The most successful Real Estate Investment is to keep a focus on the real estate market to find investment opportunities. Similar to the economy overall there’s four distinct phases in the real estate cycle: recovery expansion, expansion, hyper-supply and recession. The cycle is repeated in waves, so that the recession of the previous cycle is followed by the recovery phase of the following cycle. Investors may utilize the cycle of real estate to align your investment strategy with the current cycle phase. But, it’s impossible to know the length of each cycle that it will run.
What the Real Estate Cycle Tells Investors
An in-depth look at the current real estate market will tell you a good amount about the potential to invest in an opportunity. In determining if you’re in the expansion, recovery or hyper supply phase lets you determine the amount of return you can anticipate from your investment. It is also possible to make an educated guess as to the length of time you’ll have to keep the property in your possession and the exit strategy most likely to look like. The cycle of real estate will indicate the earnings and appreciation of a property. Additionally, it can indicate the ideal time to start making the necessary improvements.
The Recovery Phase
In the phase of recovery that follows, the market for real estate has reached its low. There is usually an elevated rate of unemployment, as well as a high amount of foreclosed homes. The prices for real estate begin to stabilize, construction starts and the vacancy rate decreases. The period of recovery is the best ideal time to purchase when you can purchase at a low price and then hold the property to be able to sell it at a premium in the near future. This is an ideal moment to look for a bargain on a property that is a core. The decision to invest in a property that is value-add that requires improvements takes an amount of planning during the phase of recovery because leases could be in decline in the present. If you’re willing to be risky in a distressed opportunity, a property purchased with a cheap basement could yield a substantial profit in the event of selling it after a few years.
The Expansion Phase
After the phase of recovery after the recovery phase, the market for real estate is now expanding. Prices rise, and new construction is being built with the rate of unemployment going down. Gross Domestic Product is normal and job growth is increasing. The cost of rent increases when occupancy rates rise. When you reach the peak during the phase of expansion the demand and supply for real property are in perfect harmony. It is an ideal opportunity for value-add investors to purchase properties at a reduced cost and then invest in upgrades to ensure that the property is sold at more value. Investors who are core plus and want low risk will reap the benefits of the high retention rate of tenants and a steady increase in rent prices. But, opportunities for investment are typically very few and far between during an expansion period.
The Hyper Supply Phase
Redevelopment and development in the expansion phase could cause the hyper supply phase where there is a surplus of space. There could be a decrease of demand due to economic conditions and the number of vacant properties begins to increase as rents decrease. In the period of hyper-supply certain investors are forced to sell prior to a difficult leasing market and possibly a loss in property value. However, properties with an excellent occupancy rate and strong tenants who have longer leases could opt to remain in the next recession. The hyper supply phase in real estate may last for a long duration.
The Recession Phase
In the period of recession the real estate market is dominated by demand, resulting in a higher occupancy rate. Construction stops for new construction, and house prices drop when selling gets underway, making houses less expensive. Rent reductions are not uncommon, and some owners offer concessions. The time of recession is a great time for prospective investors to take advantage of the opportunity. You can locate distressed properties or a foreclosure for sale at a bargain price or improve and reposition the asset, and sell it in the real estate expansion phase.
Strategies for Matching Your Strategy to the Cycle
Remember that the four phases of real estate don’t occur in equal durations. It can be a short recovery and swiftly transition to expansion, or it could be a long time. The cycle of real estate can also be affected by geographical and asset class variables. Smart investors can balance both highs and lows, by having an array of investment options with various strategies.
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