In every Real Estate market, there are cycles. There are a number of factors that influence the cycles, such as inflation, job growth, population growth, etc. In this article, I will explain…
1. Each market cycle
2. The explanation of the cycle (Indicators, causes)
3. And the suggested investment approach/strategy
Buyers Market #1
In a Buyers Market #1, what causes it to be this cycle, is an over supply of product. With too much supply, it outpaces the demand, and in real estate, in most cases, rents will start to plateau, if not decrease. Which then drops NOI (Net Operating Income), which then decreases value.
In this phase, as a Buyer, you should purchase for cashflow. Why cashflow? As I mentioned above, rents will decrease. Rents are your #1 source of income. You want to make sure that all of your properties in your portfolio are cash flowing positively. Expenses are paid, and debt is paid.
Buyers Market #2
In a Buyers Market #2, this cycle is the Recession Phase. However, the key indicators for this cycle, is demand starts to pick back up. With demand starting to pick back up, rents will slowly increase. Other indicators is jobs begin to increase, and now oversupply starts to get absorbed.
With all of this being said, there has probably been “Blood on the streets” for a while, however, this will be a great time to buy. At this cycle, we are at the bottom, bottom. The only way, is up. Buying at this time will seem like a bad idea to most people, however, for the investors that are knowledgeable, they will capitalize on this opportunity. You will essentially be buying at a steep discount, however, since you have been buying solely for cashflow, your properties are above water, and soon will worth alot more, as values will increase. So, strategy = Buy Everything.
Sellers Market #1
This is called the Recovery Phase. What happens in this cycle, is the supply of properties start to dwindle, in the buyers/sellers pool. Now, demand outpaces supply in this pool. Properties will begin to be overpriced, people are now starting to realize that it a good time to get back in the game (actually, its the total opposite). New-construction pipeline starts to get filled up. The good side of this phase, low unemployment, and rents increasing.
So, what should you do in this cycle? Buy, and sell quick. Ride the wave up, but make sure you get off the wave before its too late.
Sellers Market #2
This cycle is known as the Expansion Phase. Following the Recession phase, everyone is trying to recover, however, because of the time frame for new construction to come on line, and get absorbed, there starts to become an influx of supply, all at once. Now with this, as you can tell, piggy-backs a Buyers Market #1. Other indicators are price inflation, and rents plateauing, due to the over supply.
In this cycle, sell off those assets that are headaches to run, and keep those that you feel are worth it. Reinvest, into newer properties.
Knowing the cycles in the real estate market, can help you better develop a strategic plan, to be successful.
