Timing is everything, and this idiom is especially true when we’re talking about real estate investments and rental properties. When should you buy? When should you sell? Is this the right time to upgrade? Apartment buildings or single-family homes?
There’s a lot that goes into investment decision-making. If you’re wondering how the market cycles impact investor actions, we’re here to tell you what we know. Let’s take a look at the established market cycles that everyone acknowledges exist, and then consider what they mean for your investment goals and outcomes.
Identifying Common Market Cycles
When we talk about real estate market cycles, what we’re really talking about is the natural rhythm of property markets and how they fluctuate over time. Market cycles feel the impacts of and respond to economic factors such as inflation, interest rates, employment, supply and demand, and consumer confidence.
- Recovery Cycle
The recovery market cycle is often on the rebound from a downturn. Investors can expect lower vacancies, higher demand, and perhaps additional construction that’s providing new housing to meet that rising demand.
Typically, property prices are lower during this cycle, making it a great time to acquire new investments, particularly those that may be undervalued at this moment. As recovery begins to spread and take hold, those prices will rise.
There’s still going to be a bit of market uncertainty and everything will feel cautious during a recovery cycle. However, due diligence will help investors make the best decisions about their rental properties.
- Expansion Cycle
In an expansion market cycle, there’s going to be a lot of demand. Investors will find there’s so much demand, in fact, that supply cannot keep up. This will lead to rising rents, higher property values, and a lot of new construction. Think about what the market looked like right after the worst of the pandemic. Everyone was buying, selling, renovating, and rents were rising dramatically.
This is great for investors because property values are rising and cash flow is usually pretty strong. With so much demand from both buyers and renters, you’re really feeling like you cannot lose during an expansion cycle. But remember that overpaying for investment properties or missing the peak of the market might come with steep costs when the cycle steps back a bit.
- Hyper-Supply Cycle
In a hyper-supply cycle, we start to see supply exceeding what is needed. The demand is not matching the number of homes that are coming onto the market, and that’s creating a problem for sellers and investors who are trying to rent out a property in a market that’s saturated with similar properties. Vacancy rates tend to rise, and the growth in the rental market slows.
There is still value to be found. During this type of market, we caution investors to be careful, but also to consider those distressed properties that might be easy to acquire and inexpensive to fix up. This is also a good time to focus on making your existing investments more competitive. Invest in upgrades and improvements. Focus on tenant retention.
- Recession
There’s also the recession market, which is no one’s favorite. At this point, the market is seriously contracting. Property values drop, sometimes significantly, and vacancy rates go high. There’s not going to be a lot of new construction, and selling a home is almost impossible.
This is when investors want to buy new properties, especially if they have the necessary capital. You’ll be able to get a great deal, and there won’t be much competition. This is also the market in which you want to add value to your existing assets. You’ll boost your long-term returns even if you aren’t seeing any immediate income right now.
The risk here is that falling or stagnant rents and higher vacancies could impede cash flow quite a bit. You don’t want to be in a position where you’re over-leveraged.
How Investors Know Where We Are Cycle-Wise
By staying on top of economic indicators and other market trends, you can typically gauge market cycles. Talk to other investors. Follow the thought leaders. Here’s what you’re looking for:
- Occupancy and Vacancy Rates. Check out your own portfolio and look at the market as a whole. Those rising vacancies may signal a transition to hyper-supply or recession. If you’re renting out homes easily and keeping tenants without a lot of effort, this may indicate recovery or expansion cycles.
- Rental Values. Rising rents would indicate expansion. As rents drop, you know we’re looking at a hyper-supply or recession market cycle.
- New Construction. Are brand new gated communities on the rise? Has the construction stopped on the high-rises that were promised? These are big clues into what type of market cycle we’re working with.
Look at economic trends, too. Employment rates can tell you where real estate might be headed, and so can consumer confidence. Higher property values will typically come with market peaks.
Balancing Your Investment Strategy and Managing Risk
When it comes to making decisions about your real estate and rentals, everything starts with your investment goals. These market cycles are important and impactful, and they often provide a framework against which you can make decisions. However, it’s important for investors to stay flexible and aware. Local rental markets are nuanced, and just because there seems to be one type of market cycle taking over the country doesn’t mean your own investments are going to be impacted in the same way.
Perfect timing in the real estate market is nearly impossible. There’s no secret formula. No magic wand. As a real estate investor, especially in California, you’ll want to focus on managing your risk and maintaining a strategy that allows for long-term growth and wealth accumulation.
Diversification will help you get through any market cycle successfully. When you’re investing across different types of asset classes, locations, and property types, there’s less to lose because of a specific cycle in the market. Due diligence is always going to be important, too. Conduct a thorough market analysis before you buy or sell or make any real estate moves.
Don’t forget to keep some cash on hand. Maintain liquidity reserves to capitalize on opportunities during downturns or navigate cash flow challenges.
We’d be happy to provide some advice that’s more customized to your unique investment portfolio. Contact us at Action Properties to talk about market cycles and planning.
