There are many benefits to investing in commercial real estate. Compared to other investment assets, commercial real estate allows you to leverage financial leverage, generate a steady cash flow by invoicing rent, and reap long-term profits – lots of tax benefits along the way. And if you work a commercial real estate management company, you can take care of most of your day-to-day responsibilities by managing your assets completely out of reach (while raising income).
Many new commercial real estate investors believe that the secret to success is the timing of the market. Historically, it is easy to see that commercial property prices fluctuate. If you could buy a dip at the bottom and sell at the top of the growth curve, you could make a huge profit – but is it wise to schedule the market this way?
The answer is not that simple.
Market timing – national or local?
First, it is important to understand that the “real estate market” is not one giant entity. While there are certainly national level trends in the real estate industry, each local market is different. While the nation is experiencing a wave of rising prices and conditions that favor sellers, can be a local neighborhood or a specific business niche that is mature for buyers. Similarly, some local markets are still overpriced during national real estate, where prices are falling and ample buying opportunities.
Because of this, it is possible to find a lot of commercial real estate no matter what happens at the national level.
Key variables to be considered
What is the “right time” to enter the market, assuming you can schedule it perfectly?
Most people would answer “when prices are at their lowest,” but there is more to the equation.
– Prices – Of course, the prices are worth considering. When prices fall, the conditions for buyers are favorable. You can get the same powerful property for much less than you would have just a few months before.
– Demand – But you also have to take into account demand. Often prices rise and fall in correlation with demand. prices are falling because there is less interest in this commercial property. If you can’t find a tenant to rent your property, its value will go down – even if you get a good price for it.
– The future – Current prices are not a good indication of the growth curve of the property. You can get a great deal on a property just to see its price drop further. And you can technically pay too much for a property and still benefit significantly from future growth.
– interest rates and availability of loans – You also need to consider the current availability of real estate loans (and available interest rates). If you get a cheap and easy loan, you might want to pay a little extra for the property or even buy from the top of the market.
You also need to weigh personal factors.
– Risk profile – How much risk you are willing to take right now? Could you put up with a massive loss if the real estate market is heading in a direction you didn’t expect?
– Available cash – How much cash do you have to work? Can you afford to buy real estate in all respects? How much loan do you need to take otherwise?
– Time and flexibility – What is your investment period and how much flexibility do you have to buy and sell real estate in the future?
Unpredictability in the market
It is also worth noting that even the best, most experienced real estate experts have difficulty predicting the market. Housing bubbles emerge and burst without being proactively identified by experts, and we have seen a broad prediction of the impending verdict followed by years of subsequent growth before the recession. Don’t overestimate your ability to predict what will happen next.
Is market timing the best idea?
It is definitely possible to experience a big profit from the timing of the market. If you get in on the ground floor and see a heavenly ascent to a new peak, you can multiply your investment many times over. But it’s also possible to see a catastrophic loss of market timing – even if you did all the care. The truth is that the real estate market is impossible to predict even for experts, and if you believe in the timing of the market, it can work against you.
Instead, it is better to develop a solid real estate investment strategy and follow it as consistently as possible. With your diversified portfolio, pay attention to the market cycle and flow and hold your steady hand if you want to see the best and most reliable long-term results.