Pulling the Right Levers at the Right Time

By Justin Bone  
December 7, 2018

In preparing for this blog I began by digging into economic data in an effort to make sense of the current housing market.  The more I read, the more confused I became. It seems that whichever bias one has can be easily justified, whether it’s a bullish or a bearish outlook.  There are enough differing opinions out there that I don’t think anyone really knows what the future will bring. So, what is an investor to do in the meantime?  This question has been rattling around in my brain for quite some time now.

As investors, we have a few levers that we can pull that directly affects our bottom line.  Knowing when and how much to pull these levers can make a big difference to our business and to our investors.  One major lever is the “marketing lever”. Do we slow down our marketing efforts, maintain our current levels, or do we increase our marketing?  We have elected to increase our marketing efforts even though some economists are pessimistic about home prices in 2019. I will describe below why we are doing this and how we’ve come to this conclusion.

When dealing with the “marketing lever,” we essentially have 3 options available:

1) Hold off marketing until the market corrects

2) Maintain our current marketing levels

3) Ramp up marketing

The problem with option 1 (holding off marketing until the market corrects) is that we are not economists.  We don’t know if the market will correct tomorrow, or if it will correct in 6 months or 5 years. Even further, we don’t know if the market will gradually drop or fall off a cliff.  If we stop or slow up to wait, we certainly won’t buy any more homes and we could be waiting for 5 years! The benefit is that we won’t be caught up in a crash if it ever does happen.

The problem with option 2 (maintaining our current marketing levels) is twofold: (1) we might be buying at or near a peak, and (2) we need to market more if we want to continue our current growth pattern.

Like option 2, the problem with option 3 (increasing our marketing) is that we might be purchasing at a market peak.  However, the benefit is we are able to continue our growth if we ramp up.

We’ve accepted that we need to increase marketing, but there could be a market correction sometime between now and 5 years from now.  So, we intend to buy more houses, but with the expectation that the market will crash as bad as it did in 2008-2009.  This means that we need to purchase houses 30%-35% below current market value (not ARV).  So, if we do see a correction, we will theoretically only break even rather than lose money for ourselves and our investors.  In reality, the market took roughly 20 months to reach its bottom after it began to peak in the last downturn, so a 30%-35% discount is a bit extreme since we will likely not hold a house for the full duration of the downturn.  If we just continue to buy at our current discount levels (25% -30% discount) we believe that this is the safest, and most logical way forward.

Author Bio

Justin began his real estate career in early 2015 when he and his brother Brad purchased their first SFR investment property in Bakersfield. Since then, Justin has helped PrimeBuyers grow into a solid real estate investment company with a focus on buying property at below market values. Justin fo See more >>

Justin began his real estate career in early 2015 when he and his brother Brad purchased their first SFR investment property in Bakersfield. Since then, Justin has helped PrimeBuyers grow into a solid real estate investment company with a focus on buying property at below market values. Justin focuses primarily on the financial aspects of the company: finding new sources of funds from lenders, managing the company’s financials and working with tax advisers. He is married to Layne Bone and has 2 small boys. See less >>

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