Another one of those age old questions, which is better, the length of time in the market or timing the market to get maximum profit in as quick a time as possible.
The answer is not simple; it all comes down to your investment strategy. For example, someone looking to make quick cash gains wants to spend as little time in the market as possible to reduce holding costs and get their profit and money out as quickly as possible and by timing the market perfectly they can gain maximum profits for little exposure. In contrast someone looking to buy and hold long term isn’t going to achieve their desired profit outcome in only 1 year and therefore require a substantial time in the market to realise their goals.
Time in the market is a critical element in the long term wealth creation for most property portfolios, as wealth is created through the compounding appreciation of leveraged assets. It is a given that most property markets will double in value every 7 – 10 years, with most buy and hold investors considering this to be considered short term and long term ranging from 20 – 30 years. By leveraging their assets through mortgages, an investor can use a very small deposit to gain access to all the capital gains made by that property. For example if you had a $300 000 house with an LVR at 80%, you would have a $60k deposit and a $240k mortgage. Assuming the loan was interest only and the rent covered all expenses, in ten years time you should have a house worth $600k with a $240k mortgage and $360k in equity. Fast forward a further ten years and you now have a $1.2 million house with a $240k mortgage and $960k equity. A further ten years would see you with a $2.4 million house, $240k mortgage and $2.1 million equity – or and LVR of 10%.
When timing the market you must first understand that the market moves in cycles between booms and busts and depends on supply and demand. Timing the market is extremely difficult to do and requires constantly studying what is happening in the current and global market and determining what phase you are currently in. Timing the market allows you to know what is likely to happen next (although not the timeframe of when it will happen) and can help to maximise profits. Of course getting it wrong can see loss of profits if not money. A fantastic tool used with determining the market phases is the economic clock.
So when it comes down to the original question, once again my answer would be both. By using the timing of the market to purchase your buy and hold properties, you can purchase at a discount with good yields and gain access to immediate capital gains. By buying at 7 o’clock you can maximise your equity to start doing quick cash projects as you approach 12 o’clock. As the clock starts heading around to 3 o’clock you should start paying down some debt, getting prepared for the bust which is coming at 6 o’clock, when you know the banks are going to start tightening their belts. This will get you in the perfect position to start buying at a discount at 7 o’clock once again. In the mean time remember to keep an eye on what time it is in other markets.