To understand how market timing drives success – i.e. when the market is about to do a 180 – you must look at how it maximizes profit margins and minimizes downside risks.
Recognizing major trend changes early and adjusting your leverage are the two most powerful levers a real estate investor can use to compound wealth and minimize the risks of going broke.
Spotting major market turning points 6 to 12 months before others gives you a huge head start.
Everybody knows where the market has been – but the key to greater success is to have a reasonably good idea where the market is going.
LEADING INDICATORS TO WATCH
Trend changes in (1) Existing Home Sales; (2) New Home Building Permit; (3) Mortgage Defaults; (4) Foreclosure Sales; (5) Mortgage Rates; and (6) Months’ Supply of Homes for Sale.
Thriving at the Trough (High Leverage):
When prices hit bottom, you use 75% to 80% leverage. Because property values are low, a small market recovery creates a massive jump in your equity gains.
Surviving the Peak (Low Leverage):
When the market gets overheated, you cut debt back to 30% to 50% leverage. This keeps your payments low and maximizes your monthly cash flow, giving you a safety shield to withstand a sudden drop.
The Danger Zone:
The biggest mistake investors make is flipping this chart upside down. Borrowing 80% at the peak means a tiny 10% drop in market prices can wipe out nearly half of your cash equity instantly. A drop of 20% or more puts you upside down on your mortgage – which is the #1 driver of foreclosure activity.
On the Way Up: If you buy a house with a small down payment and prices climb, you make a massive profit on the money you actually spent.
On the Way Down: If prices drop even a little bit, your initial investment can disappear completely while you still owe the bank the full amount.
THE STRATEGIC RULE
Success comes down to matching your debt to the current market cycle phase:
When Prices Are Low: It makes sense to borrow more because market prices are likely to rise.
When Prices Are at or near the Peak: You want very little debt so you do not get crushed when market prices fall.
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