Oh my dear friend.
Those sound like remarks made today … right?
Well, they’re not.
Those are the remarks I heard in 2015, even everyone was lamenting how much real estate prices had climbed, relative to 2012.
“Damn I should’ve bought back then! It’s too late now. Everything’s expensive again. I’ll just wait for prices to come down.”
I know, that seems silly in hindsight.
But put yourself in the shoes of an aspiring real estate investor in the year 2015. They had been thinking about buying a rental property for a year or two. But they hadn’t. And while they sat on the sidelines, prices skyrocketed.
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The chart above covers January 2010 to December 2015.
In 2015, this was a prospective investors’ experience of the last 5 years. They saw home prices dip slightly from 2010 to 2012, and it scared them — “maybe there will be another crash!!” — so they sat on the sidelines.
Then the market boomed from 2012 to 2015, and by the end of that three-year period, they were kicking themselves to “waiting too long.”
“It’s too late!!!!!”
“The good deals are gone!!”
With the Great Recession in such recent memory, they comforted themselves with the idea that they could just kick back and wait for the next housing crash.
Nearly nine years later, they’re still waiting. And missing out on gains.
Here’s what the market did from January 2016 through May 2023:
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Up, up, up, up, up.
Sliiiight dip for a few months in late 2022. Then up again.
The people who lamented that they’d “waited too long” and “it’s too late” psyched themselves out. They sidelined themselves. They missed those returns.
You see, pessimists get to make excuses. Pessimists get to validate themselves.
Pessimists get to be right.
Optimists get to be rich.
“The irony is that by trying to avoid the price, investors end up paying double,” Morgan Housel writes in his book, The Psychology of Money.
In that passage, he’s discussing stock investing, but the principle applies to real estate as well. Those who lament that real estate is too expensive, relative to its previous values, are the same people who eagerly buy an index fund without complaining that it, too, is substantially more expensive than it was a few years ago.
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I’ve never heard anyone say: “VTSAX is 50 percent more expensive than it was five years ago! It’s too late to buy. The good deals are gone. I’ll wait for the next crash.”
Yet they’ll say that about real estate.
Sure, people might debate whether the stock market is overvalued. But if you’re a long-term investor, you dollar-cost average into the market.
You understand that a share of VTSAX will cost significantly more today than it did five years ago, because, well, assets appreciate over the long-term. That’s the point.
Ideally, real estate investors would be best-off viewing their properties through the same lens through which an index fund investor views their holdings.
Sometimes you’ll buy high. Other times, you might hold through a decline. But over the long-term, based on historic trends, both asset classes (real estate and index funds) significantly rise in value.
Yet often, would-be real estate investors seem to forget historical trends.
When the topic turns to rental properties, many would-be investors sideline themselves because they’re convinced that “I’m too late” and “the good deals are gone.”
Sure, you can’t blindfold yourself, throw a dart at a list of houses, and find one with an amazing cap rate, like you could in 2012.
Sure, you have to actually, erm, what’s that word … WORK.
Good deals are available for those willing to find them.
Back in 2015, I often heard people lament that they were “too late” because real estate prices had risen so much in the past three years. “I should’ve invested in 2012! The run-up has already happened. I’m too late. I’ll wait for the next crash.”
Nearly nine years later, they’re still waiting.
The question is: are you going to be one of those people who says “it’s too late! the good deals are gone!” and then sit on the sidelines for the next 30+ years? Or are you going to train and compete?
If you choose to leave the sidelines and get into the game —
The first step is to understand: It’s not too late.
The prices that existed five years ago are irrelevant.
The only question that matters: “Is this a good deal today?”
It’s easy to substantiate the belief that you’ve missed out on all the good returns — you can see how much home prices have appreciated over the past three years. You can see all the capital appreciation you could have had, if only you’d gotten started sooner.
Just like if you’d bought a ton of index funds in 2018. Or better yet, March 2009.
Assets appreciate.
Sometimes there’s volatility, and they drop a little bit. But historically, in the U.S., major asset classes — including stocks and real estate — have always risen over time.
We seem to have accepted this reality in the world of stock investing. We don’t reflexively lament *not* buying more index funds at 2012 prices.
We might occasionally joke about it — “awww man I shoulda bought Amazon in 1997!” — but we know that when we buy a stock, we’ve evaluating today’s fundamentals. Past is prologue.
When we evaluate stocks, we ask: “Is this stock a wise purchase at today’s price?” But we forget to ask this question when we’re dealing with a tangible asset class like real estate.
Real estate often fills people with fear:
- It’s a single six-figure transaction; a larger dollar amount than an index fund.
- You borrow money to get into the deal; leverage increases risk.
- You assume you can’t dollar-cost average into real estate, like you can with stocks. (In reality, many rental investors *do* dollar-cost average into real estate by investing in one property per year, or one property every-other-year … some type of periodic pace.)
Real estate’s tangibility also makes it an inherently emotionally-charged asset class. We can touch it, smell it, see it, hear its creaks and noises.
And when emotions are involved, we rationalize rather than reason.
“Assuming that something ugly will stay ugly is an easy forecast to make,” Housel writes. “And it’s persuasive, because it doesn’t require imagining the world changing.”
Pessimism is tempting, but it’s also limiting — and its intellectually lazy.
It keeps you broke and uncreative.
Optimism, by contrast, keeps you asking “how can I?” — it keeps you solving problems, rather than lamenting them.
- “How can I find properties with a solid cap rate and good cash flow located within a two-hour drive?”
- “How can I improve my skills as a negotiator?”
- “How can I analyze and cross-compare across multiple markets?”
- “How can I save for a downpayment?”
- “How can I get approved for a mortgage if I’m self-employed / if I don’t earn much?”
Ask “How can I?” rather than lamenting “I can’t because …” and you’ll find your world switch.
And if you want answers to the above questions, you’ll find them in Your First Rental Property, our flagship course.
— Paula
