The way of the contrarian.
While chasing hot trends may work as a consumer (i.e. getting the newest technology, etc.), it can be a huge mistake as an investor. When chasing a trend as a consumer, the worst-case scenario is that you are out a few hundred dollars. However, chasing a real estate trend can cost you thousands, if not hundreds of thousands, of dollars or more.
We firmly believe that investors should avoid investing in a hot market, unless you can find a stellar deal. Instead, you want to be a contrarian investor and find the investment niche or market (within reason) that is not on everyone else’s radar. Why? Because when you don't have to fight everyone else for the same product, the product does not have the upward (inflated) pressure on its price that a hot market exhibits. This gives you breathing room, and it means negotiations can fall favorably into the buyers hands if a deal is played well.
For example, the first deal I bought was a single family rental home in bad shape. At the time it was the bottom of the market and buyers could not be found for miles. In the year following the crash, while everyone was licking their wounds after making the mistake of buying in a hot market that was at the peak, I was out hunting and buying as fast as I could. After all, when else in history could you buy a nice 3-bedroom ranch in a good area for (inflation adjusted) $50,000? Not as long as I could remember, or anyone else I knew. Yet everyone around me was saying, "Real estate is not a good investment." I was buying for the future, which I knew was a $160k-200k per unit stabilized price, and I was buying them beat up and beat down to further my discount (and increase my upside). They needed lots of work after years of renting (even though the cash flow was very positive), but enough, today I am selling all 10 of them for a target of $160-180k per unit. While everyone else is "hot" to buy (and the market is peaking out), I am selling at a big profit.
So what is the moral of the story here? It is this: if you have to buy in a market that is topping out, find an asset class that is undervalued compared to its income. For instance, at the moment hotels are undervalued based on income vs cost approach compared to other asset classes (like apartments and single family homes) that are red hot and peaking out with low returns and high costs that increase risk. Take your time to find the BEST deals, get to know your markets, and BUY RIGHT.
Why is this important? Like the stock market, real estate goes up and down in huge multiyear swings, and like the stock market you always want to buy value first and get in while others are getting out. Or you want to get out while others are getting in, which is to say, sell to a market that is HOT for buying (and paying too much) and buy in a market where sellers are starving for a buyer (so you can gain negotiation to lower your deal strike price and gain leverage over sellers).
Rules of thumb:
Find and buy asset classes that are undervalued and possibly need work, but in MARKETS that support them with strong rent or income opportunities.
Use the contrarian method whenever possible. Find niches that others are not looking at, and generally stay away from "what everyone else is buying" to increase your odds of turning up downside-resistant deals that you can improve with top-line growth. Or you could rehab the management and/or the property itself to increase the value through rent or rate increases.
Know to sell when your segment is getting hot. Niches are different, and the professionals strip the upside made in one sector and then pivot to another asset class to strip it, and the cycle continues. First, it was single family homes; next was apartments, then office buildings. Each one was getting fixed up and flipped out for a profit to unsuspecting investors who were buying "what’s hot" instead of what had underlying fundamental VALUE for the long term through steady and proper maintenance, appreciation, and tenant value.
While this advice doesn’t apply to all situations at all times, being a contrarian investor and avoiding hot trends can pay off big time. Or in the words of Warren Buffett,
“Be fearful when others are greed and greedy when others are fearful.”