Invest like a pro by understanding the real estate cycles
I work every day with investors and I often hear these words:
“I wish I had…”
“I wish had bought two years ago.”
“I wish I had bought more properties.”
“I wish I had sold those properties then I would have made it big-time.”
What these investors are saying is that buying or selling at the right time is more skill than luck.
Replace the crystal ball with basic knowledge and you win
There is comfort in knowing that you are definitely buying or selling at the best possible time.
Seasoned investors understand that you are well into the best time to buy before you even know it. Homebuyers buy with emotion. An investor must remove the emotion and buy with knowledge and logic.
Here is how we invest now
We buy when indicators suggest the market is ripe for buying. We do not wait until we see everyone else buying. Following the thundering herd simply suggests the market is in full swing and we may have lost some of the best opportunities that come to those who get in first.
Instead, we are strategic in our buying. In the previous post we illustrated the first cycle, which is the buyers cycle. The market position in this first buyers cycle suggests an optimum window for low prices. Our strategy for buying was to get in early and only factor in strong cash flow as an investment decision. This is because at this point we do not have absolute certainty prices are at rock bottom. We know we are close, but until we are certain prices will not drop anymore we stick to pure cash flow. Our objective is to ride the economic wave of prosperity with assurances we can obtain great cash flow for the longest, most sustainable time possible.
Transitioning into Cycle 2 – The wealth market
The recent recession had an interesting impact on these real estate cycles. It pulled the better share of the country back to the beginning of the cycle phases. While the country typically has its different real estate markets hovering in one of all 4 of the market cycles, they have been uniquely positioned back to the first cycle. Indeed the past couple of years have been prime pickings for the cash flow buyer. We have enjoyed some hefty cash flows. While some markets in the U.S have just recently started their housing recovery and are in the cycle 1 buyers market, others have moved on to the second cycle, the wealth market.
We are living in a great time where we can capitalize on what may go down in history as one of the best wealth building real estate markets in history. This is the market in which wealth is created; it is pretty common knowledge that better than 90% of today’s millionaires made their wealth in real estate. Much of this is generated in this wealth market.
Buyers are looking to buy in this market cycle because it is the surest way to generate both cash flow and equity growth. In this market cycle cash flows will be good and sustainable and the equity growth is at it optimum. When real estate values climb, wealth is created. When buying in the early stages of this cycle, an investor can expect 3 to 5 years of solid equity growth in the property.
Distinction of the Cycle 2 wealth market
- Housing supply is being absorbed
- The market time for housing is decreasing
- There is more rehabbing going on
- Rental prices are on the rise
- Foreclosures are on the decline
- Sales activity is increased due to the lower prices
- Unemployment is falling
- Consumer confidence is on the rise
- Building is on the rise
Strategy for buying in this market
- This is the cycle in which wealth is created, best possible time to buy
- Buy anything you can afford to buy but stick to your buying goals
- Anything that matches your criteria for buying should be a safe purchase, as prices will rise from here
- Today’s prices are tomorrow’s bargain, so even market prices may be a good investment
- Cash flows will continue to increase as prices continue to rise
What do buyers who purchased during the cycle 1 buyers market do now?
Buyers who have bought property during the first cycle got in early and can totally capitalize on increasing rents and increasing equity during the entire cycle. Because these investors got in early, they bought cheap. Perhaps they had to pay cash as loans were scarce. In Cycle 2 loans tend to be more readily available and now you can put mortgages on investments and purchase some more. Buying as much as possible now will be the best hedge against the impending inflation.
These first two posts discussed the best times to buy. The next post will discuss the hold and sell cycles.
In case you missed the first post in this series last week, here is a link to it.
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