The real estate market is cyclical. Like other types of markets, it goes through changes, which history has shown is marked by 4 distinct phases. Understanding a bit about each of these phases and how they can impact investors is important in helping you find a market with lots of profit potential.
These are the 4 stages of the real estate cycle:
Phase 1 – Recovery
During the recovery phase, the market is doing just that – recovering from an economic downturn. In this climate, housing prices are extremely low, but they’ve stabilized from the freefall they were in during the previous cycle. For investors, this can be a great time to break into a market because the buy-in costs are so low. However, some of the other characteristics of this phase include unemployment, no new construction, and difficulty in obtaining financing. These factors have scared off plenty of investors, and while I don’t necessarily think these things are deal-breakers, it is something to be aware of.
Phase 2 – Expansion
Things are starting to look up during the expansion phase. Housing prices are on the rise, vacancy rates are declining, and new construction is starting up again. This is a period marked by growth in nearly all areas – economic, employment, population, etc. Demand for housing is high during an expansion phase and often outpaces supply, which in turn causes costs to rise all around. This is still a good time to invest. There are still deals to be had, but they may be harder to come by and you’ll pay a bit more for them than you would during the recovery phase.
Phase 3 – Hyper-Supply
Hyper-supply is the precursor to SCARY TIME in the real estate market. At this stage of the cycle, construction is still ramping up and about to reach a peak, but demand is starting to cool off. Soon, the supply will exceed the demand, and prices that have so recently skyrocketed will start to drop. However, most investors are still making money during this stage, because high rent rates can still be justified…for now. https://www.biggerpockets.com/renewsblog/2016/06/09/real-estate-cycle-multifamily/
Phase 4 – Recession
And now we have officially arrived at the stage of the game that everyone hates – the recession phase. Inventory is high, demand is low, and housing prices have bottomed out. Rental rates have dropped way down, too. This creates a perfect storm for investors and other homeowners, who are now saddled with properties they may or may not be able to afford. Don’t despair too hard, though. While no one can predict just how long a recession phase will last, there’s one thing that’s true: it will end, and the recovery phase will begin again.
As an investor, it’s your job to familiarize yourself with these different market phases and understand the real estate cycle as a whole. Knowing when to act and when to lie low can mean the difference between success and failure.
My advice? Invest during the recovery and expansion phases, build your savings to protect yourself during a recessionary period, and above all else, treat every property/market like the unique animal it is. Do your research. Run those numbers. Make SURE you’re investing in a cashflowing property. And remember, different markets can be in different stages at the same time, so just because the area you live in may be experiencing one phase, it doesn’t mean that a market elsewhere is in the same place.