Like the green light on a traffic signal understanding the right set of circumstances in the real estate market is like a flashing neon sign saying buy or sell hold now. Perhaps one of the greatest advantages of real estate investing is that unlike stocks, bonds, currency trading the real estate market is relatively slow moving and generally easy to time. Despite its slow moving quality, however, many real estate professionals are unaware of how to properly gauge the market. There is a popular saying in real estate that it is time to sell when real estate agents begin buying investment property.
In general though there are a few basic indicators of when it's time to buy, sell, or hold your investment property. A good indicator of when you should think about buying property would be an increase in job growth or something that might lead to an increase in job growth like the opening of a new factory. Also bear in mind that the same situation might affect different property types in different ways. For instance an increase in property buyers in a market with few homes available will mean increasing prices for undeveloped land.
On the other hand overbuilding or the presence of too many new homes in an area might drive values down. Even economic factors, such as an increase in foreclosures, might be a warning not to buy property or at least to be more cautious. There are always exceptions, but you should always have a valid reason for going against the grain of the current real estate market.
Other indicators to watch out for include a rise or fall in interest rates which affect the price of money and therefore indirectly affect how much property a potential buyer could afford. The presence of a high number of vacancies or many landlord concessions, freebies like a new toaster or a television set with the rants or purchase of the property could also indicate a declining market. Even a quick glance at the local newspaper can give you a good idea of where the market stands, look at the classifieds section for the number of foreclosures and the number of jobs available, check the business section, and many times even the front page will have news relevant to the property investor. Generally speaking the real estate market is always in one of the following phases, when you understand what phase it's in now and which one it was in before you can predict which phase it will be in much more accurately.
As the name suggest this phase is defined by increases, increased population, increased jobs, increased wages, and of course increased property values and rental rates. Easily the most exciting phase and arguably the most fun the danger of this phase is that this is one many novice real estate investors dive into the market. While it may seem like the market can go nowhere but up, by avoiding the temptation to over borrow you will be in a position to take advantage of some great deals in the Recession and Bottom phases.
If your exit strategy is to sell, this is the perfect time for it. This phase is commonly referred to as a seller's market. It's marked by an almost frenzied bidding war for available properties and a glut of new building projects on every corner. One of the best advantages of sailing during this phase is that it is marked by extremely short listing times.
The contraction phase is the market's reaction to him abundance of overpriced and often overbuilt number of properties often exceeding the number of actual buyers. While this phase is often marked by an increase in inflation, the inflation itself is actually a response to the contracting market although it may also be a contributing factor. Many property owners during this phase typically express a feeling of denial causing prices to stay at their over inflated level often sending buyers elsewhere further increasing the supply of homes available for sale and decreasing the number of interested buyers.
By this point many properties have been on the market for a very long time. While property values plummet, rent rates also tend to decline as landlords are forced to compete with each other for tenants in order to keep their properties afloat. This is usually the phase where the greatest numbers of foreclosures become available.
Due to the large number of foreclosures and owners at risk of foreclosure who are often willing to offer assistance, more generous terms, or outright owner financing, then they would be in an expanding market, this is easily the best way is to buy property. This is also the phase that scares away most new investors due to the dire headlines and rising interest and inflation rates.
This phase is essentially a return to normalcy, while interest and inflation may still be somewhat higher than during the expansion phase they may have begun to fall at least a little. Usually at this phase all of the excess properties from the Expansion and Peak phases have been purchased or absorbed back into the market and there may be an influx of new buyers.
While it is important to be able to recognize the current trends and predict what will most likely be the next phase of the real estate market identifying the phases themselves does not serve as a hard and fast rule for whether to buy or sell. For one thing there may be and usually is a difference between the national and local market for every national market in the Bottom phase there is always an area that is in the Peak or even Expansion phase. Ultimately the best indicator of whether to buy or sell a property is what your analysis of that property reveals, and how it fits into your overall real estate portfolio.