Real Estate Agents In Chicago

Investing in Real Estate Cycles Makes Doing Great Deals Easier

As we have seen with recent events in the United States real estate market, things change and markets go through different cycles. When the markets change cycles as they have, many investors were not looking at the key indicators for their market cycle and were investing in the wrong type of properties for their specific market. Many investors got stuck in deals that lost them money.

Real Estate Cycle Stages

When you look at real estate cycle, the stages of the cycle go like this:

• Increasing Rents/Prices
• Increasing Construction
• Overbuild
• Rent Concessions
• Declining Rents/Prices
• High Vacancy
• Little Activity
• Accumulation
• Low Vacancy
• Increasing Rents/Prices (and the cycle continues on)

Basically, the factors affecting these cycles all revolve around simple economic factors of supply and demand. Supply and demand are the major influences that make the stages of the market go around. At the beginning of the cycle with increasing rents/prices, 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. There are the stages between listed above of what happens in-between, but the supply and demand 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 Los Angeles, Chicago, and Miami are all going to be in different stages of the cycle because they are their own market. Also, different segments of the market (residential, commercial, industrial, etc) will be in different stages of the cycle at the same time.

We have found from our research on market cycles and in training people to be real estate investors that there are certain investing strategies that work better 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) that 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.

In the bottom portion of the cycle (starting with the overbuild stage and continuing until little activity) that wholesaling, seller financing, and lease options are your best strategies for your market conditions. 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.

What Does This All Mean?

The point of this whole article is to show you how understanding your market and its relation to the real estate cycle will increase your abilities as an investor. We have seen many investors who think that buying a rental property is the only way to invest. The problem that an investor like this will face is that they will get to the market stages where there is high vacancy and declining rents. During these stages, they will be adversely affected by the market condition because they did not adjust their investing strategy to market conditions.

If you know what stage your market is in, you can alter your strategy that will be able to take advantage of the market cycle instead of the cycle taking advantage of you. We are not trying to time the market. Trying to time the market rarely works and usually causes more harm than good. Our purpose is to align our investment decisions with what is happening in the market so that the probability of a good investment increases.

Critical Steps

Whenever you consider purchasing an investment property, you should go through the following process:

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). This information can be obtained through a qualified real estate agent and your city planner.

2. Analyze the deal – Make sure that the potential investment property is a good deal. What strategy are you going to use to acquire the property?

3. Make sure the strategy fits within the strategies that will be most successful for your market cycle – We want to align the market, the property, and the investment strategy. If all three of these align and the property is a good deal, you will significantly increase your chances of a successful deal.

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.

About the Author

Kevin Melito is a real estate investor, consultant, and runs a company that offers training programs for real estate investors. He has created Real-Estate-Investing-Cycle.com to teach people how to invest in real estate. Here’s more about real estate cycles – the key to successful real estate investing. – Copyright: You may freely republish this article, provided the text, author, the active links and this notice remain intact.

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