If you just realize and understand that, by design, the markets cycle with great steadiness, timeliness & repetition you’ll be rewarded with great financial windfall 💰!
The Real Estate market is your best friend but she speaks her own unique language! Learn to speak Real Estate and you will understand not only how to clearly positioning the market, but also how to work the right strategy to capitalize any market stage instead of going against the grain.
Before you can understand the different approaches we are about to dive into, we urge you to first grasp the basics by reading:
Why?
Why is it essential, a matter of rich or broke, that we understand the market? Well it’s because if you want to succeed you will have to go against what is perceived as the psychological emotional effects of “unknowing” traders. All markets go through different cycles that bring up different emotions to those engaging. Because most don’t have a strategic plan to navigate on, they fall victim to their emotions of fear and greed. Meaning they don’t know when to get in (buy low) or get out (sell high).
The first phase as the market cycles is “optimism”. Buyers feel comfortable as the market continues to rise optimism turns into excitement the signals are mistakenly seen as a buying opportunity. It seems like nothing can go wrong, the reality is that this is the point of maximum risk in the cycle (top inflection point). The innocent blinded by greed & expecting more profits buy in “euphoria” from the experienced, calculated selling for maximum gains, right before a recession market stage. This is called “the distribution” phase where institutional investors gain massive liquidity by unloading as there are big numbers of willing (aka uniformed) buyers. The downfall of the market kicks off the “anxiety’ phase of the cycle. The “denial” phase begins, as the market continues plumbing and the losses rise, denial turns into fear and desperation. Ultimately panic sets in, as the losses are reaching breaking point. This is called the “capitulation” right at the point of maximum financial opportunity as the experienced institutions start buying, at rock bottom prices from the desperate, for the recovery period that is coming.
This is how the experienced profit from the oblivious. This is when big money is made over and over again. Steadily, timely & repeatedly, in any market. Capiche?!🧐
Best Strategy To Profit
To best capitalize the stage of the real estate cycle you’re in, you must understand and implement different real estate strategies. Most strategies will partially work at any time during the cycle, but some are more effective during specific stages. To optimize your business you need to use the strategy that’s most effective and profitable on the current market.
We will first dive deep into the different combinations of Stages, Profiles and the best Strategies to implement during each stage 😵. Don't panic we wrap it all up with an easy quick reference sheet 🤩.
Profiles
Core, Core Plus, Value Add and Opportunistic are terms used to describe the risk and return profile of a real estate investment. They range from conservative to aggressive and are defined by the physical aspects of the property and the amount of debt used.
Core: means ‘income’ in the stock market. Core property investors are conservative investors looking to generate stable income with very low risk. These properties generate stable and consistent cash flow and their values tend to be steady. Core investors expect between 7% and 10% returns through cash flow from the property rather than appreciation and use less than 40% debt to capitalize a transaction.
Core+: ‘Core Plus’ means ‘growth and income’ in the stock market and a low to moderate risk profile. Core plus property owners typically have the ability to increase cash flows through light property improvements, management efficiencies or by increasing the quality of the tenants. Similar to core properties, these properties tend to be of high-quality and well-occupied and Investors use between 40% and 60% leverage and expect to achieve returns between 9% and 13% annually.
Value Add means ‘growth’ in the stock market and is moderate to high risk. These properties have little to no cash flow at acquisition but can produce a great amount of cash flow once value has been added. These properties often times have occupancy issues, management problems, deferred maintenance or a combination of all of the above. Value add investors tend to use between 60% and 75% leverage to generate annual returns between 13% and 18%.
Opportunistic means growth like ‘value add’, but it is even riskier like ground up developments, acquiring empty buildings and land development. No cash flow at acquisition but produce high amount of cash flow after value add. Opportunistic investors tend to use leverage of 70% or more depending on how much debt they can acquire. For land development, banks simply won’t lend more than 50%. Opportunistic investors expect to generate annual returns in excess of 20%.
Stage – Profile - Strategy
1. Expansion Stage
The market is on the upswing, there is growing demand for space. GDP growth is back to normal, job growth is strong. Occupancy rates growing, rents are on the rise, new construction is justified.
