Rich Dad Education – Real Estate Blog

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Which Indicators to Look For To Determine the Real Estate Market Cycle

There are certain key factors in each market that are vital indicators of what the market is doing at any given time. These include:

• Construction
• Employment
• Number of Households
• Household Income
• Vacancy Rates
• Demographics
• Rental Rates

The real estate cycle is important in all types of real estate, but for ease of presentation this article will focus on apartments. These same principles may be applied to any type of real estate investing.

Construction
In our Rich Dad Education Commercial Real Estate Elite Training, we will teach you how to find out more about what is going on in the new construction market. You want to find out how many building permits were pulled in order to find out how much new construction is going on.

The other advantage of obtaining information on building permits is that it allows you to see in advance what will be coming on the market. You will know what types of properties you are going to be competing against.

When you see the spike in construction, you know this market will soon be overbuilt. This will be a market that will be going from Seller Market Stage Two to a Buyers’ Market Stage One. If you are not sure how to determine what Stage your market is in, consider taking one of our Rich Dad Education Elite Training classes.

Here are some helpful resources when forecasting with building permits. You can contact the local building associations, commercial real estate agencies, banks, chamber of commerce, and planning department. All of these groups will have some sort of forecast regarding the local economy. Just ask them for a copy. Make sure that you keep track of the trends so that you can stay ahead of the market.


Employment

The best indicator of a market leaving the Buyers Market Stage One and entering the Buyers Market Stage Two is employment, more importantly, job growth.
You want to look for local governments that are giving tax incentives for companies to re-locate into their area. Once businesses begin to relocate to these areas, for every job that a new business brings to an area, there will be 3-4 other jobs created in the service sectors. And the upward cycle begins. Contact the department of economic development in the local government of the city that you are interested. Ask them what they are doing to entice businesses to relocate there. Also ask them which companies have already made a commitment for relocation or expansion. This will help you to determine which part of the housing industry is going to see growth.

Number of Households
When the number of households goes up, then the potential for rents to increase will go up as well. This is because of the increased demand for a limited supply of apartments.
The opposite is also true. When the number of households is decreasing, the demand for apartments is also decreasing and owners will lower the rent to attract renters to their buildings.

When determining the number of households, be sure you are looking at households and not population. The age of the population may greatly affect housing needs. One very local indicator is school enrollment. Many school districts determine class room needs twice a year.

Vacancy Rates
When vacancy rates are down, this is potentially a good market to be buying in. If vacancies are up, that means the net income for the complex is down. If the net income is down, then property values are down and you should be buying at lower prices. You want to be sure that you are buying in an Absorption Market. If the market is still in decline, it may be a long time before you can fill those vacancies and make any money. Make sure that you understand the differences between commercial properties and residential properties by taking our Rich Dad Education Commercial Real Estate Elite Course.

Demographics
Look at the demographic mix of a community. Factors that you want to see in the market that you are researching that would lead to a higher number of potential renters include:

• Higher female to male population
• Higher population of young and old versus middle age
• More singles versus married
• More smaller families versus larger families
• Higher amount of renters versus non-renters.

Rental Rates
A good market is one in which rents have begun to slowly increase. This is an indication that the market may be in transition into the absorption phase. Decreasing and stagnant rents are an indication that the market may be in the decline phase. I often hear investors say I have never seen rents go down. That is not necessarily true. If rents have not increased, they have actually gone down. We all experience cost increases every year so if the rent has been the same for several years that is an indicator that the value of the property is decreasing because the profits are decreasing. Also another leading indicator of prices “going down” is rent incentives. If apartments are offering move in specials, $99 first month rent, 1 month free with annual lease, etc., these are rent reductions.
If you are not sure what the rents are doing in a particular market, contact the local apartment owners association or a local commercial real estate agency.

Business Magazines
Go to a book store at least once a month and check out the new monthly magazines. Some good ones are Money, Fortune, Site Development, Multi-Housing News, and Expansion.

Internet
I have a love/hate relationship with the internet. Use the internet to perform open searches on markets, such as “apartment vacancy North Dallas.” Check a few sites to help you become informed and then make contact with the people that can help your business. Too often it becomes very easy to hide behind the computer and waste hours of valuable time researching information that you will never use. Spend your research time working on properties that you are analyzing not in being an expert in a market where you will never have a deal.

These are just a few of the indicators that we explore when researching a market. Please keep in mind I research the markets where I have a potential deal. Also remember that it is critical to research your market so that you can make an educated offer. The Rich Dad Education Real Estate Workshops are designed to help you successfully navigate the constantly changing economic conditions.

Diane Bowman
Rich Dad Education’s Commercial Real Estate Course Trainer

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