases, rents will not decrease in a crash! It is also wise to have plenty of reserves in place in case something goes wrong.
You can see below how rents overall didn’t decrease nearly as much as values.
Again, all of these strategies should be used no matter how good or bad the market is.
Should you wait to become an agent?
I love real estate investing, but a lot of my income used to come from being a real estate agent. I still own my own brokerage but rarely, if ever, sell as an agent. There is a ton of opportunity for real estate agents to make a lot of money, but again, it is not easy. Having been in the business many years, I have seen many agents come and go. Often, new agents join the business when the housing market is up like it is now and down like it was during the crash.
Usually, there are many more houses selling during the good times, and that provides more opportunity for agents. A lot of agents have joined the industry lately, but they are not making as much money as usual. As I mentioned before, there is not nearly as much building as there was in the past, and the reason housing prices are increasing is that there are very few houses for sale. When there are very few houses for sale, there are very few houses for real estate agents to sell. While the market has been great for those who own homes, it has not been great for many real estate agents.
Does that mean that no one should become a real estate agent? No! While there may not be as much business as there could be for agents, the good agents are still making money, and they are making a lot of it. Good real estate agents can make money in any market, and sadly, most agents are not good at their jobs. It does not take much effort or skill to become one of the better real estate agents out there. I try to be a positive person, but I am also a realist, and most agents are not good at their jobs.
If you ever had hopes of being an agent, do not be afraid because there are already too many agents out there. There is a ton of opportunity for good agents to make a lot of money. Now is just as good a time as any to get started.
What are the dangers of timing markets?
If you are trying to time markets, your strategy could be dependent on the market doing what you think it will do. If the market does something different, you could be in for a world of hurt! I prefer to use strategies that work no matter what the market does.
The investors who took the biggest hit in the last housing crash were those who were timing markets. They bought high and hoped things went higher. They went bankrupt when the markets stopped going up. If you invest with good fundamentals, you will usually be okay no matter what the market does.
Another risk you run when trying to time the market is never investing at all. I think a lot of people are scared to invest and look for any excuse they can not to invest. They claim they are waiting for the markets to crash, when in reality, even if the markets do crash, they are still not going to invest.
There is another group of investors who think they will wait to buy until the bottom comes, but how do they know when the bottom is? It is easy to look back at the housing crash and see when the bottom was. However, at the time, many experts were predicting prices would continue to plummet. I know investors who would not buy houses at the bottom of the crash because they thought things would go lower, and then they missed the boat. Then they waited for that second recession to hit, and it never did. Now they are still sitting on the sidelines waiting for the next crash. But how will they know when that bottom is?
Waiting for the perfect timing usually does not work out
In retrospect, we can all see how great it was to buy houses in 2012! But it was not obvious back then. Trying to time things perfectly is almost impossibl,e and you don’t even know if you were right until years later. I bought a lot of rentals from 2010 to 2015, but I was not buying them thinking they would go up in value, and that is how I would make money. I bought them because they were great deals at the time and had great cash flow.
If you are not willing to put the work in to find great deals, or you are not willing to put the work in to know what a great deal is, maybe you should not be investing in real estate at all. It is an amazing business, but it is not an easy business. For those wondering if now is the right time to get into real estate, that depends on you and if you are ready, not if the market is perfect.