Profile
Opportunistic: The ideal time to develop or redevelop properties, because of the current demand for space and leasing momentum.
Core-Plus: Investors who seek lower levels of risk can acquire Core-Plus properties knowing they will enjoy high rates of tenant retention with continued rent growth.
Value-add: The expansion stage is prime time for value-add investing. Sophisticated investors can acquire properties with deficiencies at high discounts. Once value is added, the property can be valued at full current market value. Meaning big cash out with a refinance or sale.
Strategy
Flipping; Flipping is the process of buying property below market value, adding value through renovation and/or repair, and then reselling it for a profit at or above market value.
Wholesaling is the process of finding and/or negotiating the purchase of property below market value and immediately reselling the contract to another investor for a profit. The best opportunities for wholesaling exist when deals are exceptionally difficult to find.
Development/ New Construction involves purchasing land, improving it and either selling it or holding it to generate consistent cash flow. New construction is the process of taking developed land and building on it, or taking a previously developed piece of land, tearing down an existing home and building on the lot.
Land Banking - Selling buying land (during recession!!) hold, sell for maximum profits during expansion (now) to other investors, developers, homeowners or local government. Also great times for Land Wholesaling.
Commercial investors invest in various types of real estate other than small residential properties (multi-family, retail space, mobile homes, office space, warehouse space, self-storage). Commercial investing relies on income from regular lease payments, just like in the Residential buy-and-hold strategy. While commercial investors can often get the best deals during a recession, it’s usually the most difficult for them to get the money they need to buy during this stage. Because of that, it’s often better to implement a commercial strategy during the Recovery and Expansion phases, when lending requirements are most favorable. Self-storage rises during recession.
2. Peak or Hyper Supply Stage
Oversupply caused by overbuilding and a pullback in demand caused by economic shifts. Hypersupply is marked by rising vacancies, rent growth leading to declining profits on cash flowing assets. Selling comes to a decline because potential homeowners, other investors lose their jobs and banks stop borrowing capital.
Profile
Core: Many investors may sell performing assets to maximize their exit strategies and liquidity before the decline in property values kicks in. Liquidity is key when positioning yourself for optimal purchasing power during the recession when prices dive, rates sky rocket and capital lending is almost impossible. The best opportunities for wealth creation.
Opportunistic: At this stage in the cycle an opportunistic strategy may be more of a pricing strategy applied to an underperforming asset as an optimal exit strategy. The uninformed will see the “bargain price” as an opportunity to make quick “equity build in” profits.
Strategy
Flipping: with uttermost caution. Only lipstick or cosmetic fix and quick resell (<=2 months), fit for broad audience, no multiple projects, tight calculations, only high margins (>20%) to account for possible value decline, avoid leverage (<=75% Loan To Value) & holding costs. Have multiple exit strategies in place. Avoid Class A, B aka luxury properties.
Private Lending: only short term and high rates to offset potential market correction. Only lend to Buy & Hold Landlords who are able to sit through the upcoming Recession stage with long term investments and therefore keep paying their loans. No Flippers because of the volatility in the market. Flippers who are in to deep in depth might not be able to sell and repay their loans, the collateral won't be that attractive either during an upcoming Recession.
Lease-Buy Option: give less qualified buyers the opportunity to get into a property (with no mortgage), make payments and eventually purchase the property. Lock-in for a high priced property during this stage to offset your holding costs during recession. Lease tenants, because of perceived ownership, are less likely to leave to lower priced rentals during Recession.
3. Recession Stage
Excessive oversupply by panic in the economy, producing high vacancies, rent growth is either negative or at levels that are below the rate of inflation. Rent reductions and concessions are common to entice and retain tenants. Property values hit rock bottom, loan rates skyrocket, capital is scarce, unemployment rises and wages spiral down. The recession is always shorter than the recovery and expansion stage. Those who liquidate during the peak have positioned themselves for success during the recession.
Profile
Opportunistic: This is an ideal time to buy distressed assets at steep discounts such as special servicers and lender foreclosures, real estate owned aka “REOs”. The focus is patience for the recovery stage to reposition (aka refinance) the asset during the recovery or early expansion stage.
