Buy Low, Sell High Is Still Smart; Here’s Why.
Trying to answer the question ‘should I buy now?’ is universal in the real estate world. Normally I write about Alberta real estate because I’m an Alberta lawyer, but I don’t think it matters if you live in Edmonton or New York, Calgary or London. It also doesn’t matter if you’re buying a home or looking for an investment property; their home is many folks’ biggest investment, so it’s smart to think like an investor.
People who want to own property have to make a calculated decision about when to buy. Obviously, there are lots of things that go into your decision-making, but let’s chat about something very important: the condition of the real estate market.
Figuring out when to buy is a decision based on not just your local real estate environment, but on the specific area(s) where you want to buy. Remember, as much as governments, whether federal, state/provincial, or municipal, like to talk about the average price of real estate, their numbers are always skewed. Average sale prices don’t tell the whole story, because they are a mixture of the sky-high prices in one area and the low prices in another area.
Tip: Don’t rely entirely on averages. Seek out reliable data for the specific area and type of property that you’re interested in buying.
That being said, what if the whole market where you want to buy is out of control, with bidding wars driving prices over list and desperate buyers snapping up properties very quickly? Or, maybe the market is flat, not much movement up and down. Or, maybe the market is depressed and prices are falling. How do you look at pricing trends and fit that into your analysis?
Let’s get some help on how to look at this buying decision.
“The Seven Worst Words in the Investment World: ‘Too Much Money Chasing Too Few Deals.’”
Howard Marks, CEO of Oaktree Capital Management, has lots to say about timing investments. Why should we listen to him? Oaktree is one of the most successful investment companies ever. Here are some numbers. From a standing start in 1995 with $500 million under management, Oaktree has grown to be a colossus with an astounding $122 billion under management as of June 2018. Howard and his team have a ton of experience and a huge worldwide client base. They know what they’re doing, so when Howard speaks, I listen.
Here’s Howard’s take on what it means to pay higher or lower prices for an investment, whether real estate or stocks, bonds, etc.
Investment markets are an auction house where the item that’s up for sale goes to the person who bids the most (that is, who’s willing to accept the least for his or her money). In investing, the opportunity to buy an asset or make a loan goes to the person who’s willing to pay the highest price, and that means accepting the lowest expected return and shouldering the most risk.
- Like any other auction, when potential buyers are scarce and don’t have much money or are reluctant to part with the money they have, the things on sale will go begging and the prices paid will be low.
- But when there are many would-be buyers and they have a lot of money and are eager to put it to work, the bidding will be heated and the prices paid will be high. When that’s the case, buyers won’t get much for their money: all else being equal, prospective returns will be low and risk will be high.
So, there you are. It’s no secret that ‘buy low, sell high’ is a smart investing strategy, but Howard Marks really lays out why risk is reduced and potential profit increased. Think about your real estate purchase decision as an auction. Then, apply that thinking to your current plan to buy some property.
Rather than having the dubious honour of being the highest bidder in a frantic auction, you’d be better served by biding your time or setting your sights on a different market. I recommend only bidding what fits your objective analysis—no matter what other frenzied buyers are doing!
If you think Howard might be on his own in how he looks at an investment, here are quotes from two more of the world’s most successful investors. They basically think the same way.
“Be greedy when others are fearful and fearful when others are greedy.”
—Warren Buffett“When there is a crisis, that’s when some are interested in getting out and that’s when we are interested in getting in.”
— Carlos Slim
What to Do If the Market Is Bad, But You Can’t Leave
Yes, high prices or low prices are not the only thing that goes into your buying decision; location is important, too. Work, family commitments, etc. tie some people to certain areas, regardless of how expensive they are. Rob Carrick from the Globe & Mail has crunched the numbers, and in overheated real estate markets like Toronto and Vancouver (including their entire metro regions), renting is currently much more affordable than buying. To advance your financial position, the trick is to use the money you save for other types of investments.
How to Invest in Any Market
This blog post has assumed people are going to buy and hold real estate, but that’s not the only way to invest. Creative Strategies are methods of investing in real estate that allow you to recognize other types of opportunities. Check out the home study kits in our Shop where you can learn how to use alternative, legal approaches to make money fast with Canadian real estate!
“Buy Low, Sell High Street Sign” image by Investment Zen used under CC Attribution 2.0 Generic.