With most things in the life, the best advice someone can give is to take a step back and look at the bigger picture. But when you’re evaluating real estate markets for investment, I’ve found that you have to get into the nitty-gritty details.
By extrapolating assumptions from your local market to another, for example, you’re at risk of oversimplifying the playing field and overlooking potential deals that can either generate substantial cash flow or long-term appreciation. My colleague Kimberly Yeh often reminds us that different markets can be in different phases simultaneously. Think about it like the weather: Just because it’s a balmy day in Los Angeles doesn’t mean that there can’t be snow in New York at the same time. And even more granularly, there are submarkets within markets — just like how in California, it can be 100 degrees in Concord when only 25 miles away, it’s 54 degrees in San Francisco.
Knowing real estate markets intimately and being able to correctly identify the phase each market is currently in, is the key to recognizing what is a good investment versus what to pass on.
There are four phases in the cycle of real estate, and they look like this:
Phase 1: Recovery
Recovery is typically the most difficult phase to identify. When a real estate market is recovering from a recession, demand can still be slow. Rental growth can seem flat and new builds are few and far between, so a lot of the time, the market can still look like it is in a slump. However, to those closely monitoring the data, upward trends in property viewings, the reduced pace of previous decline or a break in the downward trend are all signs that the market is coming out of the downturn.
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