Real Estate – When to Buy and When to Sell

A common question that I get from friends and associates is – Should I buy now? or Should I sell now? – can you give me a simple YES or NO.

Here’s my best try in making it as simple as possible.

The above image is a March 2018 snapshot of Teranet Index which shows composite house prices all over Canada.  On that graph, I drew a green trend line which I believe is inflation.  Let’s use that graph to talk about all these 3 things – when to buy, when to sell and inflation.

In my case, just a few years back, I was making healthy money running technology companies but I had no clue on how to invest my money to produce a viable return.  Instead, as it happens to most of us, I chose money managers. My money managers did the best they understood – but not enough to help my money achieve its full potential.  That’s my reason for writing this blog to my friends and social media followers. My way of giving something – easy financial information one byte at a time.

As is obvious from this graph, inflation is at about 3.82% per annum or about 4% for easy math.

A few years ago, when I was financially illiterate, I thought inflation happened over a lifetime and that I didn’t need to worry about it – Wrong !!!.  It happens every day, every minute of every day, and slowly but surely eats up all your savings!

So, take-away #1money loses its value by 4% (3.82% to be precise) every year.  If you borrow below 4% , you might be getting paid to buy Real Estate!

Now onto our question – when to buy and when to sell.

There are very esteemed organizations including Harvard which provide specialized courses in Real Estate Investing.  The key takeaways:

  1. Like any other market, Real Estate follows a cycle – usually 18 years in the United States. But the funny thing about cycles and the knowledge of them – it influences players in the market and thereby affecting the cycle.
  2. The cycles is usually 4 steps –
    1. Recovery.
    2. Expansion.
    3. Hyper Supply.
    4. Recession.
  3. The only real way to know what part of the cycle you are in – is to look at data carefully – supply and demand – vacancy ratios – new construction pipeline – rents going up or down … and a lot of other factors.  The recession does not come because it’s time for it to come, it comes due to Hyper Supply.
  4. The only way you can lose in real estate is either by paying too much or by not being able to hold it long enough.

So when to buy and when to sell:

If it’s your Primary residence:

Buy when you can and when you need, just plan to hold it for 5 – 10 years.  If the market dips, inflation will bring it’s value back up – you need to be in it long enough to ride the wave out of the crater.

In fact, when it’s your primary residence, you perhaps don’t want its value to go up. You can’t sell it and cash in because you will need a place to live.  If you think of flipping, something else will be fairly expensive too when the market goes up. And if you keep staying, then you are just paying more taxes on the new higher value for the same amount of utility you had before!

If one’s looking for investment property:

Then it’s not too complicated either.  Finance is easy, people make it complicated.  At the bottom it all there is just one golden rule – Demand and Supply.  So for investment property:

  1. Pick a property with cash flow and that such cash flow be positive at a 5% interest rate. Then set a plan and a profit percentage for that project – a plan like enhancing value, redevelopment or plain just clean-up and get market rents (if the property currently has below market rents).  Exit when it hits your profit percentage leaving anything over and above to other market players – don’t get greedy.  If it does not hit the desired percentage, then it won’t hurt to hold as it’s cash flow positive.
  2. Bottom fishing – pick good values whenever Real Estate index is below inflation trendline.
  3. Resist the urge of buying investment properties when the index is way above the long-term trend line (like right now!).

[Update June 20th, 2018] Counter Arguments:

There are some valid counter-arguments I received from my very informed friends and these deserve mention and further discussion here.

  1. Markets just don’t go purely in cycles (technically known as mean-inversion), but instead comply to fundamentals of demand and supply.
  2. Rents are going up like crazy, which means that if something is not cash-flow positive today then it might become positive tomorrow.
  3. There is so much demand, builders have nothing left in 100s of thousands of condos that they are building.
  4. I am not able to find a place despite the atrocious rents, which means there is still scarcity.
  5. If I don’t buy something now, I may not be able to afford anything down the line.
  6. Core downtown will always be high in demand, so even if I pay more now, I will not be hurt in long run.

[Update] Reply to Counter Arguments:

  1. I will provide both sides of the argument on all of these in detail. coming soon …

These are my thoughts and not financial advice.

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