Real estate markets are cyclical, and successful real estate investors remain aware of the real estate cycles in their areas. First, you need to understand seller’s and buyer’s market:
However, not everyone agrees that real estate cycles are relevant to residential real estate investors. Some of the real estate infomercial gurus claim that real estate investing in homes and apartments is recession-proof because people always need a place to live. Although that is partly true, the economic base of the community where you invest does have a direct impact on all aspects of your operations — occupancy, turnover, rental rates, and even quality of tenant.
- A seller’s market is almost like the classic definition of inflation — “too much money chasing too few goods.” In this case, the goods are real estate properties, which are in high demand. When sellers are receiving multiple offers within 24 to 48 hours of a listing or you see properties selling for more than the asking price, you’re in a strong seller’s market.
- A buyer’s market occurs when current property owners are unable to sell their properties quickly and must be more flexible on the price and terms. This is a great opportunity to seek seller financing.
Real estate traditionally experiences cycles as the demand for real estate leads to a shortage of supply and higher rents and appreciation. That leads to the building of additional properties, which, along with changes in demand because of economic cycles, usually results in overbuilding and a decline in rents and property valuation.
For example, when times are tough, residential tenants are the first to improvise, with some finding that “doubling up” or even taking in roommates is palatable if it results in lower costs for housing. Some younger renters are even willing to move back in with Mom and Dad or another relative when their personal budgets don’t allow them to have their own rental unit.
Can real estate investors who track real estate cycles make investment decisions based on this information? Absolutely. That is where most successful and knowledgeable real estate investors see potential for increasing their real estate investment returns by timing the real estate market.