Is this the right time for investing in Real Estate?

I have heard this question so many times that it inspired me to write this blogpost. And interestingly this question has been asked in good times as well as bad times! I used to get this question in the 2015-16 period when a boom had already begun in real estate. I have gotten this question at the peak of COVID crisis too!

The implicit argument hidden in the question is that this is not the right time to invest in real estate. In the 2015-16 timeframe it was because the market was hot and hence the recession was imminent. In the peak of COVID crisis, there is big uncertainty and a possibility of prices going down hence not the right time.

But people who are asking this question forget an important characteristic of real estate investment. It’s a long term vehicle. When you buy a house or an apartment building  a holding period of 5 to 7 years and even 10 years is very normal. As per an article on on an average a recession lasts for 11 months. They have looked at 33 recessions since 1854! Let’s say the price falls below your purchase price and then it starts recovering in a year or so, but still remains below your purchase price for next three years. You are still going to come on top as long as you wait for 3 to 4 additional years!

This has happened to me before. I bought a condo in LA in 2007 when the prices were reaching their peak. I bought it for $550K. In 2011 I wanted to sell the condo and move to a single family house. I tried to sell the condo and realized that nobody will give me a single penny above $450K! A good $100K below my purchase price! I decided not to sell.  I was able to buy a single family house and rent the condo. In 2018 I sold the condo at a handsome price of $840K. A good $290K above what I had bought it for! My IRR for the condo investment was a good 17%! Thus if you are willing to wait for enough time, you can get a handsome reward even if you buy it at the peak!

Now, let’s talk about the people who thought that real estate had reached its peak in 2016. Those people were waiting on real estate to come down to buy a house. They were waiting for a recession. And guess what, the real estate recession is still not here! Even after COVID, the real estate is extremely hot and the house prices are increasing almost every month! Imagine if those people would have bought a house in 2016, they would be rich by now!

Market timing is extremely difficult and one shouldn’t attempt to do so. Even if you buy real estate at its peak, in a few years a new valley will come and go. Soon a new higher peak will be achieved. Thus if you wait enough, you will always win. Moever every business cycle provides opportunities.  You just need an eye to look for them. And if you don’t have an eye, then you can outsource that work to someone else. There is no bad time to buy real estate.  As they say, real estate is a forgiving asset class! You can make mistakes and you can still come on top.

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