If you’ve been thinking about investing in real estate, you may be wondering which phase of the housing market cycle you should buy in.
Real estate market cycles follow a predictable pattern that is helpful for potential real estate investors to be aware of. Understanding the pattern of the housing market cycle can make a critical difference in the success of your investments.
So, how do you know when to invest in real estate? This article will discuss the four phases of real estate market cycles and the benefits and disadvantages of buying rental property during each phase. Ultimately, you will learn what the best time to invest in real estate is for you.
Four Phases of the Housing Market Cycle
There are good reasons to buy in any phase of the housing market cycle depending on your goals and financial situation. If you have a stable income and cash reserves to support investing in a rental property, it is always advisable to do so.
Because the housing market cycle is predictable, no matter which phase you invest in, the market will always reach a high point again where you can capitalize on your investment. The goal for most real estate investors is to hold their properties long term and reap the benefits of real estate appreciation in addition to cash flow. Compared with other forms of investment, such as the stock market, the US housing market cycle is relatively stable and easy to understand.
Related: How to Get Rich in Real Estate: 4 Different Cycles
Expansion
This phase is an excellent time for real estate investors who already have rental properties, because investors can enjoy high rental rates and occupancy rates.
The favorable circumstances are due to an economic boom. For a period of time, the demand exceeds the supply of available properties, and landlords are able to increase their rental rate. Due to economic growth, many construction projects will likely be started during this phase.
As you can imagine, property prices are quite high, and it is a seller’s market. However, there are still good reasons to buy during the expansion phase. If your financial situation permits it, you could enjoy sky-high rental rates. Or, if you flip properties, you could find a distressed investment property for sale, renovate, and flip it for an excellent return on investment.
Hypersupply
Unfortunately, expansion cannot last forever, and the housing bubble must pop. When demand is too high for supply, the supply of housing will start to increase to meet demand. However, when supply and demand meet, the supply usually continues increasing regardless, reversing the situation.
At this point in the housing market cycle, we see what is known as hypersupply. There are more housing units than buyers or tenants, and occupancy rates are very low.
This might be one of the least favorable times for investing in rental properties. If you consider buying rental property during the hypersupply phase of the housing market cycle, follow these tips:
- Make sure you can afford the property, even with an excessive vacancy
- Make sure you have cash reserves
- Find investment properties for sale that are near full occupancy
- Buy properties in stable, dependable real estate markets
Recession
As the inevitable housing market crash turns into a recession, real estate investors may find themselves in luck. This is the time to snag real estate deals through buying rental property for sale below market value.
During a recession, the hypersupply and low demand drive prices down, and investors who jump on these real estate deals could see the highest return on investment.
This phase of the housing market cycle is great for scoring deals on any property, but distressed properties will be especially cheap. No matter what your real estate investment strategy is (flipping, renting long term, etc.), this is an excellent opportunity as long as you are financially stable.
Have you heard the investment advice “buy low, sell high?” In real estate, a recession is the housing market cycle phase to buy in for big discounts.
Related: How to Find Real Estate Deals in Any Housing Market in the US
Recovery
Much like a recession phase, the recovery phase of the housing market cycle is a good time to invest in real estate.
The prices of investment properties will still be low, but the US housing market cycle that comes next is the booming expansion, and unlike buying during a recession, you won’t have to wait as long to profit.
So, When Is the Best Time to Invest in Real Estate?
All things considered, during a recovery phase might be the best time to invest in real estate. Why? You can reap the benefits of below market value prices in an economy that is about to explode with high rental rates and a great occupancy rate.
It is important to understand that, depending on your goals, you might be better off buying in a different phase. For instance, if you want the absolute cheapest price, buying during a recession would be best. Or, if you want immediate, excellent cash flow and you can afford to pay a little extra for your investment property, buying during the expansion phase is probably right for you.
When it comes to real estate, as long as your finances support it, there is never truly a bad time to invest. As long as you make informed investment decisions based on real estate data and analysis, you can never go wrong.
Use Real Estate Analysis
As we discussed, if you hold onto your investment properties for the long term, the housing market cycle will always bring you back to a lucrative point to sell for a profit. Also, by using real estate analytics, you can secure a rental property that will bring you positive cash flow through the ups and downs of the housing market cycle.
Mashvisor provides the real estate investment tools you need to perform rental property analysis that leads you to the best investment property for your needs. With Mashvisor, you can use our property finder to locate your ideal rental property and take advantage of our real estate heatmap for neighborhood analysis. You can also use our rental property and Airbnb calculator to find the most profitable properties.
Related: Mashvisor: A Real Estate Investing Tool for All Your Investment Needs
With the right data and powerful real estate investment software at your fingertips, you can secure the best possible income property at any phase of the housing market cycle. To learn more about how we can help you make profitable real estate investments, start out your 7-day free trial with Mashvisor now.