Yes, I admit it. I am scared of a real estate bubble. But I’m continuing to invest anyway.

Here’s why.

Over the past several years, I’ve heard the following claim consistently made by investors both in my home market of Denver and nationwide. It seems by far to have been (and continues to be) the most popular prediction made by investors, both experienced and novice:

“The market is probably going to [reset/correct/crash/fall/decline/etc.] over the next 18 to 24 months.”

Pundits have predicted a price squeeze or bubble that was two years out on average every year for the last six. Don’t believe me? Check out article after article from basically every major media outlet in the United States predicting a bubble at some point in the last eight years.

How Long Are You Willing to Wait for the Impending Market Crash?

If you believe that a market crash is coming, you are either right—or else you might be waiting a long time to get started in real estate investing. People were waiting for the next crash in 2013, 2014, 2015…and every year since up until now.

Oh, and of course, there were just as many equally well-written and well-researched opinions talking about the housing market’s great health and future growth. These bullish opinions are just as prevalent today. I could easily compile a list of housing market bulls to complement the bears I posted above.

But the point is that I’ve heard about an impending market crash throughout my (admittedly short) entire investing career.

Let me ask you this: When the next crash comes, will prices drop below 2013 levels? Below 2015 levels? Below 2017 levels? How much do those waiting for a crash stand to gain by waiting it out, and how much will those who own property today lose?

How low do prices have to go to eliminate the gains of the last eight years here in Denver? How about your city?

I don’t believe that these pundits have any real advantage in predicting the market on you or me. The thing is, I don’t think anybody knows when the market will crash. Nobody knows if that will happen this year, next year, the year after, in five years, or in 20.

To be clear, I’m not saying that I think the market will continue to go up forever. And the truth is, I’m scared. I’m afraid of two things:

I’m afraid that the market will crash and that I will lose a ton of equity very quickly.

I’m afraid that prices and/or interest rates will climb much higher and that I will miss the ride if I don’t buy more.

I’m equally afraid of both of these things!

I’m sure that if you have an opinion on the market over the short-to-medium-term (two to five years) future, you have great reasons. I bet you have a bunch of charts, just like those pundits. I’ll bet that you can cite numbers that talk about supply, demand, interest rates, leverage ratios, employment, household income, the stock market, bitcoin, inflation, the trends of the Millennials, the trends of the Baby Boomers, or something else that’s just as important as all of the above.

But I’ll also bet that the fellow who is just as smart as you—but has the exact opposite opinion—has strong data behind his beliefs as well.

The fact of the matter is that if you believe that the market will crash, you could be right! You could also be wrong! Or (and in my opinion, the worst and saddest waste of being able to say “I told you so!”) you could be right and still lose.

The thing is that you don’t know which of those metrics and factors will be the lever that actually moves the housing market over the next few years.

As I hope I’ve demonstrated with the news articles above (and I can anecdotally tell you that I’ve been part of discussions on BiggerPockets about this very topic since 2014), we hear this song and dance about impending crashes all the time as real estate investors.

It scared me when I was thinking about starting to invest in 2013, and it scared me in 2014 when I bought my first property. It scared me in 2015 as I held that first property, and it scared me in 2016 when I bought again. It scared me in 2017 as I held those two and bought a third. It scares me as I’ve bought more since 2017, and it scares me as I just closed on a property here in May.

One day, the doomsday prophecies will come true. These pundits (and you, if you agree that we are headed for a correction/bubble burst) will be proven right eventually. But will that be this year? Next year? Five years? What if the correction comes in seven years? What if every metric that you can conceive screams, “bubble!” and still prices climb? What if the bottom of the correction sees real estate prices and rents much higher than today’s?

Those sitting out will be right, and they will still lose.

That is why I continue to invest—even though I, too, fear a bubble. I believe that over a long time horizon, say 20 or 30 years, prices and rents in my market will appreciate at a rate equal to or greater than inflation. I believe that this will be the case regardless of whether I buy at the top or the bottom of the market today. And I believe that so long as I can ride the tides of market volatility and sustain possible cash flow, that I will not regret my decisions over time.

I also believe that I am incapable of accurately predicting when the market will boom and bust.

