Should You Invest in Real Estate in a Volatile Market?

If every house on the market reliably increased in value by 6 percent each year, everyone would feel supremely confident investing in real estate.

Unfortunately, we don't have such a consistent real estate market.

Instead, things are messier and more chaotic. And sometimes, the chaos consumes the market, creating volatile conditions that worry even seasoned investors.

Is it a good idea to invest in real estate in these volatile markets?

The Nature of Volatile Markets

A volatile market is one in which prices rise, fall, and otherwise “bounce around” in chaotic, unpredictable ways. It's normal for markets to experience periods of growth and periods of decline, but a volatile period is one in which prices continuously fluctuate, such that it may not even be able to be defined as a time of growth or decline overall.

For our purposes, we'll be looking at volatile markets in two different contexts. First, we'll look at the potential of investing in real estate when a local real estate market is volatile. The real estate market across the country tends to be quite stable, with only occasional deviations from a slow and steady rate of growth. But in local sectors, real estate markets are much livelier, shifting from buyer’s markets to seller’s markets and vice versa, and sometimes experiencing long periods of growth or decline. Accordingly, it's not especially hard to find volatile local real estate markets, where prices are in flux and no one is sure exactly where things are going.

Second, we'll look at the potential of investing in real estate as a hedge against broader economic volatility. If the stock market has gone crazy, if inflation has run rampant, or if broader economic conditions otherwise indicate chaos, it could be a great opportunity to get more real estate exposure.

Investing in a Volatile Real Estate Market

There are some advantages in investing in a volatile real estate market:

·       Potential deals. With prices rapidly fluctuating up and down, you have a better chance of finding an incredible deal. Sellers and their agents may have a harder time keeping up with the latest pricing trends, so they may have a harder time setting the most appropriate price. Additionally, during short downturns, you may be able to find a wide variety of properties available for much lower prices than usual. What's important is that you find the right property; as you're already aware, it's not a good idea to buy a property just because the price is attractive.

·       Potential growth. Volatile markets are also interesting to some investors because they represent the promise of significant potential growth. Just as prices may plunge suddenly, they may explode suddenly. If you have reason to believe this area is going to benefit from increased demand in the future, or if you can time your purchase and ride the waves perfectly, you might be able to multiply your investment many times over in relatively short order. Just make sure you don't count on this, as timing volatile markets is incredibly difficult.

·       Uncertainty and limited competition. Because market conditions are uncertain in volatile environments, you'll also benefit from limited competition. There will be fewer buyers interested in securing new properties because they want more predictable, sustainable conditions. This means you'll have fewer competitive bidding wars and you might benefit from lower prices and easier transactions overall.

·       Faster paced development. Working in a volatile real estate market is also associated with faster paced development. When prices change so frequently, every day is interesting.

Of course, there are some downsides:

·       Unpredictability. This is an unpredictable market, and you shouldn't convince yourself you know exactly how to time it. Yes, this may be a great price for a local property, but there's also a chance it plunges further. Yes, it seems like this neighborhood is poised for growth, but there's no guarantee when, where, or how it will unfold. Every decision you make in a volatile real estate market needs to be hedged and carefully considered.

·       Potential losses. Similarly, investing in a volatile real estate market means exposing yourself to higher potential losses. If things don't go your way, you can suffer massive losses as a mirror image of the potential gains you could win.

·       Urgency. Because prices and conditions change rapidly in this type of environment, there is an overall higher sense of urgency among investors. You'll need to act quickly if you want to take advantage of current conditions, and if you're too slow, you may miss out on some major opportunities. Not everyone likes investing with this level of time pressure.

·       Lack of learning potential. For the most part, volatile markets are untamable. Suffering losses in typical, stable market conditions can often be a learning opportunity, helping reveal mistakes you made in your due diligence or your decision making process. But suffering losses in a volatile market is often due to factors beyond your control – and far beyond even expert economists’ understanding. There's a significant lack of learning potential here.

Investing in Real Estate as a Hedge in a Volatile Economy

A volatile economy in the broad sense is more than just a recession. It refers to many economic factors that are undergoing a phase of instability or unpredictability. Usually, the stock market is the best indicator for everyday monitoring purposes, but we can also look to interest rate fluctuations, data from the Bureau of Labor Statistics, and more.

