The Real Estate Cycle is Your First Key to Successful Investing

The real estate cycle is the most influential key to your real estate investing. If you do not understand how the cycle works, your real estate investing will be more difficult. When you understand the cycle and identify where your market lies, then investing becomes easier because you are going with the trend instead of fighting it. These principles can also help you identify emerging markets as the cycle changes. 

Let's look at the cycle:

For now, we are only going to focus on the outer edge of the cycle. The primary factors that drive the real estate cycle are based on supply and demand. The supply is based on the amount of homes that are available for sale (new and existing homes) as well as the homes for rent. While the demand is based on the number of buyers/renters that there are for those properties.

In essence, economic factors drive the market. When you start to get to the top portion of the cycle "Sell High", it is because the supply begins to out pace the demands. Too many people have purchased existing properties, too many people are building new homes, and too many people have rentals that they have purchased. As a result, the cycle begins to change downward.

The masses hear about how prices have increased during the previous stages of increasing rents/prices and begin to build new homes. This stage of increasing construction is usually when many speculative investors build a new home to sell. What the speculators have not realized is that the market has changed. As a general rule of thumb, when the media is talking about a great investment opportunity, the real opportunity has come and gone.

Now that people have overbuilt, there are many more vacancies and properties for sale. Why?

Because the inventory of properties (supply) has outpaced the demand and the market turns down towards the "Buy Low" portion of the real estate cycle.

With vacancies increasing, landlords will do what they can to get a tenant in the home. Rent concessions will be commonplace as landlords offer free rent, lower deposits, or something else to entice tenants to come to them. Similar concessions will also be apparent with people selling their home.

As landlords/sellers begin offering these concessions, they are trying to offer something better than their competition. Rents/prices decline as a result. As inventory is not moving, declining construction  is the result. Builders do not want to build if they cannot sell the property.

High vacancy will also be present in the bottom portion of the real estate cycle. Again, there will be more inventory than there will be people to fill them.

A change will happen in the market where a little activity will begin to build. This is usually a result of new jobs coming into an area. People will move into the area for the jobs and demand will rise as a result. This helps the demand catch up to the supply.

When the supply and demand begin to even out, investors that track these figures will begin to accumulate properties. The investors that understand this concept can watch the real estate market trends and adjust their strategy accordingly. With demand increasing, there will be low vacancy because people will be buying/renting.

Increased demand with buying and renting will force rents/prices to increase. And the cycle will begin again, and again, and again...

There are several things that you want to learn from this:

1. Real estate always goes in cycles.
2. Every market is in a different cycle.
3. Financing is also directly tied to the cycle.
4. There are also investing strategies that work better in one part of the cycle than another.
5. Identify the key indicators to know what stage YOUR market is in.
6. Once you know your market, where your market is at in the cycle, and what techniques you should be focusing on, you will be able to create a real estate investing business plan customized to your area and your resources.

This is why it is so critical for you to become an educated investor. When you understand the real estate cycle and how it works, you will be better positioned to make a profit in the real estate market.

In order to begin investing, you must have a complete vision of what to do as an investor. To help you with this, we have created the real estate investing guide. Click here to get this free guide that will serve as a checklist to get your investing business started. 

Do you still have questions about investing in real estate? Visit our real estate frequently asked questions (FAQ) to get the most commonly asked questions answered.