Investing in Real Estate Cycles
Author: Michael Joseph Wilsonbr
Source: ezinearticles.combr
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The Real Estate Cycle is Your First Key to Successful Investing
The real estate cycle is the most influential key to your real estate investing. If you do not understand how the cycle works, your real estate investing will be more difficult. When you understand the cycle and identify where your market lies, then investing becomes easier because you are going with the trend instead of fighting it. Lets look at the cycle:
For now, we are only going to focus on the outer edge of the cycle. The primary factors that drive the real estate cycle are based on supply and demand. The supply is based on the amount of homes that are available for sale (new and existing homes) as well as the homes for rent. While the demand is based on the number of buyers/renters that there are for those properties.
In essence, economic factors drive the market. When you start to get to the top portion of the cycle Sell High, it is because the supply begins to out pace the demands. Too many people have purchased existing properties, too many people are building new homes, and too many people have rentals that they have purchased. As a result, the cycle begins to change downward.
The masses hear about how prices have increased during the previous stages of increasing rents/prices and begin to build new homes. This stage of increasing construction is usually when many speculative investors build a new home to sell. What the speculators have not realized is that the market has changed. As a general rule of thumb, when the media is talking about a great investment opportunity, the real opportunity has come and gone.Now that people have overbuilt, there are many more vacancies and properties for sale. Why?
Because the inventory of properties (supply) has outpaced the demand and the market turns down towards the Buy Low portion of the real estate cycle.
With vacancies increasing, landlords will do what they can to get a tenant in the home. Rent concessions will be commonplace as landlords offer free rent, lower deposits, or something else to entice tenants to come to them. Similar concessions will also be apparent with people selling their home.
As landlords/sellers begin offering these concessions, they are trying to offer something better than their competition. Rents/prices decline as a result. As inventory is not moving, declining construction is the result. Builders do not want to build if they cannot sell the property.
High vacancy will also be present in the bottom portion of the real estate cycle. Again, there will be more inventory than there will be people to fill them.
A change will happen in the market where a little activity will begin to build. This is usually a result of new jobs coming into an area. People will move into the area for the jobs and demand will rise as a result. This helps the demand catch up to the supply.
When the supply and demand begin to even out, investors that track these figures will begin to accumulate properties. The investors that understand this concept can watch the real estate market trends and adjust their strategy accordingly. With demand increasing, there will be low vacancy because people will be buying/renting.
Increased demand with buying and renting will force rents/prices to increase. And the cycle will begin again, and again, and again...
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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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