Russell Gray from the Real Estate Guys Radio podcast said it very well when he stated that “Good Underwriting Beats Market Timing.” There are not too many people that can predict with consistent accuracy when the local or greater real estate market will “take off” or “slow down.” No one can, with 100% certainty or accuracy say where the top of the market or the bottom really is.
There are economic experts that have been preaching for years about market cycles and the coming economic crisis, using data and experience to support their claims. We can learn a lot from them and caution ourselves as we invest in the environment of greater uncertainty.
Do we stop investing altogether? Probably not. Warren Buffet has made some of his greatest investments in times of economic uncertainty.
What is the difference maker? Conservative underwriting. When analyzing deals, cautioning yourself against lofty expectations such as compressing cap rates, consistently rising rents and little to no vacancy is critical. Avoiding these traps prevents pain for you and your investors when the unforeseen can and does happen.
Here’s the good news about unforeseen issues. Most unforeseen issues can be identified and accounted for during the underwriting phase. Here are a few:
– inability to raise rents in the first few years
– higher than usual vacancy
– higher than usual uncollected rent
– increasing of market cap rates
Broader market considerations could be the potential for slow down of jobs to the area as a result of COVID putting dampers on company expansion plans or risks of people moving out of that particular market to others where they can work remotely.
Maybe you feel like an insurance agent by bringing up all these risks. But identifying and accounting for risks now and during the underwriting stage is the best way to avoid issues that could arise when it is too late. Thorough and conservative underwriting helps mitigate market cycle-related risks, with much more effectiveness than market timing. Attempting to time the market perfectly will keep one inactive and without the education and experience needed to grow wealth and gain skills as an investor. Do not be on the sidelines waiting for the perfect time. Overcome market risk with great underwriting!
