Welcome to this month’s newsletter. This time I would like to discuss the timing of entering the real estate market as a property investor, and why timing is actually irrelevant to most of us.
Let’s take a snapshot of an investment property being presented to you by someone. Say the asking price for it is $500k. How do you decide whether you should buy it or not?
What most people want to know, before they can make a decision on such a purchase, is whether or not the market is moving up. How do they determine whether the market will be moving up? For most people, the market’s future movement is largely determined by its past movement:
- If the market has been trending down for a while, some would say that it is therefore time for it to go up; or
- If the market has been trending up, others would say then that it should continue to go up for a while.
So if we are taking a guess on future market movement based on its past movement, in these two scenarios past market behaviour can be quite misleading.
If you had a way to work out that the true value of this $500k property was actually $1m, but most people were being kept in the dark about its true value and it was only a matter of time before the market would be willing to pay $1m for it, would you find your purchase decision a lot easier to make?
Alternatively if you had a way to work out that the true value of this $500k property was actually only $250k, but most people were being blinded to its over-inflated value and it was only a matter of time before the market would adjust itself to pay only $250k for it, wouldn’t you find the decision not to purchase a lot easier to make?
You may have heard some of the world’s best investors, such as Warren Buffet, repeatedly tell us to ignore market movement. They do this for a very good reason. They focus on the intrinsic value or fair value of an investment rather than what majority of the people think it is worth, because they recognise that the majority of people are mostly wrong when it comes to determining the value of an investment. This is probably why only a very small percentage of the investors do well as they don’t follow the majority (which is the market).
So when it comes to property investing, I tend not to pay too much attention to market timing. Instead I look at my personal investment capacity at any given time, and go searching for properties that are severely miscalculated (undervalued) by the general public. Then I buy as soon as I can afford to do so. Doing it this way can have two advantages:
- I can put my spare financial capacity into good use, locking into an asset that has got intrinsic upside as soon as possible. Sitting on money and waiting for market timing is very risky, as we often find the money isn’t then available when the “time is right”.
- We don’t have to be emotional about our investment due to market movement as we know we have bought value. It is then just a matter of time before the upside will come to us.
This is the simplest methodology I use when it comes to selecting investment properties and suburbs to invest in. I always like to see my calculations showing the fair value of property in that suburb being $800k, but the market is currently selling it at $400k. I don’t necessarily know how soon the market will adjust itself towards $800k, but I know it will. It’s just a matter of time.
Until next month, happy investing.