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There are essentially 2 primary real estate investing strategies; cash flow (rental) and forced appreciation (flipping). Depending on the type of investor you are, you would tend to look for a property to suit your investment preferences.
While both are important, they will not lead to you building any significant wealth over time. Real wealth is created through strategies that harness the power of compounding.
The best strategy for this is buying income property at the bottom of a real estate cycle, when it’s available below market value when demand is scarce and selling it at the peak of the cycle where trading is far above your purchase cost and demand is high.
The key to this being familiar with the real estate market cycle, knowing when to buy and when to sell.
1 – Early Downturn
1. The market is at its peak.
2. Construction projects are being completed.
3. A downturn is expected to follow.
2 – Full Downturn
1. Demand is decreasing, rents are falling.
2. Vacancy is rapidly increasing.
3. The prices of properties that do sell are falling.
3 – Bottom
1. Vacancy has reached its highest point.
2. Rents and prices are at their lowest.
3. The signs of excess inventory are everywhere.
4. This is the time for investors to aggressively pursue asset purchases.
Early Recovery
1. Occupancy is low, but demand is starting to improve.
2. Cap rates start ticking downward from their highs. Net Operating Income is growing and prices are increasing.
3. Investors should continue purchasing assets.
Early Stable
1. Gathering recovery stimulates demand.
2. Rents are increasing, vacancy decreases.
3. Credit is increasingly available. More investors enter the market
Late Stable
1. Real estate cycle is building up to its peak.
2. Prices start exceeding any reasonable valuation of properties.
3. Rents increase to peak levels. Occupancy is 100% and vacancy close to zero.
4. Competition for deals is intense.
5. This is the time to sell your assets.
Different Real Estate Markets are at Different Stages of the Cycle
It’s important to note that not all markets go through the 6 cycles at the same time. It depends on the concentration of development in both the market in question and others.
There’s no way to generalize about the stages of the real estate cycle. It depends on the market you’re in and the asset class within that market.
This is what creates the opportunity.
By familiarizing yourself with the real estate cycle and the associated metrics in your local market and in other markets around the country, you can very intentionally buy low and sell high.
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