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Is there a “Best” time to invest in property?

by , 30 June 2022
Is there a “Best” time to invest in property?
We all want to buy low, sell high. Or buy a property at the lowest price possible, and get the best possible rental income from it, right?
So, is there a best time to invest in property? Is there anything to look out for when making your investment?
The reality is, great investors learn to make the best of every market cycle. The key is to have strategies that fit the different market cycles.
Let's have a look.

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What is the property cycle?

The property cycle is the process prices follow going from high to low, and back to high again.

Often times the property cycle is driven by a combination of interest rates and inflation.

Supply and demand also play a big role. Typically, an area would see increasing demand for housing. But there’s a lag phase in building new properties.

Especially when new land has to be zoned. This causes a shortage of supply, pushing prices upwards. If interest rates are low, it would exacerbate the situation.

But as new properties are then built, and the market is eventually flooded as everyone wants to jump in – the prices come back down again.

That said – property is a lot less volatile than stocks.

That’s because it is less liquid. It takes longer, costs more and is a lot more difficult to sell a house than it is to sell a hot stock on the JSE.

This illiquidity causes real estate to be much more sluggish than other types of investments. Beyond the fact that home sales take a significant amount of time, home prices are based upon recently sold homes, so it takes longer for them to drop or climb.

The property cycle can be broken up into four phases:

Phase #1 – The market starts to decline
All good things must come to an end. Property prices are sky-high. Investors say that property will always continue to increase in value. Your dentist tells you to invest in property…

This is similar to the SA property market in 2006 – 2007.

According to housing market trends, home prices reach an unsustainable peak every decade or so. A correction ensues when supply and demand invert due to these high prices.

Purchase demand can also be stifled by rising mortgage interest rates. When rates begin to climb, affordability decreases, which leads to fewer prospective buyers.

When the market has topped, and a downturn starts, the best option is to look for motivated sellers. People that have been caught offguard because of rising interest rates.

Typically in this declining market there’s less competition, especially when it is driven by rising interest rates.

Phase #2 – The market is crashing now
With phase #1 you might find yourself wondering whether the market is in a downturn or just a slight correction. Phase #2 you’ll know – the market is crashing.

While the top half of a declining market is filled with fear and anxiety, the bottom half is typically marked with depression. Instead of holding onto the high house prices that once were, homeowners begin to accept that their homes are not worth near what they used to be.

This can be the best time to buy rental property because prices will be extremely low. The good part about buying during this time is that you will likely be ahead of the bulk of the competition. When the market turns upward, many investors will flood the market. By purchasing properties before this, you will be able to buy them at low prices and then capitalize on the appreciation caused by the influx of buyers.

This phase is a good time to make cash offers on distressed properties. Or to simply buy on auctions. This is a great time to accumulate properties with debt. Usually, interest rates top out in this phase.

Phase #3 – The market is turning
This phase will be characterized by a return of optimism. A feeling that things have gotten as bad as they could, and the property market will pick up again.

Once the property market begins to turn upward, homeowners begin to feel hope, and buyers start to have confidence in purchasing a home. However, prices are still low at this point, and interest rates are typically low or dropping as well.

This makes buying rental houses extremely lucrative. However, flipping also becomes an option since prices are appreciating, and many first-time homebuyers will be looking to buy a newly renovated home.

Phase #4 – The market is heading for a top again
During this phase investors are starting to pile in again. People that would otherwise be cautious are now highly optimistic. Property prices are suddenly rising and competition is increasing.

Hopefully, you have already accumulated rental properties at this point and don’t feel the need to compete with investors making aggressive offers. It is tough to find rental houses at the top of the market that offer the same cash return as those closer to the bottom. Although rent prices are generally higher at this point, home prices are even higher percentage-wise, so the rent-to-value ratio is significantly lower.

Instead of growing your portfolio at this stage, it is a good idea to fix up some properties and sell them. Flipping properties in this phase to quickly build capital is a good option.

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You can make money from property in any market
As you can see, there are different ways to make profits from property in any market.

The key to success is being flexible with your strategies and adapting to circumstances.

Right now we’re seeing increased interest rates (and they will probably continue increasing in the coming year. This follows good increases in property values following the covid pandemic. You can decide for yourself, but I’d say we’re between Phase 4 and Phase 1 right now – and there’ll soon be some motivated sellers coming to market…

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