I could be wrong on these beliefs, and I constantly reassess the foundation upon which I construct my investing philosophy. But this is my philosophy and approach for now—and the one I have acted on and plan to continue acting on until I find something better.

Given my overall take on investing, I believe that I can maintain a system of investing such that I give myself reasonable odds of winning financially in all three market scenarios:

I win if the market goes up. If you don’t own real estate, you lose if the market continues to appreciate.

I win if the market goes sideways. My portfolio cash-flows and I amortize my mortgages and generate a yield even without appreciation.

I win if the market goes down. I believe you have a reasonable chance at winning if the market goes down if the following are true:

A) You have the personal financial position and stability in your portfolio to make it through even serious market drops, particularly in rent.

This means a substantial cash cushion and substantial cash flow from existing properties. And I have no doubt that a sudden drop in equity will be hard. I try as best I can to mentally prepare for that ride and to learn from folks who have been through the 2007 recession.

B) You have the reputation to convince lenders and potentially other investors to invest alongside you when/if bargains do begin popping up.

Guess what? If you own no real estate, you cannot develop this reputation. I am not investing alongside someone in a recession or depression who has no experience, who owns no rental properties, yet who tries to convince me that they’ve known all along that the crash was coming. A very long parade of people have come through the BiggerPockets forums and every major news company in the country over the past 10 years predicting a crash.

I am instead going to look for someone with years of experience and the confidence to say, “Sure, I’ve lost some equity, but I couldn’t care less! Every month, I achieve a 10%+ cash-on-cash return, and I’m foaming at the mouth to buy as much as I can now that I see 20%+ cash-on-cash returns everywhere!”

No one can predict when the market crash will happen, how severe it will be, or what its effects will be. For all we know, we might be in for a run of inflation for 3-5 years in the double digits. The Fed might have to spike interest rates to 10%, 15% or higher to combat it!

If that happens, prices might fall in real estate, but rents might skyrocket. Meaning that buy and hold investors like me see a tremendous run-up in cash flow that we would not be able to realize if we were not in the market the whole time, but also realize an uncomfortably low rate of appreciation during that period.

To be clear, I am not predicting this or any event. I’m just pointing out that this is one of many possibilities that could negate the effects of other market conditions and throw off the predictions of even the best pundits.

Why I’m Not Investing Aggressively

Now, all this said, I certainly do not believe that now is the time to overextend. I buy well within my means, with a rock solid personal financial foundation, and spend very little on my lifestyle. I maintain a high savings rate and have stashed away a large cash reserve. I also own a large stock portfolio (which, by the way, the pundits were finally right about – for the first time in 10 years, we are seeing a sustained drop in equities – I’m continuing to buy my boring old index funds as I write this).

I do this because, just in case the pundits ARE right this time (and we are certainly 9 or so years closer to the next correction than we were in 2013!), I do not want to be caught with my pants down.

But I am not staying out of the market entirely, regardless of what may or may not be on the horizon. I’m doing this because I believe the best policy is to adopt a conservative, winning formula and to apply it consistently. And that is what I’ve done and plan to continue doing.

I do not believe that continuing to buy is any riskier for me than staying out of the market is. Although I tremble with every purchase.

Conclusion

Should you wait for the next market crash? I don’t know. Someday, the pundits will be right. I’ve shared what I’m doing and why, and I hope that perspective gives you something to think about.

I’ll caution you, though. I think, personally, that it is unwise to invest a large, lump sum of money all at once in a real estate investment. And when I say large, I mean an amount that is more than one to three years of savings, given your current financial position.

If you do this, it means that you might be investing in a manner that is unsustainable for you. And if you are investing unsustainably, you risk losing a huge chunk of savings, perhaps all of your investment and then some, all in one go.

I believe my system has a good chance of working for me because I believe that I have an excellent probability of being able to buy similarly sized or larger properties year in and year out in my market and sustain a system of dollar cost averaging.

If I wasn’t able to do that, I’d be finding another market to invest in, developing another investment philosophy, or working on my personal financial position outside of real estate to the point where I thought I could sustain my approach in an up, down, or sideways market.

-Scott Trench (Bigger Pockets)