Investing in real estate has its ups and downs. Much like a roller coaster, if you are on the ride it can make you queasy, but if you are just a spectator, you can see the bigger picture. If you look at the real estate market cycles in the same way, you will know what to expect, how to plan for it and how to profit from it.
In this article, we give you the tools to put you ahead of the game. We examine each of the six phases of a market cycle and the best acquisition strategies to employ given any market conditions.
Regardless of whether we are in an upswing or a downswing, it is important to always be building your network of potential lenders as traditional funding sources become more limited during a declining market.
Stage 1: Early Downturn
We start out immediately after the peak in what is called the early downturn. Home prices have already reached their maximum levels and buyers are more selective and more price sensitive. This leads to an increase in the days on market and growing inventory of houses; both indicators of an approaching decline. Lenders become more conservative and cash sources dry up.
For investors, this is the time to use someone else’s pre-existing loan to purchase properties. Using the “subject to” strategy is a great way to acquire properties with little to no cash. You are buying the house subject to the existing lien staying in place, and you make payments on the homeowner’s behalf.
Turning this into profit means that you can sell these properties with a wraparound mortgage to create the cashflow necessary to operate your investment business.
Stage 2: Full Downturn
In the second phase, the full downturn, house prices continue to fall, and people are afraid to buy houses. This creates an ever-increasing supply, which leads to lower prices and so on. As this “fear” grips buyers, the lenders become increasingly more cautious and withhold funding.
As investors, you can leverage these price drops by using the short sale strategy. A short sale is essentially negotiating with the bank to accept a short payoff of an existing loan. For example, a property may have a loan for $200,000, but only be worth $130,000 due to the price drops. Short sale acquisitions create wealth by capturing the future appreciation and existing equity.
Because traditional funding sources will be limited, you may need to use hard money or private lenders to finance these deals. This is why it is important to always expand your lending network.
Stage 3: Bottom
By now, we have hit the bottom, and prices are so low that buyers are willing to re-enter the market. This is when real property assets will be at their lowest price and the perfect time to create the most wealth as an investor.
Acquire properties through short sale and subject to strategies. Look for neighborhoods with gentrification or historic appreciation. This is where you start building a portfolio focused on long-term wealth rather than transactional income.
By getting properties in this phase, you are paying the lower price for an asset with the most potential of increased value. If you hold these properties as rentals, you can sell them when the market recovers and maximize your gains from the property appreciation.
Stage 4: Early Recovery
In phase 4, early recover, prices remain very low, but the values start to increase, and lending starts opening back up. This is still a great time to buy rentals as well as using the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat).
Even though you can get great deals during this time, each property must have a positive cash flow to stay in your portfolio and perform.
Stage 5: Early Stable
As everything stabilizes, prices increase and the inventory of houses and days on market shrink. You start to see a greater volume of transactions as everyone wants to buy a house and lenders are now more than willing to lend.
This is the time to increase your cash flow through quicker transactions such as wholesale projects and quick rehabs.
Stage 6: Late Stable
The last phase, late stable, continues to be a seller’s market, which is expressed through the decreasing days on market and dwindling inventory all while prices steadily increase. Transactional deals become harder to find as wholesale and rehab profit margins shrink.
Because money is abundant, and people will buy a portfolio with a minimum return, this is time to do turn-key projects.
By understanding these cycles, employing these strategies and building your network, you are prepared to capitalize on the capricious whims of this industry.
*Disclaimer: This information is not intended to serve as legal or financial advice. It is designed to provide general information on the subject matter. Consult with your own attorney and/or advisor(s) regarding your specific situation.
