Real estate is a dynamic business. With many trends changing constantly, investors need to be up-to-date on the factors that impact their investments. Being aware of the real estate cycle and your position within it is therefore crucial. Read on to find out how to take advantage of the real estate market, no matter the phase of the real estate cycle.
Phase #1: Expansion
The expansion phase of the real estate cycle is the time when investors stand to make the most profit. Occupancy rates will be high, and vacancies filled more quickly than ever. Rents will be high and often increasing as well. On top of that, new real estate developments will be popping up left and right, just in time to meet the high demand for properties. This is a rare time when home prices peak and home sales spike.
This will typically be a result of macroeconomic trends in the United States. Unemployment rates will typically be low during this phase, a driving factor that leads to higher demand for properties. Gross domestic product will be on the rise, meaning people will have more disposable income, opting for more expensive properties, or willing to take on higher rents.
Savvy real estate investors can’t miss out on the huge opportunities offered during the expansion phase which is typically characterized as a housing boom.
One thing to consider is instating a rent increase for your existing rental property or properties. But tread carefully; raising rent too much, or too quickly, will have a hugely adverse effect on your occupancy rate. You will typically want to increase rent in accordance with overall trends in the economy, or according to the average rent increase in your area. Rental rates rise gradually in the economy as a whole, and you need to make sure you’re keeping up.
The expansion phase is also a great time to buy and flip property. In all phases of the real estate cycle, there are discount properties to be found. Distressed properties can be purchased, rehabilitated, and resold for huge rewards during this phase. Otherwise, it could also be a wise idea to rent out your rehabilitated property once upgrades wrap up. The high demand means your rental property won’t be vacant for too long, and a higher-than-average rent could mean that you cover your costs more quickly than usual. Make sure you run the numbers, though, and ensure that your upgrade costs don’t negatively skew your return on investment. An advanced real estate investment calculator, like the one offered by Mashvisor, is a godsend in this circumstance, allowing you to quickly figure out your return on investment after repair costs are covered.
Phase #2: Hyper Supply
After several fruitful years in the expansion phase, the hyper supply phase is the first harbinger of decline in the residential real estate market. The demand and supply for real estate, which formerly existed in an equilibrium, slowly starts to tip into oversupply. To meet the demand for property that existed in the expansion phase, many developers rush to build new properties and capitalize on the need for housing. This leaves cities full of new dwellings, without enough demand for housing to actually fill them. This is definitely not a seller’s market.
There are still many right moves to make for real estate investors. Rent growth may slow down, or even begin to decline during this phase. Therefore, if you’ve already found dependable tenants, it is crucial that you lock them in with a long-term lease agreement. This will ensure that you can maintain your level of income regardless of the real estate market trends around you — especially the economic decline that may be on its way.
Since there will be high competition for tenants during this phase of the real estate cycle, buying vacant properties becomes much riskier. Your rental property may fail to attract tenants for several months, all of which is lost income. It is, therefore, a great idea to find occupied properties, where your cash flow is guaranteed.
Phase #3: Recession
Given that real estate cycles are cyclical, recessions are unavoidable. Although this phase in the real estate cycle looks dreary from afar, investors have options available to make huge profits down the line.
Vacancy rates will be high during this phase of the real estate cycle, and rent prices are likely to decrease. This is why it is crucial that you instate strong lease agreements during the hyper supply phase. This sort of forward-thinking can go a long way to maintaining your cash flow during the recession phase of the real estate cycle.
With high supply and low demand for dwellings, the recession phase of the real estate cycle definitely favors buyers as home prices fall. This buyer’s market can be tricky to navigate, but playing it correctly can be hugely beneficial.
Unless you absolutely have to, it is advisable that you don’t sell investment property during this time. Your return on investment will be lower than in other real estate cycle phases — and that’s if you even manage to find a buyer.
Conversely, buying investment property may be a good idea at this time. You can snag up some fantastic properties for low prices, and resell later on for huge rewards. Foreclosures rise during this phase, which means you can find many high-quality distressed properties during this real estate market cycle.
Knowing full well that the real estate market is cyclical, you can rest assured that the recession will end. Once you’re back in the recovery or expansion phase, your bargain properties will increase substantially in value. If you have the ability to buy and hold property, the recession phase is the perfect time to enact your strategy. Buying and holding property is the best real estate investment strategy during a recession.
Phase #4: Recovery
The recovery phase isn’t as easy to spot as the others. Daily life won’t look much different, but the macroeconomic numbers will be on a rise. Vacancies will still be high — but decreasing. Rents will still be low — but increasing. Indicators will point towards the end of the recession and an approach towards the fruitful expansion phase of the real estate cycle.
Much like the recession, there’s still plenty of bargain real estate properties to be found. If you don’t have the liquidity to hold on to properties for a long time, it may actually be wise to find investment properties for sale during the recovery phase, rather than the recession. It may be slightly more expensive, but with expansion just around the corner, your investment properties can be resold much more quickly.
Where Are We in the Real Estate Cycle in 2020?
It is difficult to discern how the US housing market 2020 will play out. On the one hand, indicators point towards the expansion phase, as home prices have been rising across most cities in the US. Demand is growing faster than supply, and the upward pressure on home prices has continued strong for the last while. Rising prices have been met with strong real estate sales, and positive indicators all around.
The spread of COVID-19, however, may alter this trajectory. Many have begun to speculate about the possibility of a housing market crash, but the extent of the impact is not yet known.
No matter which phase of the real estate cycle you are in, savvy investors have a multitude of options to maximize their returns. Real estate investment strategies should differ in each of the four phases, to fully capitalize on the unique opportunities and mitigate the unique challenges of each phase.