Real estate has its own set of challenges. The primary one is predicting the market value in seasons.
This is where real estate cycles come into play.
These are patterns that leave clues for the investor to consider when buying or renting a property.
In this article, we’ll tackle the basics of this cycle and what makes it an important knowledge for real estate investors.
The Phases of the Cycle
Recovery
It is important to note that this is a cycle. While this is first on the list, it might be at the end of the whole cycle. This makes this phase a bit tricky to identify.
This is when vacancies decline and there’s limited construction going on. This is when the market looks a little lethargic.
But if this happens, watch the data and the market for signs and trends that the market downturn is coming to an end.
Given you’ve identified this phase early in its conception, you can buy properties that have been marked down due to the previous phase. It’s the perfect opportunity to buy low.
Expansion
Immediately after recovery, this phase is all about a rise in properties. Construction increases and the unemployment rate goes down.
In essence, this is the perfect environment for the supply and demand in real estate. The balance between the two makes for an ideal time for investors to improve their acquired properties and sell them at a higher value.
However, there is a low opportunity for acquiring a high-return investment in the expansion phase.
Hyper Supply
This phase is largely due to the expansion. Since the previous phase was ideal for the expansion and improvement of properties, that would result in the high supply. Vacancies begin to rise as rent declines
Basic economics teaches us that with high supply and low demand, the prices tend to go down. The observant investor will consider his properties. If he already has high occupancy and long-term leases, he would opt to keep a level head during this phase.
One thing to note about the hyper supply phase is that it may last for a long time.
Recession
While there is a high supply in the, well, hyper supply phase, the recession is a time when the supply overpowers the demand.
This is when home prices fall and properties become more affordable. While some look at this as a downward spiral for their investments, investors see this as an opportunity to acquire new properties for less.
They only need to wait for the next expansion to resell the property at a higher price. These investors can use the waiting time to rebuild and renovate the property.
Conclusion
These phases do not occur with the same timeline. Some of the phases can be quick, especially the ones with the best opportunities and with ideal times for investment. Suffice to say that it’s impossible to know how long each phase will last.
What is sure though is that the cycle will continue to happen and that there’s no evidence of it changing any time soon.
Keep in mind that balance is key to having the best opportunity and profit for you.
What do you think is the phase we are in now and what is your proof for your observation? Sound off in the comments below.
ENRICHEDREALESTATE.COM
Provides the highest quality and most detailed commercial real estate data, FREE, through crowdsourcing to supplement a national commercial real estate database with 32 million records.