Most people misunderstand real estate investing. It’s not about buying the best piece of real estate possible, or finding the best deal out there in your own back yard. It’s about finding the best emerging market that is statistically proven to explode in appreciation over the next five to seven years.

No one has a crystal ball, but real estate is cyclical, and if you follow the economic statistics carefully, there is a way to identify markets that are on the verge of appreciating exponentially.

The trick to investing in the right market is to beat the masses and the amateur real estate investors. The news and media will announce hot markets when the prices are increasing, when in fact, it’s too late. As savvy investors, we need to buy real estate prior to the prices increases, and sell when the media enters the town, and sell to the amateurs and speculators.

At any given time, there are 20 to 25 emerging markets across the U.S. regardless of the overall national economy. There are four market cycles in real estate, which follow the fundamentals of supply and demand.

Sellers' Market Phase I
Demand is rising; prices are rising according to the rise in demand. We are leaving the last phase of a buyers' market and this is the first transition into a sellers' market.

Characteristics of this market:

  • Supply of properties on the market dwindles
  • Properties selling fast, time on market is at its lowest point
  • After a long period of inactivity, speculation and development are in full swing
  • Unemployment is low
  • Property prices and rents are rising
  • Demand for real estate is at its highest point

Buying strategy: There's lots of money to make in this phase, but you’re half past the optimum stage. No one knows how long and how far the market is going to increase.   If you buy early in this phase, you can afford to pay market prices as you expect the property to appreciate.

The strategy is to buy and hold long term or until you see the market entering Sellers' Market Phase II.

Sellers' Market Phase II (Cash Out Market)

In this phase, due to new construction and owners seeing an opportunity to cash out, supply begins to rise. Also, demand remains strong and the amount of excess supply is not enough to shift the market to a buyers' market.

Characteristics of this market:

  • Time on the market begins to increase
  • The number of properties on the market increases
  • Sellers are waiting longer but are still getting unexplained inflated prices
  • Land is being purchased for speculation
  • Amount of construction in the pipeline is excessive and the potential for overbuilding is likely
  • Demand for construction and materials is rising
  • Prices for construction and material rises accordingly
  • Business and job growth begin to slow

Buying strategy: Sell. Once you recognize that your market has gone into a Sellers' market Phase II, any property that you own that you do not plan to keep for a long time should be sold.

Buyers' Market Phase I
During this phase, the dominant characteristic of the market is the oversupply of properties now on the market. The market is now overbuilt and both buyers and sellers know it. The market has transitioned from sellers' market to buyers' market.

Characteristics of this market:

  • Excess supply of properties on the market
  • Prices are falling, rents are falling
  • Demand is falling
  • Time on the market sharply increases
  • New construction is overpriced and stagnant
  • Unemployment reaches its height
  • People in the construction fields struggle for work
  • Bank foreclosures sharply increase
  • investment property values decline to lowest level of all four cycles

Buying strategy: This is the bottom falling out of the market. The only thing you want to buy in this market is a deal that has huge cash flow. Otherwise, keep your money in your pocket.

Buyers' Market, Phase II (Stealth Market)
The market is recuperating from oversupply. Due to over building, new construction has been virtually halted. The market is absorbing the excess supply with fewer and fewer properties coming on the market.

Demand for properties begins to increase sharply as more buyers are qualified to purchase at these low prices.

Characteristics of this market:

  • Market absorbing oversupply
  • Time on market decreases
  • Job growth increases
  • Existing properties start being rehabbed
  • Investment properties are at their lowest levels but begin to slowly increase
  • Rents are at their lowest level and have begun to slowly increase
  • Competition for bank foreclosures is fierce as their number declines

Buying strategy: Of the four phases of a real estate market's cycle, the best time to buy is Buyers' Market Phase II. It is at this time that the market has turned the corner room the bottom and we see prices and rents start to slowly increase. But other investors are still in recovery mode and not buying. It’s time to buy everything that you can put your hands on. This is the phase where millionaires and multi-millionaires are born.

Three keys to selecting the right emerging market in the U.S.

  • Need consistent, solid job growth. It’s really important to find a market that has seen job growth in the past 18 months, and is projecting job growth over the next 24 months. Where there’s job growth, there’s population growth. Where there’s population growth, there’s more demand for real estate, more demand means climbing real estate prices. Remember, for every new job, there are at least five new service jobs created
  • Need a market with more than 250,000 people. The market you’re investing in must be large enough to have its own medical hubs, colleges and airports.
  • Need real estate under 100k. To be able to cash flow when renting your investment property, you must be able to find an inventory of properties under $100,000.

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