Blog | Real Estate

The Right Real Estate Moves at The Right Time

It’s all about location, location…and timing!

Summary

• To grow wealth in real estate, you must first understand the real estate cycle

• The key to successful real estate investing is a financial education

• There are four phases to the real estate cycle

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Real Estate is one of the most popular methods for the rich to build and grow wealth. Because of this, many start their investment journey with real estate, but often lack the financial education needed to avoid costly mistakes or miss out on big opportunities.

“When the supermarket has a sale, say on toilet paper, the consumer runs in and stocks up. But when the housing or stock market has a sale, most often called a crash or correction, the same consumer often runs away from it. When the supermarket raises its prices, the consumer shops somewhere else. But when housing or the stock market raise their prices, the same consumer often rushes in and starts buying. Always remember: Profits are made in the buying, not in the selling.”

–Robert Kiyosaki, "Rich Dad Poor Dad"

Whenyou should invest in real estate is just as important as where you invest. Your first objective is investing for cash flow, but your timing could affect whether your rental rates will increase or decrease, or property values appreciate or depreciate.

The uneducated consumer often believes that whatever is happening now will continue to happen forever. Your goal should be to educate yourself on the real estate cycles.

The four phases of the real estate cycle

Recovery

The Recovery phase of a real estate cycle is often referred to as the ‘bottoming of the market.’ This is when the market stops declining and begins to level off or even grow slightly. During this phase, you will see:

• Vacancy rates stabilize and start to decrease some

• There is virtually no new construction

• Housing supply is low

• Housing prices begin to slowly rise

• Demand begins to slowly rise

• The media becomes more optimistic

This is a great time to buy properties for cash flow. If a property provides cash flow during this phase, it will really improve cash flow when the markets improve.

At this point in the cycle, most people know the market has passed bottom and investors are entering the market again.

At the later stage of this phase, called Early Stable, real estate prices begin to slowly rise along with demand. Media is often becoming optimistic, investors start to jump in, and the market begins to feed off of itself. This causes prices to rise.

The earlier in this phase you invest, the more money you will make. If you are waiting until the middle or even the end of this phase when everyone is talking about real estate, you’ve missed out on big profits.

Expansion

Expansion is the next phase in the market cycle and is also called Late Stable. Expansion is where the economy starts really growing again.

In this phase, you’ll see:

• Vacancy rates decreasing

• More new construction

• Rents rise

• Property values are increasing

An educated investor might refinance their portfolio at this time and start preparing for the next downturn. Investors who want to sell assets will often be greedy and try to hang on for the peak of the market (for higher profits).

By selling assets that you want to unload NOW, in this phase of growth, you’ll avoid the mistake of being unable to sell at or after the peak. Markets turn quickly!

Downturn

The Early Downturn is the next phase of the real estate cycle. Everything that goes up, must come down!

Early Downturn happens when prices have reached their peak and they begin to flatten out. Some signs of the Early Downturn are:

• Peak prices are flattening or stabilizing

• There are fewer buyers, because most people who were going to get in the market are already in

• New construction is high, so the supply starts to outweigh the demand

• Vacancy rates start to increase

• Credit becomes harder to come by

During this phase, investors begin to prepare for opportunities in the coming downturn. Sellers will often try to hold out without lowering prices until they are forced to. Buyers might still get a decent deal, but it’s a dangerous time.

You don’t want to buy in this phase unless the property has major cash flow that can withstand prices dropping!

Full Downturn

This is the phase where everything begins to come apart in the market. Here’s what you’ll see:

• More and more sellers are forced to lower their prices

• Homebuilders and sellers start to offer a lot of incentives

• Many new construction projects will be abandoned

• Prices continue to fall

• Home/property prices are often falling below replacement value

This is the time to start buying assets! Take advantage of distressed properties and low pricing.

Bottom

The real estate cycle will hit its fourth phase, The Bottom. During this time, you’ll see:

• Vacancy rates increase

• New Construction comes to a halt

• More and more specials offered

• Rental rates will go down

• Sellers become desperate

• Foreclosures begin to increase dramatically

• Properties are cheap and there are bargains everywhere

• The media is extremely negative at this phase

You’ll also notice some other signs that the market is at or near the bottom. Home builders will be going out of business, real estate agents will be leaving the business.

This phase is when you can make the greatest profit. Your emotions may be telling you not to because the uneducated investor feels like this phase will never end. But this is the time!

The tricky part is that no one is screaming that it’s the bottom. Some ‘experts’ and most of your friends will think you are crazy. It takes courage to buy in this phase, and it takes three to six months for most investors to know the bottom of the cycle has been reached.

If you can identify this phase, it is the best time to buy!

Recovery to Bottom

Using these tell-tale signs to help determine what part of the cycle you are in can make a significant difference in profit and cash flow for a real estate investor. Study the markets, develop a strategy, secure your capital, and be prepared when the right moment comes. Remember, it’s all about location, location, and timing!