Property investment strategies: Buy too early and sell too soon
If we were to say to you that possibly the best piece of property investment advice you could ever receive would be to buy too early and to sell too soon you would probably think we were crazy. After all, in a perfect world all of us would prefer to buy at the bottom of the property market cycle and to sell at the very top creating the maximum return in the shortest space of time. But is this really reality?
The fact is that very few property investors will ever buy at the bottom and sell at the very top and there are a number of reasons for this. Despite all of the information we have from property cycles in years gone by, no two property cycles are ever the same and if everybody is suggesting that the property market in America for example will bottom out in two months, you can bet your bottom dollar that investors will try to jump the gun and invest before the market rebounds.
The likelihood is, assuming the economic climate is suitable, the market will reach its bottom before the "expected two-month deadline" and many people who waited will miss out. The same type of scenario is also relevant for those looking to sell property because you will never hit the top even if you have all of the expertise available in the world, statistics and a crystal ball.
When we suggest dipping your toe into the property market before it hits the "bottom" this is really down to personal preference as to when you believe the long-term benefits of acquiring property outweigh the potential short-term downside. If you believe the market is say for example 5% off the bottom but you believe there is potentially a 50% upside within a decade, would it not be sensible to begin building up your property portfolio before the market hits the bottom?
There are a number of reasons for this, the first being that it is unlikely that you will ever hit the bottom and if you acquire property as the market continues to head downwards in the short term, if you believe there is still long-term value, you can always average down by acquiring more property lower down. If you begin to build up your property exposure and the market bounces higher then you can always average up assuming there is more upside than downside in your own personal opinion. You are giving yourself a place from which to start, a base for the future.
The fact is that nobody can ever confidently predict the bottom of a property market before it happens. Very often when property markets hit a "perceived bottom" they will bounce very quickly and you may not have time to pick up relatively cheap property before the market turns. If the market does turn, human nature will very often mean that you will hold off hoping the market will fall again in the short term only to see it move higher and higher and you may even get sucked in because of the fear and greed factor, the fear that you are missing out and the greed that you could be making money.
As Lord Rothschild once said "the reason I am so rich is because I always sold too early" - if you remember these wise words you will do very well in the longer term. So what exactly did he mean?
In many ways you can turn the above buying strategy on its head to replicate Lord Rothschild investment strategy during his very successful financial career. It is worth remembering that, due to fear and greed, markets will overreact on the downside and overreact on the upside but the nearer they get to the bottom of the market and the top of the market the more stretched the value elastic band becomes. When an elastic band reaches its maximum stretching point and you let go, the rebound can be very quick and if you blink you will miss it. This is the reason why many successful investors will begin to buy property before the market bottoms out and coincidentally they will begin to sell their property before the market tops out.
If you can picture the scenario, you have a sizeable paper profit on your property assets and the property market keeps going higher and higher. The financial press believe the market has much further to go, investors are paying what you think in your mind are "silly prices" so what do you do next? If you're happy with your investment return, you do not believe the market has too much further to go and is indeed beginning to look frothy then what is wrong in taking a profit?
When the market hits its perceived "top" the likelihood is that a small trickle of sales from short term speculators will very quickly become a tidal wave and prices will fall at a fairly quick pace. If you miss the top of the market you will probably be kicking yourself, you will probably be hoping the market will bounce again at some stage and you could well be tempted to hold on. If this was indeed the top of the market then slowly but surely you will see your profits eroded in front of your very eyes and the more your paper profit is reduced the more frustrated you will become. This is where many investors hold on for far too long and then eventually bailout a significant distance from the top of the market.
The reality is that it is almost impossible to guess the bottom of any property market cycle as it is almost impossible to guess the top of the cycle. If you ignore the natural investment overreaction on the downside and the upside, do your own calculations taking into account property values, economies, etc and you feel there is more upside than downside (or vice versa) then take into account your own feeling on the risk reward factor. The best investors in the property market will ignore the overreaction which comes at the top and the bottom of any investment cycle and will remain focused on figures alone – taking out any emotion, like a well oiled machine.
The fact is that when investing on facts and figures alone, ignoring human emotion and over reactions in the investment market, you will never make the best possible return in any one investment cycle but in theory you have a great chance of outperforming in the long term those investors who chase short term trades. Any investment market which you join should be seen as a long-term commitment but if there are any short to medium term opportunities to bank a profit, or indeed crystallise a loss, and you feel this would be the most appropriate action then take it.
Mark Benson is editor of PropertyForum.com. Whether you are looking at the latest mortgages, maybe considering some DIY, looking overseas or just curious about the latest trends in the property market, checkout the Property Forum for more information.