Time in the Market vs. Timing the Market — An Economic Take on Real Estate Investing
You’ve probably heard the phrase “buy low, sell high” related to investing in the stock market. It’s also a phrase that resonates with a lot of real estate investors. However, this harmless strategy often leaves investors thinking that timing the market is key to success.
Many real estate experts advise against trying to time the market. Much like other asset classes, real estate prices are subject to ebbs and flows based on a variety of market pressures.
Regardless of how markets change, the overwhelming consensus is that it's more advantageous to buy-and-hold with a longer time horizon to optimize returns and minimize risk.
While experts may have their predictions about where markets are headed, the truth is that nobody really knows the exact route real estate will take. That means that trying to time the market is a major gamble.
Alternatively, a more prudent investment strategy would be to get into the market and invest long-term to reap all the rewards real estate has to offer. Let's look at some real-world data that validates the power of a buy-and-hold strategy.
How Does a Buy-and-Hold Strategy Work?
To understand the power of how time in the market is more important than timing the market, it's important to dig in and really analyze the financials.
Doorvest makes it easy to review both qualitative and quantitative data. On each home profile, you can see how the potential investment is forecasted in key metrics over both short and long periods of time. You can also compare conservative projections against historical data to be sure your investment meets your overarching investment criteria.
Let’s examine the potential investment of a single-family home in Galloway, Ohio. The fair market value for the property is $260,000 and it can be rented for $1,920 a month.
Note: This is an example of a Doorvest Home Profile, and this home may not be available for reservation.
Rental Income and Long-Term Appreciation
Even at first glance, you can see that a buy-and-hold strategy will work well in this scenario by providing recurring rental income and long-term appreciation.
Based on the financials of this Ohio property, you can tell that the property has strong, positive monthly cash-flow potential. As rent, maintenance, and property management scales, this home can be rented out for $2,089 by year 30. With this projection, you can earn over $25,000 a year (assuming no additional cash outlays other than in the first year).
Annual Cash-on-Cash Return
The annual cash-on-cash (COC) return in the first year alone for this property is 7.57% – which is comparable to an attainable return if you invested in equities, but with less risk and a better shell to hedge against inflation.
Once you consider that the average historical stock market return is about 7% a year, it's clear investing in this property can offer a great return on investment, which will continue to grow the longer you hold it (Titan).
Equity Accumulation
Similarly, keeping with the theme of growing wealth over time, also consider the equity accumulation potential of this and other real estate assets. It's important to understand that the benefits are twofold.
First, you would be reducing the principal balance of any financing used to acquire the property. Financing new rental properties is a great way to expand your portfolio while reducing the total amount of cash you need to pay out of pocket.
Additionally, you have appreciation working and consistently growing your rental’s fair value which should also amplify your profits over time.
Long-Term Tax Benefits
Lastly, the longer you own real estate the more long-term tax benefits you can attain. For example, you can take the depreciation deduction of a residential property like this one over a long-time horizon to minimize your taxable income.
If you finance your rental, tax advisors will also tell you that you can deduct the mortgage interest you paid as well as other operating expenses including maintenance and repair costs, property tax, and homeowners’ insurance.
Also, consider the use of a 1031 exchange to defer capital gains. The longer you wait for a property to appreciate the more impactful a like-kind exchange becomes.
Conclusion
There are many ways to successfully invest in real estate. However, most experts would argue that you are better off spending more time in the market rather than trying to time a big payday.
While there is no right or wrong way to invest, once you dig into the data it becomes a game of risk versus reward. A buy-and-hold strategy is a much more consistent way of getting amazing returns on your investment without taking excessive risk.
Reflecting on the data from a real investment scenario, it seems clear that the longer you retain a property often the better the return. There are also other benefits to consider including equity accumulation, appreciation, and tax advantages.
Although it may seem like a lot of work to analyze deals upfront, Doorvest’s suite of tools provides you with the data and projections to help streamline your analysis and help you start building wealth faster.
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