For many people the idea of property investment is a long-term situation using money which is unlikely to be required in the short to medium term. In a perfect world this would be the situation but we do not live in a perfect world and things can change. However, many people seem to get sucked into falling markets usually “Lock, stock and barrel” only to find there is further downside and they are locked in at unattractive levels.
There is a saying on the stock market which relates to investing during troubled periods suggesting it is like “catching a falling knife”. So what does this mean and how is this related to the real estate market?
Sentiment
You can throw all of the statistics, facts and figures at real estate but the fact is that if investor sentiment is downbeat this will at best take some of the shine off the market and at worst push it into a downward spiral. As we saw during the 2008/9 the US mortgage collapse had a massive impact upon sentiment and eventually economies followed. During this period investors were looking ahead and trying to factor in potential economic challenges – hence the drop in investor interest and asset valuations.
Do not underestimate the power of sentiment because it can and does literally move markets.
Investing in a falling market
As we touched on above, property investment should be seen as a long-term investment but if there are opportunities to pick up “cheap stock” then these should be considered. However, sometimes the facts and figures in depressed markets may give a very different impression than that on the ground. Sentiment, as we discussed previously, plays a major part in any investment valuation including real estate.
Trying to second-guess the bottom of any investment market is difficult and akin to “catching a falling knife” which could effectively leave you cut and wounded. So, if you believe there is long-term value in an individual property market how can you benefit from a period of depression?
Split your total investment into tranches
Even the best minds in the real estate world will never be able to pick the bottom of the market, or indeed the top, on a regular basis. If you see long-term value in a real estate market then you should consider investing part of your funds. How much you invest, and what percentage of your overall fund, will vary from investors to investor but your first investment gives you a foothold. So where do you go from there?
If you sit back and consider the situation, you have bought your first tranche of real estate on the way down, so what do you do if the market falls further? Simple, as long as the long-term situation has not changed then you can simply buy a second and more if the market continues to fall. At some point the market will turn and very often it will turn very quickly as sentiment changes.
What happens if the market recovers and you are left with a smaller investment than you had anticipated? Well, if you have your first tranche in the bag and the market begins to turn then why would you not consider increasing your exposure on the way up? It may well be that you buy additional tranches at more expensive levels than your initial investment but, for the market to turn, prospects must have improved? Many people are afraid to invest additional funds “on the way up” and are often preoccupied with the issue of why they did not invest more at lower levels. Isn’t hindsight a wonderful thing?