Originally posted on https://investormint.com/financial-terms/r/how-real-estate-market-cycles-work
When considering your real estate investment strategy, the most important thing to do is to know the market you are attempting to invest in.
Every real estate market is different, so you need to do some basic research. As Forbes magazine points out, two real estate markets can be in different phases of the real estate cycle, so you can’t rely on one-size-fits-all advice.
However, what you can and should do is understand what the real estate market cycle is so you can evaluate where in the cycle a market of interest is and how to best approach your investment into that market.
What Is The Real Estate Market Cycle?
The real estate market cycle is a theoretical concept that explains the way property markets move up and down.
The basic idea is that real estate markets change in predictable, patterned ways and that understanding the cycle can help you understand financial news and reports about the real estate market in general or about your own real estate investments.
The cycle consists of four parts:
- Economic Growth – the market is doing well and appears to be growing.
- Falling Demand – demand for real estate seems to be shrinking but supply continues to grow.
- The Downturn – supply far outstrips demand and real estate investments shrink in value as a result.
- A New Dawn – the real estate market recovers from a recession and prepares for growth again.
Your investment strategies must be different for markets in each of these phases if you want to be successful.
Part 1: Economic Growth
Economic Growth markets make people feel good about investing. During this phase, the market is growing and expanding.
Demand for property outweighs supply of property, meaning there are few vacancies in existing properties. The excess of demand allows property owners to raise rents, too, as people are willing to pay premium prices to secure spaces in existing properties.
There is good news for the construction industry during growth phases, too: work is plentiful as developers are eager to build new properties or expand existing ones to accommodate demand.
Strategies: During expansion phases, you can play it safe.
- Use core investment strategies and rely on the knowledge that there will be little turnover since demand is outstripping supply.
- It’s also a good time to consider flipping properties.
- Purchase lower-cost properties that need repairs and bring them up to code before reselling for a higher price.
Part 2: Falling Demand
The Growth Economy phase doesn’t last forever. As construction jobs are completed and vacancies are filled, eventually supply catches up with demand.
Once this equilibrium point is reached, typically supply begins to overshadow demand, so that there are more properties being built than there are people interested in living in them.
Thus, occupancy rates begin to fall and rental growth slows, and many investors begin to consider selling their properties before a full-fledged recession hits.
- Invest in properties that offer long-term leases and have a stable set of tenants. During this time, you want to think long-term and invest in properties that likely won’t change much. This reduces your chances of losing money from tenants leaving the property.
- You also want to keep an eye out for low-cost properties. Many sellers offer discounts because they are eager to get rid of the properties, so if you can grab something stable at a low price you can weather this storm and make money even if a recession hits!
Part 3: The Downturn
The Downturn is the opposite of expansion. During a recessionary downturn, everything slows almost to a stop.
There is way too much supply relative to demand, meaning that there are a ton of properties that nobody wants to live in.
Property owners are forced to reduce rents to fill vacancies, and many properties have multiple vacancies open at a time.
In some cases, the recession phase never fully hits because developers pay close attention to the market and cut back on expanding of properties or development of new properties when they see demand falling.
But even in these cases, the market slows (since there is less development). Paying attention to the market can lead to a faster recovery, but some slow down is inevitable.
Strategies: Investing during a recession can be high-risk. You need to really think long-term here.
- You may be able to purchase bank-distressed properties or vacant properties at rock-bottom prices, but will need to be willing to hold onto the properties and invest in improving them for however long the recession lasts.
Part 4: A New Dawn
Recessions always end eventually, but it may not be easy to determine the point at which the market is no longer in recession and now is in recovery. Growth continues to be slow during the recovery phase, and there is little to no increase of rental prices.
The best way to figure out whether your market is in recovery is to pay close attention to statistics. Check the number of property viewings on a daily or weekly basis – growth of this metric means people are interested in renting again.
In addition, if vacancy and sale rates are slowing even slightly, it may be a sign that the market is getting ready to turn around again.
Strategies: Recovery is the best time to buy new properties. Prices are still relatively low, but you will reap large-scale returns on your investments when the economy begins booming again. There are two ways you can approach a market in recovery if you want to make money.
- You can purchase properties in a prime location for cheap prices and watch the value go up as the market recovers; or
- You can return to evaluating properties that need renovation and select some to invest in and flip once the economy begins to grow again.
How to Make Money From Real Estate Market Cycles
Clearly, it’s possible to make money in real estate regardless of where in the cycle your real estate market is. It’s just harder during downturns and recoveries than during expansion phases.
The key to making money in real estate is research. That’s where a real estate crowdfunding platform like Crowdstreet comes in.
Crowdstreet and similar programs vet potential investment opportunities before providing them to investors. You can read all the information you need about each property right on the site. This cuts down on your research time – the platform does it for you.
If you have some knowledge of the real estate market cycles, you can read this research with an eye towards determining whether this investment fits in with the phase of the real estate cycle you’re working with. You can also look at general trends to determine the market’s phase so that you know what strategies to lead with.
As long as you understand the real estate market cycles and the strategies you need to employ during each phase of the cycle, you can use Crowdstreet or another real estate platform to help you find appropriate investments and make money regardless of where in the cycle your market is in right now.