Real estate investors face a multitude of challenges when building a profitable real estate portfolio. The ability to research, finance, and implement an effective strategy are integral in the process of building a strong portfolio. However, an important factor that is sometimes overlooked is the actual timing of the purchase or sale of the property, which can often have substantial impact on the return and profits of your overall real estate portfolio.
The ability to understand and determine when to purchase, liquidate, raise or lower rents can be done more effectively by understanding the real estate cycle. Far too often people tend to follow the crowds and buy yesterday’s deals. If you can accurately time a rising market, you can benefit from higher rental income due to higher occupancy, which results in upward pressure on property values, and, conversely, liquidate when the opposite is evident.
There are typically 4 stages to a real estate cycle
The First Stage is the “Top of the Cycle/Market”. In this stage the demand for housing properties is high, which results in higher housing prices and an increased amount of housing starts (as developers try to increase the inventory to meet the high demand.). Vacancy rates will also dip lower as properties fill up quickly due to the high demand. The key indicators to look for in this stage are the increased housing sales on a month-to-month basis, the decreased duration it takes for an MLS property listing to get sold, and whether multiple offers on properties are becoming common, which drives property prices up even more.
What an investor should do:
- Raise rents and renew leases
- Liquidating one or more properties
- Buy-Fix-Sell strategies
- Sell later in the cycle
The Second Stage is the “Down Market”. This downward trend typically follows after the top of the cycle. A downward trend occurs when the construction of housing units exceeds the demand and/or prices hit maximum affordability. Once the market hits this stage, the prices begin leveling off, demand slows down, and public optimism becomes uncertain. With excess inventory in the market, sales also decrease, leading to the average “days on the market” of each property to increase. Lastly, vacancy rates increase as tenants have more choice of units and landlords begin to offer discounted rents or move-in specials.
What an investor should do:
- Sell fast and don’t hold out for top dollar
- Decrease rents or offer incentives to attract or keep tenants
- Many landlords will have higher vacancies and be highly negotiable on price
- If you don’t sell now, hold properties until market corrects
The Third Stage is the “Bottom Market”. Public perception of the economy is negative, unemployment is high, and the bank’s lending criteria become increasingly stringent. As a result of this, demand slows down leading to housing prices declining and foreclosures or power of sales becoming more popular as economic pessimism prevails.
What an investor should do:
- Buy distressed properties
- Holding and waiting for the “Up” market indicators (if you are looking to sell)
- Provide furnished rentals to keep your unit rents up
- Approach builders who have unsold inventory and purchase at a discount or with a purchase option
The Fourth Stage is the “Up Market”. During stage, housing prices have bottomed out and are more or less stabilized. Market prices will start to increase based on the recovery of the local economy, thus increasing demand. With less property available, there are less MLS listings and average “days on the market” decrease. From a rental perspective, this creates a diminishing supply of units, which triggers lower vacancy rates and higher rents. Banks will start to become more lenient in their lending practices and the general public opinion of the economy becomes more positive.
What an Investor should do:
- Buy property from other investors who still haven’t realized a new cycle has begun in order to get bargain prices
- Increase rents
- Buy, Fix and sell
- Refinance existing properties to purchase more properties
- Sell, if you move the equity into a more valuable property
Taking the time to truly understand the real estate market can pay big dividends to any real estate investor, as they can better anticipate the up’s and down’s of the market and act accordingly.
Louis Tam is the online marketing coordinator for Vision Investment Properties. Vision is a real estate investment company that provides safe, secure, turnkey investment properties. Their current projects are focused on multi-family residential real estate centered in the heart of Alberta’s booming economy.