What You Should Know About Real Estate Investment Cycles

Do not dabble into “timing” the market. From my wealth of experience in real estate investment, “timing” the market is too risky a venture for any real estate investor. To avoid this practice, you need to have a sound knowledge of the market that you are in, and you also need to know the stage at which the market is as at the time you are dealing. I hope you heed to this advice, it could mean the difference between the shore and the deep blue sea.

This topic is crucial to every real estate investor. In this piece, w are going to take a concise but professional look at the various real estate investment cycles. Regardless, I will never fail to emphasize that every real estate investor is duty-bound to study and be abreast of the real estate investment cycles as this is the blueprint that shapes investment decisions.

Let me start by saying that the real estate investment cycles consists of four different phases. Two of these phases (recession and recovery) are below equilibrium while the other two (expansion and contraction) are above equilibrium. Moreover, for every cycle, there are things to do in order to effectively carry out successful real estate investments.

A cycle consist of recession, recovery, expansion and the fourth one, contraction. Now, let us take a closer look at each of them.

 

RECESSION STAGE

This is when there is a nose-diving below the equilibrium of real estate investment activities. A recession is characterized by gross liquidity-a period when cash dries up in the socioeconomic system. It is also a period when mortgage seems to have gone out of the window and nobody seems to be buying properties…everybody rather wants to sell. Usually, as in any economic climate, the forces of “demand” and “supply”, are the ones that play out all these stages.

For example, during a recession, supply not just outweighs demand but continues to increase without any significant rise in demand. This is so because when people do not have cash, or access to any form of funding they cannot have effective demand. Also, during a recession, people may actually want to buy, they may even wish to buy, in fact, they might seriously be planning to buy, but the truth is that they will not be able to pay for the property because there is no money in circulation. This cash drought makes it extremely hard for property to be sold and as a result of this; properties languish for what seems an eternity in the market.

There are different strategies to adopt for these various real estate investment cycles. However, each strategy adopted emanates from a thorough study of each stage. For example, in a recession, you are better off not selling your properties (unless you are under intense pressure). Albeit there is an exception to this: if you have a judgment call to make, let’s assume you are selling at the price the market will be able to offer regardless of whether the price is profitable, once you can avoid a state of absolute liquidity or bankruptcy, YOU CAN SELL once you get a buyer.

Having said that, bear in mind that it is during recession investors with purchasing power stand to make a lot of money…Why? Sellers are under pressure, hence they dispose of their properties for pittance and the shrewd real estate investor exploits this situation by picking properties in their numbers!

When you buy such properties, to hedge against funds requirement, do not put these properties back in the market immediately as this hardly makes business sense. Your best course of action would be “To Let” for a period, especially for the period of recession to be over. When the coast is clear, you can begin to sell because then you can expect to make good margins.

My sincere advice to anybody that can afford not to sell during a recession is NOT TO SELL. A period of recession is not the best time for you to sell, hold on until the recession blows over. Except you just cannot hold on any longer as earlier explained.

RECOVERY STAGE

This is the next stage after the recession stage. At this stage, things begin to get a little better.

Here, the level of demand begins to pick up steam such that the gap between demand and supply starts to get reduced. Properties begin to sell, although they still take time to happen but increasingly they begin to leave the market faster and at some margin. It is easier to record sales during this period than in the recession stage. It is a stage on the way to the positive side and though still under equilibrium, the market is headed for expansion.

Bottom line; Always remember that during a recovery stage you can begin to buy, sell and rent property out over a short period. Sales of properties also steps up at the later stages of a recovery.

We shall be looking at the next two stages: EXPANSION and CONTRACTION as well as the strategies to adopt to stay afloat in your real estate investment cycle in the concluding part of this piece.

Debo Adejana
MD/CEO Realty Point Ltd