Knowledge of the current real estate market cycle is important to first-time and experienced investors as it affects their strategies. Their decisions may vary depending on which part of the cycle the market is in—boom, slump, or recovery. This way, they can assess the proper timing for investments, which can maximise profitability and mitigate risks in the long run.
This blog will help you understand the market cycles and how you can make profitable investments for each phase to achieve your portfolio goals.
There are four phases in the real estate market cycle: recovery, expansion, peak, and recession.
Recovery starts a new cycle, and the market shares the same conditions as the recession phase. Here, new construction is limited and the rental growth is decreasing or flat.
Expansion is where demand and prices rise. During this phase, occupancy rates improve as vacancy rates drop, and construction activity increases.
The increased construction activity often results in hypersupply, reaching the peak phase. Rising vacancies are one of the signs of the peak and rent rates remain positive but may have a slowdown in growth. Property owners may lower rental prices during this time to help retain current tenants or attract new renters.
The recession comes after the peak. There is an oversupply of properties, rental growth is dropping, and vacancy rates are high. Landlords may compromise with renters about their leases to retain them.
Now that we understand the market cycles, let’s identify the right strategies for each phase to make profitable investments.
As demand and construction activity increases, the supply becomes overwhelming. Rather than acquiring more properties, focus on tenant management and property management optimisation. Market trends can decline after a hyper-supply, so you may consider liquidating your assets before property values decrease.
The slump phase is the opportunity to buy low. It is the best time to buy discounted assets, foreclosures, distressed, and undervalued properties. Hold on to your assets as much as possible as you wait for the recovery phase.
Know more about how to find heavily discounted investment property here.
Recovery Phase
As mentioned above, it is tricky to identify the recovery phase as it has the same traits as the recession. You can take note of the gradual increase in demand, but you can still find properties at a bargain. With the right renovation strategy, these properties can be highly profitable. Remember: invest in areas that show economic improvement.
Cash flow is the general term for the income return from an asset after all the expenses. When investing in a property in any market, take note of the income potential and property costs so you can make wise investment decisions.
You can use our Free Cash Flow Calculator to have an overview.
Two of the factors to consider when spotting markets with long-term growth are population and demographics. They may not seem much, but these can affect growth for decades to come. Other things to consider are the economy, interest rates, and local government policies, all of which affect your ability to buy a property within a certain area.
Local market data like occupancy rates and economic growth are indicators of profitability. Real estate investors use this information to analyse market trends and make wise investment decisions.
Regional factors include age, education, population size, and income. These factors may shift, and you should be able to adapt to the changing market conditions and customer preferences. You can anchor your investment decisions on these changes.
The market cycle is dynamic so tailor your portfolio goals depending on the phase. You can buy and hold, which involves holding onto a property for a long period of time to acquire a higher income. You can also use the fix-and-flip strategy. This is buying a property and adding value to it by renovation before selling. Remember to align your strategy based on the market cycle positioning to make profitable gains.
Whether you are in a recovery, expansion, peak, or recession phase, take note of the key metrics for investing in any market cycle. Choose the best strategy and tailor your portfolio goals to make sound investments across all market conditions. In no time, you’ll be able to adapt to maintain profitability and build long-term wealth.