Real estate market cycles are a favorite topic of investors. I listen to podcasts…..a lot. And many of them on the topic of real estate. I am obsessed you could say. So that being said, I feel that I am fairly up to date on the current market sentiments of real estate investors throughout the country. And by having listened to many success stories, I’ve learned the challenges people had along their journey.
Many of the current success stories started at the bottom of the current market cycle. Also, many people feel that we are near the top of the current market cycle. Depending on where the cycle is, there are certain advantages and disadvantages. The bottom of the previous cycle was in 2008/09, and we are arguably at the top of one now.
So what is an investor to do? Wait on the sidelines until the market crashes, and then scoop everything up for super cheap? Get too scared and never invest?
Those are both terrible ideas. Luckily, every phase of the market provides ample business opportunity for the savvy investor. Let’s find out how to make some money at each turn.
Defining the market cycle
Before we continue, let’s define what the real estate market cycle is.
The cycle looks like this:
The real estate market cycle is also referred to as the property cycle. There are 4 phases in the cycle: Recovery, Expansion, Hyper-supply, and Recession. These are similar to the overall economic cycles. But because people need a place to live, and are often locked into longer contracts on properties, the property cycle tends to lag the economic cycle.
It is a cycle because it repeats itself over and over, due to predictable supply and demand. In addition to the nationwide market cycle, there are localized property cycles due to local supply and demand pressures. Let’s explore these from an investors perspective, and how to profit handsomely at each turn.
Recovery
Everyone is a little scared. People have been losing their homes and going bankrupt over the last several years. Now things are turning around a bit. But investors and lenders are wary of putting too much capital in the market. There are starting to be more loans available, and lending standards have started to ease. On the positive side, there are deals everywhere. Many people were in bad fundamental financial positions and were wiped out during the downturn. There are lots of opportunities to find under-priced properties and deals.
Real estate still seems to be a highly risky venture to many of the general public at this point. As opposed to being a strong up or strong down market, people are generally unsure of where prices will go in the short term. Money is tight, and so property development and lending to large scale commercial operations is limited. Pretty much, those who can still afford and want a house have one. Rents are suppressed therefore due to the high supply of housing. Vacancies for investors can start getting higher too.
Profit:
A recovery is one of the best times to invest in real estate! Prices will likely be rising strongly in the near future. There are so many deals, and so long as you can find someone to lend you the money it is like shooting fish in a barrel. Buy and holding properties works really well here. Fixing and flipping is another decent strategy. And lending money to cash strapped investors can prove to be very profitable.
Expansion
Well damn. Sally bought a house 3 years ago, and sold it yesterday for double the price! Prices are on the rise, and everyone is feeling confident. Those who were able to stay in business, or just simply stay in their home through the downturn now find themselves flush with equity. And in an expanding market, that is almost as good as cash. Lenders are giving money away like candy to a baby. Side note- who in the hell is giving tons of candy to a baby anyway.
Real estate looks like a sure thing. Everyone who is involved is looking like a genius, making money hand over fist. Builders start creating more homes. And when combined with relaxing lending standards, there are plenty of people who can afford these shiny new homes.
For the investors, however, things are starting to look a little tough. Price increases can outpace rental growth. So sure, you could get a loan on a property, but the rent may not cover the costs to own the home.
Because everyone has lots of available money, and real estate looks so certain. Many new investors come onto the scene during this time. New real estate agents are born every minute. The longer that the expansion goes, the more picked over the market becomes. Deals are harder to find. Homeowners aren’t as likely to sell for a good price when the home is appreciating 1% per month. Once the deal is acquired, however, vacancies are low.
Profit:
Making money during an expansion is also not too hard. What becomes more difficult however is starting to find the properties. Buying and holding, flipping, and wholesaling are all attractive strategies at this time. This is the best time for wholesaling as the market has plenty of available deals, but they take a little more effort to lock down than before.
By providing a steady stream of investment grade distressed properties, you can make a fortune as a wholesaler in an expansion. This is also a great time to provide mentoring and coaching services to other, newer investors. As the popularity increases for this asset class, newer investors hungry for knowledge would benefit greatly from your coaching services.
Hyper-supply
Somebody poisoned the watering hole. Demand for properties has started to fall. And newer builds may continue, which further compound the problem. At best, real estate values are only mildly increasing and may have stalled completely. Similar to the recovery phase, uncertainty is in the air. Deals are very hard to come by, and everyone is anticipating a recession very shortly.
Profit:
The biggest opportunity here is to provide wholesale services. Finding a deal that meets the underwriting criteria for savvy investors is near impossible at this point. Everything in the market has become massively overpriced, and people are wary of tying up money in an asset that could plummet in value in short order.
It is also prudent to either work on very short projects such as flipping at this time so as to protect yourself against a possible recession. However, don’t simply sit on the sidelines at this time. It is hard to predict when the crash will be, and you don’t want to miss out on the gains. Just watch the market closely at this time.
Also, remember that real estate markets are very local. While your market may be in hyper-supply, a different market across the country could be in the expansion phase. So if your strategy no longer works locally look for another market where it might.
Recession:
This is the big R word. As the saying goes,
“A rising tide floats all boats, but a sinking tide shows who’s swimming naked.”
This is nearly the opposite of the expansion cycle. Whereas before everyone had lots of money and no deals, now everyone can find deals everywhere but money is tight. Real estate is seen as a risky venture and a losing proposition.
Profit:
The biggest opportunity to make money during a recession is to purchase property for buy and hold. Money lending is also a profitable endeavor at this time. Because of the scarcity of money, you can charge higher rates. But for the average investor, the name of the game here is an acquisition.
Summary
In general, the secret to success in real estate and business is finding an underserved need, and providing it. When times are good, people have trouble finding deals and places to invest their money. When times are bad, people have trouble finding money and getting rid of their overleveraged portfolios. By finding ways to help those people, you can become very wealthy in the process. Until next time, make today great!