Investing in real estate when the broader economy is volatile can benefit you in several ways:

·       Asset stability. Real estate is one of the best-performing assets from a historical perspective, and it's one of the most consistently performing assets in the present. People don't need to invest in major companies, nor do they need most of the products and services those companies offer – but they're always going to need a place to live. Accordingly, real estate is a great long-term hold, regardless of what else is happening in the economy.

·       Differentiated performance. If you have a robust portfolio of stocks and bonds, a volatile market may raise your blood pressure every morning. But you'll feel much better if your portfolio is sufficiently diversified, as real estate performs independently of other markets most of the time. Even if your stocks are generally declining, the value of your real estate may go up.

·       Diversification options. Even within the real estate market, you have multiple diversification options. You can choose safer investments, like single-family homes in relatively safe areas, or riskier investments, like commercial real estate in a volatile area. This way, you can fine-tune the balance of your portfolio and ultimately find the best balance of risk and reward. This is especially important in volatile environments.

·       Revenue consistency. Many investors love real estate because of its potential revenue consistency. If you have a portfolio of properties that you rent to tenants, and you can keep them occupied, you'll essentially have a powerful, passive stream of revenue that you can count on indefinitely. This can provide great assurance in times of economic uncertainty, and help you ride the waves of any economic hardships you might experience along the way.

·       Inflation protection. Real estate is one of the best hedges against inflation, and for several reasons. Perhaps most importantly, it outpaces inflation in terms of growth. It also allows you to capitalize on financial leverage, using borrowed money to invest – and in inflationary times, the real value of debt decreases.

However, there are some limitations here:

·       Capital issues. If the stock market is fluctuating wildly, or if economic conditions are too uncertain, you may struggle to summon the capital necessary to fund your real estate investments. Even if you're taking out mortgages, you'll still need enough cash for a down payment, and you may not be able to rise to this challenge.

·       Lack of liquidity. Investing in real estate directly means locking up some of your money, as real estate is notoriously illiquid. You won't be able to pull this money out very easily if and when market conditions change, and you may have less money for taking advantage of the broader volatile market.

·       Balancing issues. It's not always easy to balance a real estate portfolio, especially when the market is performing so chaotically. And if real estate is your only safe play in a volatile environment, you may become overexposed to it.

Investing in Real Estate the Right Way in a Volatile Market

These are some strategies to help you invest in real estate intelligently, even when markets are volatile.

·       Trust the experts. Even if you have some experience in real estate investing, it pays to work with experts. Real estate investing advisors, real estate agents, and other professionals can guide you to better properties and help you appropriately analyze them.

·       Maintain an appropriate balance. The balance of your portfolio is key to taking advantage of any volatile market. You need a safety blanket of reliable assets, but you will also need to remain exposed to promising growth opportunities if you want to secure a reasonable long-term growth rate. Keep a close eye on your balance.

·       Invest for the future, not the present. Many people are tempted to time volatile markets so they can buy low and sell high. This is certainly a nice idea, but it's incredibly tricky to pull off. Instead of investing for the present, or for the next few days and weeks, shift your focus and look at the long term. Look for deals and growth opportunities that are going to pay dividends well into the future, and you'll find it much easier to discover the right opportunities.

·       Understand all the variables. Chaotically fluctuating prices are just one variable to keep in mind when purchasing new real estate assets. You also need to pay attention to variables like interest rates and neighborhood data. Always do your due diligence before securing a new investment.

·       Use leverage (but be cautious). Financial leverage essentially allows you to invest with borrowed money, which multiplies your investing power and gives you a critical advantage in an inflationary environment. Accordingly, you should take advantage of it as you accumulate more properties – just exercise caution, as interest rates often rise in response to volatile conditions. If you accumulate too much debt, or if you pay too much interest on that debt, it can wreck your entire financial position.

·       Choose reliable properties. If you want more reliable performance in an unfamiliar market, choose more consistent, reliable properties. Go for pieces of real estate that have historically performed extremely well and for neighborhoods that will probably remain good investments for decades to come.

·       Be patient. As always, one of the best strategies for any real estate investor is to remain patient. You don't need to scramble to buy a property just because it's listed at an attractive price. You also don't need to jump into the maelstrom in pursuit of explosive growth every time volatile market conditions emerge. Regardless of the external circumstances, the best real estate investors are ones who wait patiently and strike only when the moment is right.

Investing in real estate is one of the best ways to flesh out your investment portfolio.

But if you’re new to the real estate world, you may not know where to start.

We’re here to help you make sense of things – and make better investments for your portfolio.

Ready to start the conversation? Contact us today!

‍