Real Estate Marketing
Real Estate Market Cycles
By
Oct 11, 2014, 12:07

There are four basic phases of a market cycle. Many people right now are in slower markets. Some are in emerging markets.

What you’re hearing on the news these days is how the real estate market is changing.

The good news is that slow markets are the best time to be multi-family properties. That’s because as homes become over-supplied, people stop buying them. They stay in apartment buildings, and that means occupancy increases.

We also know there are a lot of foreclosures taking place. When people get foreclose out of a property – and there’s a huge national wave of foreclosures going on now – those people go back into apartment living.

This is one of the best times to be in apartment buildings. The Wall Street Journal said, “Multifamily properties are fast becoming the real estate investment of choice for the savvy real estate investor”.

There are four different phases of a market cycle. They are:

1. Seller’s Market 1

2. Seller’s Market 2

3. Buyer’s Market 1

4. Buyer’s Market 2

You can think of these phases like a roller coaster going up and down. The important thing to know is that these phases never skip each other.

They never go from one phase and jump over another phase. Knowing that they’re cyclical predictable allows you to plan your strategies accordingly.

Let’s start with a Seller’s Market 1.

In a Seller’s Market 1, the supply of properties dwindles. Properties are selling fast. Unemployment is low. Prices of rents are rising and demand is at its highest point in a Seller’s Market 1.

That's very important. That's the key characteristic. It’s so key because it determines our strategy, which is to buy and hold long term, or to flip.

This is the only phase you can do both major strategies: buy and hold long term, or flip.

For example, I bought a three-family property in an early Seller's Market 1. I bought it for $224,000, sold it for $320,000 13 months later, and profited $86,000.

The important thing to note is I held it for 13 months. That’s because I wanted to pay less in tax. Any holding period over 12 months means you pay tax at a greatly reduced rate.

Think about this: I went to one closing and I bought one property. During the entire 13 months, those tenants paid that mortgage payment each month. During the entire 13 months, those tenants paid for maintenance on that property, and for a management company to care for them.

I bought the property. I handed it to the management company. That cash machine started depositing chunks of cash into my bank account so I could use my debit card month after month after month. On the 13th month, I sold that property and got a check for $86,000.

Think about it. How long does it take you to earn that amount of money? How much blood, sweat and tears goes into that? Isn’t this a better way?

One of the ways I get deals like that is with a “letter campaign.” They are the fastest way to attract motivated sellers. You're not finding them. They're finding you.

One of the important parts of the campaign is the actual list of names itself. If you don't have a good list then you're really not in business.

There are many different sources of lists. Here’s one: Go to where your landlords are evicting their tenants. That's either housing court, small claims court or district court. Get what's called the “summary process list”. That list is all of the landlords that are evicting tenants. Mail your letters to that list. It will give you a higher than average response. It can make you wealthy. You will get many landlords that are fed up because they have their tenants in eviction court and they just want to be out of the property. (They don’t know the right way to own apartments, using management companies.)

Let's go to Seller's Market Phase 2. This is the risky time in the market. It’s when the market starts to slow down after a period of emergence.

Properties start staying unsold on the market for longer. The number of properties on the market increases. Sellers are still getting inflated prices but it's taking longer to get there.

Business and job growth begin to slow. There are two things in this particular market I want you to note. Number one, the market's over-supplied with properties. Number two, business and job growth begin to slow. Your strategy in this market is to flip. You don't want to be holding anything long term here.

You flip and turn your properties into cash. Then you can hold onto that cash until your market corrects and stagnates – and cash is king in a down market. Or you take that money and move it into another emerging market. Then you’ll watch your money double, triple or even quadruple because it's riding the wave in that new emerging market.

People ask: "How long does an entire market cycle take?" Market cycles typically take anywhere from 8 to 15 years. Each phase within the market cycle lasts from 3 to 5 years.

Now let's go to a Buyer's Market Phase 1, the next stage of the cycle. In a Buyer's Market Phase 1, prices of rents will fall. Demand is falling. Unemployment is at its highest. Investment properties are at their lowest levels and in this particular phase you're only buying properties that have great cash flow.

There's one thing that will turn this market around and that's jobs. You should always be following jobs. Look to where people are migrating because that's where the markets are moving.

Once you realize that jobs are just starting to move into a city, well, now it's time to go in and start investing. You've got people that bought at the wrong time, and there haven't been a lot of buyers in the area for a while. The sellers are just looking to get out

When markets first start to emerge, you're a contrarian investor. You're buying when everybody else is selling. Then when suddenly the momentum starts to pick up, people recognize what's going on and lots of investors come into the market.

Let's talk about a Buyer's Market Phase 2. That's the millionaire maker. In this particular market, time on the market decreases. Job growth increases. Prices slowly increase and, more importantly, this is when rents have started to increase for the first time. This is when you buy and hold. In a very short period of time – three to five years – you will become a multimillionaire.

People ask: "Do I have to travel all around the United States?" You don't.

Here's what to do: First thing is determine where the jobs are going. When you do that, you're going to call that particular city, talk to their chamber of commerce, and find out what's going on in there, what jobs are coming in. The more white-collar jobs the better.

Then you make contacts over the phone. You then take some easy steps to negotiate that deal. You put it under contract using the fax machine.