The Secret to Buying Low and Selling High

Top secret in redThe secret to buying low and selling high is the same secret to losing weight: time focused attention and following a quality plan of action.  Yet, if this were easy, everyone would do it, right?  Buying low is a relative term? Low where?

A Plan, Time and Expertise

Making money in any business requires a plan of action, time, and expertise, and we need all three to have a high degree of success.  In real estate, add capital. Lots and lots of capital.  Sure, we can add leverage, but along with this comes the need for increased risk appetite.  Yield requirements change along with the capital stack; the thinner the equity, the higher the yield requirements from an investor.

Assuming leverage is at an acceptable level, how long does it take to make any money in real estate? Here is my least favorite answer: that depends.  No one can time the market.  If they could, every real estate owner would have dumped their portfolio in 2007 and repurchased the same collection of assets for less than half the 2007 selling price. So that’s out.

While you cannot time the market, you can make educated guesses about future events. For example, interest rates have been artificially low for many years. Chances are they will rise. Chances are they will rise much fast and much higher than most people believe possible.  Thus, prepare accordingly.

Back to timing – let’s stick with the rental property, property that generates a monthly income. There are five ways to make money:

  • Appreciation
  • Income
  • Depreciation
  • Mortgage principal reduction
  • Active management

As an owner of real property, you have no control over appreciation unless you consider market and submaket conditions before the buy decision. The other four categories, however, are ongoing parts of being engaged in this business.

How do you address income? Do you have good counsel for selecting how depreciation is taken?  Did you select the right mortgage vehicle for long-term ownership? Are you actively managing the asset?  These are all part of having a good plan of action.

Applying appropriate expertise to real property assets and given time to develop your plan will set your sail in the right direction for reaping benefits from an eventual sale.  Thus, while you cannot time the market, you can attempt to gauge the best time to sell an asset based on the availability of equity and debt in the marketplace at any given time.

What is the secret to buying low and selling high?  There is no one secret but many facets to solving the equation for making this occur beginning with time, giving the asset your focused attention, and following a quality plan of action.

 

John Wilhoit is the author of the best selling book on rent roll analysis: How to Read and Rent Roll. See also the companion guide to measuring the quality of rental income: Rent Roll Triangle.  Find JW’s Podcast here.

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