The real estate market is cyclical, even in Las Vegas, where time does have a reputation for standing still.
When you’re investing in rental properties, timing is everything. When you’re creating a lease and thinking about potential vacancies, the season has to be considered. With the right approach to timing, investors can earn more on their investments and their rents.
Understanding market cycles can make all the difference between a smart purchase that generates consistent income and one that falls a bit flat against the existing rental market. Whether you’re an experienced landlord and real estate investor or thinking about making a purchase for the first time, we’re here to help you master the art of timing your rental property investments. It’s critical for long-term success.
What Are Market Cycles in Real Estate?
One of the things that makes understanding market cycles so challenging is the fact that they’re not always consistent. There are ups and downs seasonally, especially when it comes to tenants deciding to move, but local economic factors, new business developments, and the general mood of the market will impact the sales and the rental markets in different ways, depending on a lot of factors. So what you planned for market cycles last year might be a bit different next year.
Outside of seasonal and annual cycles, however, most experts agree that the real estate market operates in cycles that can generally be categorized into four phases. Here’s what they are:
- Recovery. This might look like a period of slow growth following a downturn. Property prices may be lower, with minimal new construction. Rental demand may start picking up. Think about how things looked as Las Vegas began to recover from the housing downturn in 2008 – 2010. It took our market some time to recover because it was especially hard-hit during the recession.
- Expansion. An upswing in market activity where economic growth, job creation, and housing demand increase. Vacancy rates drop, and rental prices rise. We have been in an expansion market for a couple of years now, and the hope is that these market conditions continue.
- Hyper Supply. A surplus of properties as developers try to capitalize on high demand. Rental rates may stabilize, and vacancy rates begin to rise.
- Recession. A slowdown in the market where oversupply leads to lower demand. Prices and rental yields may decline. Again, it’s hard not to think of the big recession in the 2007 – 2012 time period, where the economy was struggling, the housing market was depressed, and investors in Las Vegas and around the country had to be creative in order to sustain their investment properties.
Some market cycles are more challenging than others for obvious reasons. But, each phase also offers unique opportunities for smart investors. Timing your entry (or expansion) in line with these cycles is key to maximizing your returns. Being prepared to position yourself and your investments well during any type of market is also a key to succeeding all the time.
Benefits of Timing Your Rental Investments
Timing your investments based on market cycles can provide numerous benefits to your portfolio in the short term as well as the long term:
- Maximize Returns. Buying during market dips (such as the recovery phase) allows you to acquire properties at lower prices, potentially increasing their long-term value. There’s going to be a lot less haggling with sellers when you’re the only buyer showing up with an offer. If you have the resources, this is an excellent time to increase the size of your investment portfolio.
- Less Competition. Investing in slower market phases often means less competition, giving you the upper hand in securing desirable properties. When the market is awash with buyers and everyone is scrambling to make a competitive offer, you might find that you have to pay more for the property you want.
- Higher Cash Flow Potential. Entering the market at the right time can lead to higher rental yields as demand for housing grows. In the early days of an expansion phase, for example, getting good renters into long-term leases with a rental value that has peaked will deliver the stability and profitability that your property needs to succeed.
- Risk Mitigation. Understanding market cycles can help you avoid investing during periods of oversupply or market downturns, reducing your risk exposure. If you are completely over-leveraged and a recessionary period shows up, you might find yourself in a very uncomfortable position, financially. Make sure you know your comfort level when it comes to risk, and have protections in place if the worst-case-scenario arrives.
This is not to say that you cannot be successful during unexpected market turns. Owning real estate assets is always a good investment strategy because people always need homes. These are tangible assets that can help protect your entire financial existence against inflation and other threats.
Knowing what kind of market you’re working in and with, however, can provide you with these competitive advantages.
How to Recognize Market Cycles
Understanding the way the market cycles through is one thing. But what can you do to get a sense of where the market is currently and the direction in which it’s heading? Correctly identifying a market cycle requires a mix of research, data analysis, and market intuition. Here are some key factors to watch for.
- Economic Indicators
Real estate is a big part of the local, state, and national economy. This is not an industry that operates outside of that economy. Pay attention to local economic conditions such as employment rates, population growth, and wage trends. A growing economy often signals the recovery or expansion phase, while declining indicators may point to a recession or hyper supply. We’ve been dealing with a lot of inflation over the last few years, and that has pushed housing prices higher. This has not led to a recession in Las Vegas, however, or in any major downturns, despite what some experts feared a year or two ago.
- Supply and Demand
Track housing inventory and vacancy rates. High demand with limited supply indicates expansion, whereas high supply with falling demand signals hyper supply or recession. The vacancy rate is pretty low right now, and that’s due to a pinched supply and the higher rental prices that are keeping people in their current homes.
- Rental Rates
Rising rental rates typically occur during expansion and early hyper supply. Decreasing or stagnant rates may indicate oversupply or an impending recession. Falling rents is a huge warning sign about the strength of the market.
- Property Price Trends
Property values often rise during expansion due to increased demand and fall during recession. Research historical pricing trends in your target market to identify patterns.
- New Construction Activity
An uptick in permits for new construction is characteristic of the expansion and hyper supply phases. When construction slows, it could indicate recovery or early recession. We have seen a lot of new development as housing communities and apartment buildings push further outside the city of Las Vegas itself.
Tips for Timing Your Rental Investment
How can you leverage what we now know about the market cycles and the impact they have on investments?
These are very general tips that won’t apply to every investor. But, prevailing wisdom says that you should buy in the recovery phase of a real estate market. This is often the best time to invest in rental properties. Property prices are lower, competition is reduced, and rents are beginning to stabilize or increase. Holding properties purchased during this time can yield long-term gains as the market moves into expansion.
It’s also wise to be cautious during hyper supply. While deals might still exist, the hyper supply phase can be risky. Rising vacancy rates or falling rents may reduce the profitability of your investment. Focus on properties that are already generating cash flow to minimize risk.
Remember that real estate is inherently local. While one region might be in a recession, another may be experiencing expansion. Research regional markets to identify areas that align with your investment goals. A lot of out-of-state investors are buying properties in Nevada, and that’s because our market has remained strong even while others have struggled.
Real estate cycles are inevitable, and trying to time the market perfectly is nearly impossible. Instead, approach investing with a long-term mindset, ensuring you have the financial staying power to weather cycles until the market turns in your favor.
Timing your rental property investments might feel overwhelming and even unnecessary, but with a clear understanding of market cycles and a well-thought-out strategy, investors will have a better shot at minimizing risk, maximizing profits, and building a portfolio that generates long-term wealth.
Let’s talk about how to position your real estate investment portfolio to thrive in any market cycle. Please contact us at New West Property Management. Our team expertly manages residential rental homes in Las Vegas and throughout Clark County, including Henderson and North Las Vegas.
