Timing The Market Vs. Time On Market: Aussie Investor Guide
Written by Leading Australian Property Market Analyst, John Lindeman.
It’s a classic question: what property investment strategy is better: Timing the Market or Time on Market? Some property market analysts advocate buying and then selling in a short time. Others recommend buying and holding on for longer periods of time. Which one should you choose?
Your choice ultimately lies at the end you have in sight, and the strategy becomes your means to that end. With the overflowing amount of information you find out there, it’s easy to get confused. You can get swayed into making a hasty, uninformed decision. What do you need to know first?
We’re drawing on the insights of our resident Property Market Analyst John Lindeman for answers.
TIMING THE MARKET OR TIME IN THE MARKET: LAYMAN’S DEFINITION
When you’re trying to identify the best times to enter and get out of the market, you’re Timing the Market. You rely on educated forecasts, fact-based market analysis and authority figures to guide you as you invest in property.
In contrast, when you enter the market and hold on to your property investment, you’re following the ‘buy and hold’ or the Time on Market strategy. In this case, you don’t rely on the current property market cycle to help you make decisions. Instead, location influences your decisions.
Which investment strategy best suits you?
THE TORTOISE OR THE EARLY BIRD: WHAT KIND OF PROPERTY INVESTOR ARE YOU?
Your attitude towards certain property investment strategies is, in part, influenced by your goals. Are you looking forward to making a profit from your investment in a short period of time? Or are you aiming to see results from a long-term perspective?
John Lindeman has been recently interviewed by the API magazine and has this to say about the question above:
“I’m at the stage where cash flow is more important than growth. So a buy and hold, debt-free and high cash-flow investment portfolio is preferable.”
“Timing the Market is [more for] investors wishing to grow their equity.”
In other words, Timing the Market is suitable for property investors looking forward to short-term but rapid capital growth. They’re the early birds who intend to take advantage of the current positive market indicators to secure their investments. And then they let go of these investments at a critical time when the market shows signs of slowing down.
On the other hand, the Time in the Market strategy is more suitable for property investors who want to leverage their investment’s equity against a more consistent and long-term income stream. This means that investors will continue to hold on to their investment for as long as it provides positive yields.
So having positioned your investment goal as the benchmark for your strategy, the next question for you is:
How will you put these strategies at work?
THE CLEVER INVESTOR: THE CONCEPT OF TIMING THE MARKET
If you’ve decided to use Timing the Market as your strategy, John says that you need to drum up your capital to make a deposit on an intended property right away. The catch is, you have to be sure that ‘the property must substantially grow in price during the time that you own it.’ How?
John says that ‘the cost of selling an investment property and then buying another is 8% of the sale price.’ This includes agent’s fees, stamp duty and legal and inspection costs. He says that you need to buy in a location where there’s impending price growth and where that growth is above 8%.
THE PATIENT INVESTOR: THE CONCEPT OF TIME IN THE MARKET
The Time In The Market strategy involves one crucial factor to ensure steady cash flow: location. Other property market experts claim that success in this strategy is 80% dependent on the property’s location and the remaining 20% rests on the property itself.
This means that acquiring a ‘5-star’ property in an area where ‘3-star’ properties are prevalent poses a challenge. The theory is that you should look at a place where there’s actually a demand for the type of property that you intend to invest on in order to strategically ‘spend time’ in the market.
THE MUTUAL RELATIONSHIP BETWEEN TIMING THE MARKET AND TIME IN THE MARKET
While it looks like Timing the Market and Time in the Market strategies are in direct contrast with each other, they’re not. In fact, just as a property market moves to a boom and then slows down and then booms again, there’s a progressive path that property investors like you should know. John says,
“At some stage, when you’ve amassed a considerable capital by buying, selling and then buying properties again in high price growth areas using the ‘timing the market’ strategy, you’ll want to change to a ‘buy and hold’ cash flow ‘time in the market strategy.”
He further states,
“This is when you gradually swap your portfolio from those with growth potential for those that will assure you of a reliable income stream. In other words, you now use your equity to buy high rent-yield, buy-and-hold properties which you own without any debt, in strong rental demand areas.”
PUTTING IT ALL TOGETHER
While John supports ‘Timing the Market’ as a better strategy, he isn’t oblivious to the fact that the ‘Time On Market’ strategy also has its merits. On Timing the Market, he reveals that the secret to understanding the direction of the property market lies on people’s movements. When people relocate, they change the market status quo on both the place where they come from and the place where they go to.
In the same vein, Time On Market also looks at long-term demand as the key for property investors to invest in a specific market.
So, given your goals and the demand-supply chain as your critical decision factors, which strategy do you opt to follow? Let us know your thoughts and your questions!