The Market Cycle Miracle - 7 Essential Indicators

by : Justin Anderson

in this business used to tell me that was absolutely the best investment vehicle you could ask for. He said this not only because of the ability to leverage into Real Estate Assets, but also because Real Estate prevents us from making quick decisions and liquidating assets just to solve a short term problem. In other words, once you were committed to a deal, there was no quick fix to get out of it like a stock.

For many of us, this benefit of investing in Real Estate has reared its head as somewhat of a curse over the course of the last 12 months. Many of us are sitting on dead beat properties that we wished we have never seen. The challenge now is…what can you do with those assets to turn those lemons into lemonade? The good news is…the market will help you over time.

You see, . While it may seem like the worst of times now, the market is not far from turning and creating another Real Estate Gold Rush. To help you identify the changing of the winds in the market, there are 7 essential indicators to watch.

Job Growth – this is the strongest trend by far to watch. If there is an increase in job growth, demand will increase for the available product. This trend usually will increase the NOI (net operating income) on investment properties, and thereby increase the property value.

Migration – In considering migration, there are several core areas to address to properly evaluate your market. Is the migration coming in, or going out? Is the demographic young or old? What is the income level? What is the education level? What are the buying needs and desires of this demographic? If the overall trend is low income, this will create an increase in rental demand. If the trend is toward higher income levels, this will create an increase in demand for single family residences.

Path of Progress – Where is the growth happening in your area? The best investments you will ever make will be in front of the path of progress. This does not necessarily mean on the outskirts of town. In many cities there is a strong trend towards urban revitalization in the downtown areas. The key here is to get in far enough ahead of the path of progress to profit from it.

New Construction – While the past four indicators have been driven by demand, new construction is driven by supply. When evaluating a market with a high supply of new construction inventory on the market, NOI is generally lower on investment properties. Conversely, a low supply of new construction inventory will generally lead to a higher NOI in the given market. This one indicator is often the easiest to identify and predict when the next market cycle shift is on the horizon.

Inflation – Often, inflation can be a Real Estate Investors friend. Generally when inflation is up, rents follow. The trick to manage as an investor is to make sure your expenses stay in check and rise at a slower pace than your rents as inflation pushes everything up. In other words, during a period of inflation, your goal as a Real Estate Investor is to have your NOI exceed the rate of inflation.

Interest Rates – Interest rates are the most instrumental indicator for a Real Estate Investor to understand. Buying an asset at the wrong time with a favorable interest rate can still work out to be okay over the long term…but buying at the right time with poor financing terms can be devastating for an investor. Usually when we see low interest rates, property values are higher and there are more single family purchasers in the marketplace. As interest rates rise, property values decline and we see an increase in renters in the market.

Flow of Funds – If you look at money in its broadest scope, there is a finite amount in the world. Depending on what is happening in the world, this money flows into and out of a wide array of investments and resources. The question is…how does this affect Real Estate? Usually when funds are flowing into the stock market, they are flowing out of Real Estate, and vice versa. The key here is to avoid the herd mentality. So…where should you be investing today?

If you keep a close eye on these indicators, and look at historical data, you will see that we are near the bottom of the market. What does that mean for us as investors? As soon as the market definitively turns…it is all up hill! While the herds are running for the hills to get away from Real Estate, the mini-Warren Buffets in each of us should be gobbling up property as fast as we can get our hands on it! BUT…not without a proper amount of due diligence and understanding of the market you are about to invest in. Don’t run blindly into an investment. Study it carefully, and select it wisely. If you approach this from the right angle, it will not take many investments to fund a retirement that is far beyond your wildest dreams! Now take action!