Is now a good time to invest in private real estate or should I wait it out? It’s a debated topic, but, unless you can predict the future, it might be elusive to time the market and find the right entry point.
Successful real estate investors promote that private real estate has been a cornerstone to building their wealth. As individual investors who are looking to invest alongside professional real estate managers to partake in their wealth building efforts, it’s an important matter to ensure that their investment is protected.
A typical concern and follow-up question that comes up is about the timing of the private real estate market. When is it be an ideal time to start investing?
It’s a sensible question to ask, given the financial commitment allocated to these types of private investments. Therefore, a common strategy that investors attempt to execute on is to time the market correctly. However, the private real estate market is more complex than most real estate investors would consider and timing it correctly is more difficult to achieve.
As most individual investors understand, the real estate market operates in cycles of booms and busts as prices fluctuate up and down based on a variety of economic factors.
Timing the stages in between market cycles requires an inordinate amount of time and energy that will require a lot of research, patience and discipline. When the right conditions are met, individual investors must know with definiteness to start allocating or risk losing out on potential opportunities.
A question to ask yourself regarding market timing. Were you allocating to private real estate during the spring and summer of 2020? If not, then that would have been a great time to start investing given the recent boom in private real estate.
Understand that each part of the market cycle offers a unique set of opportunities, risks and factors. So, instead of timing the market, it’s better to have a tailored method towards investing and focus on a certain key fundamentals.
As an individual investor, it’s important to understand your investment criteria when it comes to private real estate as there are a variety of options and strategies to choose from.
Having a better understanding of what you are looking to achieve in your investment goals will help you arrive at a better conclusion of which investment strategies and options makes the most sense.
For example, investors who are looking for yield should focus more on an investment’s cash-on-cash return, sustainability of the manager’s long-term NOI growth projections and financing terms. Treat appreciation as a bonus.
As for investors primarily seeking appreciation, focus on the manager’s assumptions and math on how the managers arrived at the expected pricing strategy.
Here are some questions you should ask yourself before starting your search:
Lastly, practice dollar cost averaging. Commit to allocate an investment amount to private real estate at steady intervals, regardless of market conditions. You can shift your timing slightly to avoid obviously bad conditions or take advantage of good ones, but if you remain consistent, you’ll remain practically immune to the effects of wild fluctuations.
Real estate markets are not homogenous across the board and are inherently a local business. It’s very common to witness different geographic markets to be in different stages of a real estate cycle.
Individual investors should pay closer attention to targeted local market trends they are investing in vs. the national averages as these local metrics and conditions have more impact on real estate assets. Therefore, it is critical that when individual investors decide to invest alongside a manager, that they follow a strong, consistent, and expansive sourcing approach. This will allow the manager to be apprised of current opportunities and make those necessary adjustments in their analysis if markets move.
Experienced real estate managers can make variable adjustments, if needed, to ensure that they can match their investment criteria. Certain variables, such as pricing, may need to be adjusted to match current market conditions. However more importantly, is maintaining a hardline position on their respective investment criteria and due diligence needs to avoid analysis decay.
Lastly, identify the market fundamentals that will drive demand for the type of real estate product needed in the given market (i.e., strong population and job growth are important metrics for housing).
Private real estate is inherently an inefficient market. There may be certain real estate managers that hold better information than their competitors giving them a clear information advantage on how to properly value an asset. Local market trends, asset location, potential city planning rumors and current asset conditions are asymmetrically gathered.
To gain the best position in the market, managers should have strong local connectivity. One example is having a well-established broker network. A strong network can significantly help managers in their discovery and asset valuation process as almost all assets have a unique narrative behind their pricing and pathway to unlock value. As an example, a manager may encounter a current owner who has kept rents the same for the last five years, rents are 10% below the market rate and their pricing is not reflecting it.
The manager’s duty is to properly identify these mistakes and design a plan to correct them so they can unlock value for investors. Identifying and planning is only one side of the equation, however, more importantly is their capability of executing that plan. The manager’s operational management capabilities and their previous track record will be a critical component to understand in order to properly assess the feasibility of their investment thesis for the asset.
Real estate remains one of the most popular types of investments, and for good reason. It’s a great way to balance your portfolio, and if it keeps performing in the future the way it has in the past, then it could set you up for a great way to create wealth.
But try to avoid the temptation to attempt timing the market—it’s far too difficult, and you’re almost always better off following a pragmatic strategy instead.
If you're seeking specialized expertise in private real estate investments, Wealthstone Group is your trusted partner. Contact us today to discover our customized solutions and how we can assist you in achieving your investment objectives.
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This material is provided for informational and educational purposes only and is based on information from sources we believe to be reliable. However, its accuracy is not guaranteed, and it is not intended to be the sole basis for investment decisions or to meet specific investment needs.
Wealthstone Group does not offer tax or legal advice. This content should not replace professional advice tailored to your individual situation.
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