I have no idea where the market is going? Anyone who says they know definitively and isn’t absolutely rolling in dough is bullshitting you, because, if you are certain the directions of prices in any market, you don’t spend your time talking to people in the media – you go make big bets on Wall Street.
That’s fundamentally why I distrust speculation in general and the single family home market in particular. If there’s no cashflow to underpin the valuation of an asset (or, not nearly enough cashflow to underpin the valuation), then you’re just betting that there’s some idiot coming in behind you who will be willing to pay more than you paid. And you’re somewhat likely to be right… until you are spectacularly wrong.
So, I simply refuse to buy deals where I’m not happy with sitting there and collecting the cashflow in the event I can’t re-sell at my target exit price.
Does this mean I’m invulnerable to shifts in the economy? No, because in a sharp recession, rents can fall enough to screw up my cashflow. But, as long as I’m not over-levered, this is survivable, too (for example, my yield drops from 12% to 8% – not great, but not too bad, either).
If you stick to the strategy outline above (don’t overpay, don’t over-lever), you will miss out in environments where prices are rapidly rising. But you will never crap out when the market turns sour. And that’s the name of this game… staying in it until you get as rich as you want to be.