Real estate can be a tricky business. Some years, you might be able to charge high rents and reap a huge return on investment. A few years down the line, and you can find yourself blindsided by a receding economy. As such, every smart investor should be mindful of the real estate cycle and their position within it.
This article will flesh out how to take advantage of real estate market cycles and ensure that you’ve got a solid real estate investment strategy for each of the four phases.
Phase #1: Expansion
The expansion phase of the real estate cycle is usually tightly linked to the economy as a whole. On the macroeconomic level, businesses will be experiencing growth, the job market will be strong and growing, and consumers will be out spending their hard-earned money.
These indicators conflate to create a very strong real estate market. During this phase, vacancy is low, and rents are high — oftentimes increasing, as well. Everywhere you look, you’ll find new construction, as more and more developers are looking to capitalize on this prosperous phase. With high demand and low supply, new properties will be popping up everywhere, and rent prices for existing ones will get more expensive; a win-win for real estate investors.
For real estate developers, this phase in the real estate cycle can provide massive opportunities in residential real estate. With demand currently at its peak, you have a prime opportunity to find tenants who are willing to pay top-dollar in rent, upon delivery of your new construction. This high rent, if properly locked in with a lease, will be a great source of cash flow for years to come.
This is also a great phase for finding value add real estate. During this phase, real estate investors can find suffering properties that are in need of maintenance at sizeable discounts. By working to rehabilitate and renovate these properties, you could resell for a significant profit once the investment property reaches its full productive potential. Selling an investment property during this phase can be hugely fruitful.
Phase #2: Hypersupply
Expansion can’t go on forever, and eventually, the high demand will be met with an equal supply. The equilibrium, however, runs the risk of tipping into a situation of oversupply. Many real estate developers, enticed by the recent years of the expansion, will continue to build new properties at an equal pace. Even if demand is spiraling downwards, supply will continue to increase, as previously-started constructions wrap up. This is the start of the hyper-supply phase of the real estate cycle.
During hypersupply, occupancy rates tend to go down. And to the dismay of landlords, rent growth may slow or even decrease.
Alas, the smart real estate investor knows exactly how to handle this situation. Savvy investors should look for dependable investment properties, at or near tenant capacity, and with long-term leases in place. This will allow you to have a consistent cash flow for years to come, and they’re a great way to guarantee income during the upcoming recession.
Phase #3: Recession
When hypersupply goes on for too long, a breaking point is eventually reached. Sky-high supply eventually meets rock-bottom demand, leading to an overall contraction of the real estate market. Housing market predictions will be bleak for a while to come. And thus, the recession phase of the real estate cycle has started. This phase is characterized by high vacancy rates and a downward trend in rent prices.
This phase, however, poses some unique and potentially rewarding investment opportunities for a real estate speculator who can handle some risk. This phase in the real estate cycle allows you to pick up defaulting bank-owned properties, vacant plots of land, and halted construction projects, at huge discounts. There will be no shortage of superb real estate deals during this phase in the real estate cycle. This is, therefore, a great time to buy and hold real estate far below market value, and count on real estate appreciation to take effect. Knowing full well that the real estate market is cyclical, these bargain investment properties can be resold during the next expansion phase for a very sizeable profit.
Phase #4: Recovery
However long the recession has lasted, you can be sure that a recovery is on its way. At first, many will fail to realize the beginning of a recovery, since not much will be different on-the-ground. But paying close attention to housing market data will reveal the start of improvements in the real estate market on a lot of fronts.
Occupancy rates will still be fairly close to their low point, but slowly increasing nevertheless. Later on in this phase, rental growth will resume, although it will remain below the rate of inflation. Regardless, these real estate trends all point towards an improving housing market, with fruitful years ahead in the expansion phase.
Much like the recession phase, this is a great time for real estate speculation. Since prices are still near their lowest, buying distressed properties for rehabilitation and resale is at its most profitable. Adding value to these investment properties ensures you a sizeable return on investment once economic indicators perk up. Buying an investment property during this phase can thus be highly rewarding.
Where Are We in the Real Estate Cycle in 2019?
So with all of that said, where are we in the real estate cycle in 2019? It actually depends. Housing cycles differ by region, and San Francisco’s place in the real estate cycle can be markedly different from New York’s.
However, with regards to the macroeconomic situation in the United States, many indicators point towards the hyper-supply phase. Vacancies are currently at a high, and properties are on the market for longer than usual. As previously stated, though, local markets can be at entirely different points in the real estate cycle simultaneously, and these are merely macroeconomic trends.
Thankfully, savvy real estate investors have huge opportunities to capitalize on in each of the four phases, and there are always smart investments ahead!
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