Strategy
Residential Buy & Hold: involves purchasing property and renting or leasing it to a tenant who pays for the use of that property. The rent paid covers all costs associated with holding the property. Plus, profit aka cash flow. Buy-and-hold investors are only interested in low purchase prices to maximize their earnings, they don’t need to sell. They hold long term for the rental income each month.
Commercial Buy & Hold with private money: capital loans are not available. If liquidated well during Peak that capital can be used to acquire properties at rock bottom prices and refinanced during Recovery/Expansion stages when loans are easy to get and rates are low.
Commercial Self-storage rises during recession because of many foreclosures, relocations and downsizing.
Land Banking Buying as mentioned during the Expansion Stage, the Recession stage is the best time to load on land. Hold and Sell during Expansion when builders and developers start coming back to the market, and most hungry for new land, because of the ease of loans and lower rates.
Private Money Lenders Lending can work in any part of the market cycle, especially for those lenders who can underwrite a wide variety of deals. Many successful lenders will diversify their portfolio and lend to different types of investors such as flippers, builders, buy-and-hold landlords and commercial investors so they can lend regardless of which strategies are working in the current market. Demand impacts lender profits and interest rates impact lender margins. When interest rates are high, investor demand for money is high, the supply of loans is low, lending profits and margins will be higher than when interest rates are low and cheap money is readily available. During the Recessionary and Recovery stages, when there aren’t many professional lenders working and private lenders are scared to deploy their cash, lenders may be able to generate 10% or more above bank rates, plus several “points” upfront, on their loans. This is the prime time for wealth accumulation with private money lending.
Notes: A note is simply a promise to repay a loan (the mortgage agreement you sign is a note) and there are many different strategies around buying, selling and holding notes. Notes are often a great strategy during the economic phases where other strategies are less effective.
4. Recovery Stage
The recovery stage is the bottom of the "trough". A recovery is often fueled by government intervention in the form of lowered interest rates shortening the impact and duration of the recession and speeding up the recovery due to easier access to cheap financing. With increasing demand and lower investment costs, companies expand their businesses. They hire more people, rent more office space and buy more equipment. The adding of jobs drives residential demand, driving up rents and property values. Home builders slowly start to build again.
Profile
Opportunistic properties tend to need significant rehabilitation or are being built from the ground up. They have the chance to reach the highest rate of return for investors. Holding periods are often targeted at two to four years, fully rehabbing distressed properties and liquidating during the expansion phase.
Value-add: Value-add strategies during a recovery phase require careful thought and patience. Great pricing for value-add assets but execution may only occur until the early part of the expansion phase.
Core; commercial real estate investments are the least risky offering. They are often fully leased to quality tenants, have stabilized returns and require little to no major renovations. Acquire trophy assets in “main” locations and then capitalize on the strong rental growth of the next cycle through a combination of lease renewals and lease up of any residual vacancy from the previous recession phase. The asset is then positioned to be refinanced or sold during the expansion phase.
Strategy
Commercial: Real Estate with low rate loans. While the economy slowly starts to boost, it is prime time for commercial real estate. Businesses are eager to invest, expand and take full advantage of the upswing shift.
Private Money Lenders: Although the economy starts to upswing, businesses and investors may lack the financial strength to make the necessary investments to expand and grow. Banks are slowly starting to open house for loans with lowering rates so these are still great times for private money lenders to profit.
Notes: Many homeowners and investors might still be feeling the hardships of the ending Recession stage and might depleted their last financial resources. These are great times for Note investors to come out of the woods as the saving Robin Hoods and offering "a way out of foreclosure".
It's A Wrap
It's been a minute, 😳 pffff! So take a deep breathe, relax. We got you covered with an easy quick reference sheet 🤗. Yes we love good karma 😇!
We cannot stress enough tough how important it is to learn to speak Real Estate. It will help you “read” the market by understanding the different stages of the cycle. Analyze both national & local indicators that tell you where you are! You are now prepared to "sense" where the market is going before others do and most importantly, you now "know" how to adapt and keep making money in any market 💰💰💰!
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