How to Use Real Estate Cycles to Your Advantage As an Investor
Author: Kevin Melitobr
Source: ezinearticles.combr
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Recently, there have been events within the real estate market that have caused many markets to change. These changes affected many real estate investors because the investors were not adjusting their strategy to the market. When the market changes as it has, your investing strategy must change as well.
You will be able to use this article to help you identify stages in the real estate cycle. When you know what the stages are in the cycle and what is causing the change, it will be easier for you to see the next stage coming. As a result, you can tailor your investing strategy to what is happening in your market.
Real Estate Cycle Stages
When you look at real estate cycle, the stages of the cycle go like this:
1. Increasing Rents/Prices
2. Increasing Construction
3. Overbuild
4. Rent Concessions
5. Declining Rents/Prices
6. High Vacancy
7. Little Activity
8. Accumulation
9. Low Vacancy
10. Increasing Rents/Prices (and the cycle continues on)
Basically, the factors affecting these cycles all revolve around simple supply and demand factors. Supply and demand are the major influences how the cycle changes from one stage to the next. Lets start with Increasing Rents/Prices portion of the cycle. The demand has outpaced the supply and caused prices to go up.
As supply begins to catch up with demand, the cycle goes towards the bottom of the cycle which is declining rents/prices. Listed above are the stages that happen between the top and bottom of the cycle. The important thing to remember is that supply (existing homes for sale/rent and new construction) and demand (people wanting homes for purchase/rent) is what is driving the changes in the cycle.
Keep in mind that there is not a set time frame of how long it takes to go from one stage of the cycle to the next. It could take 20 years or more to go around the cycle one time. It is also important to point out that each real estate market acts independently based on the supply and demand of their own area. This means that New York, Houston, and Seattle are all going to be in different stages of the cycle because they are their own market.
From my experience of training investors, we have found that there are certain investing techniques that are more effective in one stage of the cycle than another. In the top portion of the cycle (this means starting with the little activity stage and going around the cycle until the overbuild stage) rentals, rehabbing, and lease options are the best strategies that are suited for those conditions. These strategies will help you take advantage of the increasing demand to maximize your profits based on strategies that benefit from the increasing demand.
In the bottom portion of the cycle (starting with the overbuild stage and continuing until little activity) wholesaling, seller financing, and lease options are usually the best strategies for those stages of the cycle. Lease options mainly work well in the bottom stages of the cycle as an entrance strategy so that you are not stuck with a deal that is declining in value. These strategies are designed to protect you from the downside of the market while being able to profit.
What Does This All Mean?
The purpose of this article is to keep people from making mistakes when buying investment real estate. When investors understand how cycles work, what is driving the cycles, and what techniques are best, their success rate increases dramatically. You will be investing with the trends of the market instead of fighting against it. You are not going to be able to change the market conditions, but you can use techniques that will put market conditions in your favor. This is truly becoming an investor as you use the market to your advantage.
If you know what stage your market is in, you will also be able to adjust your strategy as the market changes. When you see levels of supply and demand changing, you can prepare for the next market cycle and modify your strategy to match the conditions. I am not telling you to time the market. Trying to time the market usually ends up in disaster. What I am telling you is that money can be made in real estate at any time. It is a matter of knowing how to use various techniques and when to use them. This will make your success rate increase because you will be able to make a profit when other investors cannot.
Critical Steps
Whenever you consider purchasing an investment property, I recommend the following steps:
1. Identify the stage of the cycle in your market - Again this will be based on supply (inventory of properties for sale/rent/being built) and demand (people moving in, jobs coming in, number of properties being sold). Find a qualified real estate agent and your city planner to obtain this information.
2. Analyze the deal - You need to crunch the numbers to ensure that the deal is profitable. Is there a certain technique you are going to use on the deal?
3. Make sure the technique works well for that stage of the cycle - When you align the market stage, the property, and the strategy with your market conditions, profitable deals are much easier to do. Successful deals are more plentiful when all three of these factors are aligned.
Spend the necessary time to obtain the information on your real estate market. This information will make you a more powerful investor so that you do not get stuck in deals that are not good for your market conditions.
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pKevin Melito is a real estate investor, consultant, and runs a company that offers training programs for real estate investors. He has created the web site a target=_new href=http://www.real-estate-investing-cycle.com rel=nofollowhttp://www.real-estate-investing-cycle.com/a to teach people how to invest in real estate./pbr
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