Upswings and downturns: the real estate market works in cycles and if you can identify and decode each phase correctly, you’ll be able to maximise your return on real estate investments.
If you take a plunge during a downturn and invest in a property that you may not be able to afford during an upswing, the rewards can be remarkable. Similarly, knowledge of these phases and various investment metrics will guide your decision on when to sell your investment.
Phases of the real estate market
The real estate market has four phases: expansion, hypersupply, recession and expansion.
The expansion phase is typically seen when the economy is strong. Hand in hand with steady job growth and a stable economy, construction of new homes and developments increases and improved investor confidence inspires spending across the board. As a result of the strong economic conditions, lending criteria become less stringent, meaning that more people have access to home loan finance.
The hypersupply phase follows on from this, when the balanced supply becomes a surplus. Rental rates remain high during this phase, and this is a perfect opportunity to look for properties which have stable tenants in place with long-term leases. Since hypersupply precedes a recession, this is a time to approach any new property purchases with caution and to follow the advice of a trusted property practitioner.
A recession is characterised by high rental vacancy rates and an oversupply of available properties. Hand in hand with this comes lower rental costs and less new construction. In the broader economy, some small businesses will be forced to close their doors and unemployment rates will rise.
The recovery phase follows a recession and can be tough to identify. This is when demand starts to pick up after a recession, and the shift can be very subtle. Factors like an uptick in property viewings and fewer new properties coming on the market are typical indicators of an economic recovery. Having a strong relationship with a property practitioner can be a huge advantage here, as they will have access to the data that indicates the turning of the tide.
Important metrics to consider when investing in real estate
Evaluating the success of your property investments and analysis of the real estate cycles needs to be done in quantifiable terms. Here are some top metrics that investors should be keeping up to date with as part of their analysis of real estate cycles and arsenal of real estate investment tools.
- Your return on investment (ROI) is the profit you make after subtracting all your loan payments and other expenses pertaining to your property portfolio. If you’re just starting out, it can take some time to start seeing a positive ROI.
- Cash flow is your total monthly profit after all expenses and bills pertaining to your property portfolio have been paid.
- Your operating expense ratio measures your operating expenses and compares them to your operating income. Operating expenses include maintenance, property taxes, insurance, levies, property management fees and utilities.
- Capital expenditure (also called CapEx) refers to once-off expenses that go towards improving a property. This can include building, renovations or security upgrades, to list just a few examples.
As the old saying goes, timing is everything. By planning your real estate investments with the phases of the real estate market foremost in your mind, you can make smart decisions that will have a significant impact on your wealth. Whether you’re a first-time investor or a seasoned professional, the information and guidance you’ll get from the Seeff team will be invaluable. Contact us today for more information.
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