Is Market Timing Possible in Today’s Residential Real Estate Market?
ByOkay, if you’ve been reading this blog regularly, you know I’ve just bought a rental property in Charlotte, NC – near my in-laws. (One of the few housing markets that’s doing well at the moment, btw. Seattle is currently experiencing a price decline and Charlotte is the only city that hasn’t…) And I’ve also been searching for the next great place to invest… I’ve been looking here in Seattle in my own back yard, as well as in other markets like Dallas-Fort Worth, for cash flow and Mobile, AL and Biloxi, MS for the Go-Zone tax benefits.
Once you free yourself from the idea that you can "only" invest where you live, you dive into the more complicated question of – "If I can invest anywhere, where should I invest?"
It’s hard to know where to invest when the news is sending out lots of contradictory information about what the markets are doing and where you should go. Plus, if you do find a hot market, like California, Phoenix, Las Vegas and Miami have been in recent years… how do you know how long to ride the wave up and when to get out (before things crash)?
Well, that’s the million dollar question, and a few weeks ago I happened across a gentleman who purports to have discovered the answer!
How Can We Improve Our Investment Returns?
Ken Wade is a 30-year veteran of the real estate investing industry. The initials behind his name include a CPA designation and an MBA from Harvard Business School.
Ken was frustrated to realize in the course of his investing career that even though he was spending hundreds of thousands of dollars on marketing to motivated sellers and employing a giant staff to handle the leads, his know-nothing-about-real-estate friends were beating him in their investment returns simply through the DUMB LUCK of being in the right place at the right time.
I had a similar experience, acquiring about rental homes from motivated sellers I found with blood sweat and tears and renting them out for five years in a flat market with no appreciable gains in value, only to have a friend in a different state buy two random rental properties from a realtor and sell them two years later for a $200,000 profit.
In real estate, there are really four main profit centers to be aware of:
- Cash Flow
- Tax Write-Off’s
- Loan Pay-down
- Appreciation
Of these, appreciation is by far the most powerful profit booster.
Combining leverage of putting 20% down or less on a property and appreciation (nationally 6%) a year, investors can expect a scenario similar to this:
$20,000 invested to buy a $100,000 house. House goes up $6,000/year for 5 years. That’s a 30% annual return. More realistically, it’s a $30,000 increase in value after 5 years, and if you have 6% transaction costs to sell (realtor fees, etc.), you walk away with $22,200 in profit over five years. That’s closer to a 22% rate of return per year. Not a ton, but significant, twice the average rate of the stock market returns and enough to put you well ahead financially when you look at the results compounded over time.
Well, the problem is you can’t buy the "average American house" – you have to buy a particular house in a particular market area. Local markets experience up and down cycles, often going up in value for 5 or 6 years, and then declining in value for several years (or staying stagnant and letting inflation due its corrosive work).
The question when it comes to real estate market timing is – Can we predict these market cycles enough so that we can stay in the market when it is going up 5%-10%-15% or 20% a year and get out before the market starts to fall? If so, we can harness these price trends and the power of leverage to make our investable funds compound much, much more quickly…
What is Technical Analysis in the Context of Real Estate Investing?
So what Ken Wade has done is to capture the real estate trends in charts and graphs so you can see the up and down cycles of the market place. You can know when the market is going up, when the market is going down… that tells you when to buy, and when to sell.
Technical Analysis is the name by which the process of analyzing these trends is known. The math behind technical analysis was developed hundreds of years ago by Chinese rice merchants and it is currently used extensively by stock and commodity traders. Although there are mixed reports on the effectiveness of technical analysis for use in the stock market, there are reasons to believe that technical analysis is VERY useful when it comes to analyzing the real estate market.
In fact, I called the developer of this real estate market-timing product, Ken Wade, and spoke with him extensively (for over an hour) about his system and its effectiveness in predicting the performance of the real estate markets. Although nothing is ever fool-proof, he said that doing technical analysis trading in stocks, you’d be lucky to get your trades right 60% of the time.
Doing technical analysis with real estate investing is much more effective because the real estate market is more cyclical, slower moving, and less volatile than the stock market. He said it was like putting a college economics student in a fifth grade math test to see how well she did on the exam. It’s a no-brainer…
He encouraged me to personally go into his data set (which I have to subscribe to have access to, of course, and personally spot-test data points to my hearts content to see how accurately they were predictive of correct actions in the market place. He said he had done just that after developing this program and was amazed by the results!
Ken had personally been doing technical analysis calculations on specific markets he was interested in for the last 10 years and having great results. Now, with this software system, he was able to look at results from across the country very quickly and choose the best market places to invest in.
If it works as well as he said, this is absolutely got to be the biggest boon for real estate investors since I don’t know what… no-money down investing, sliced bread, short sales… it’s tremendously powerful.
I would love to chat about this one, guys. If anyone has the chance to go through Ken’s sales information and get some background here, I think you will be very impressed. Let me know what you think! I am thisclose to moving forward o this myself, but still doing a bit more research. I’ll keep you posted on what I decide and what I think of the program once I get inside. I’ve heard from a friend, Byron Walker who promotes emerging market real estate opportunities, that it really is as good a program as Ken says it is!
Emily
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April 5th, 2008 at 1:04 am
[...] I recently posted about my investigation into whether "technical analysis" could be applied to the real estate investment market. One of the things that I decided to do as a part of my investigation was to learn more about [...]