In nearly every market (stocks, crypto, real estate, etc.), investors attempt to time the market cycles to maximize their profits. They follow the “buy low, sell high” philosophy and try to buy when prices are down and sell when they peak.

With that logic, the best time to buy real estate is when the market is significantly down.

However, the reality is that savvy investors have learned to build wealth in every phase of a real estate market cycle. The key is having a broad range of investing strategies and knowing which ones perform best for each market.

There is nothing wrong with buying at the bottom of a market cycle and selling at the top. Investors that have abundant capital ready and buy discounted properties during a crash often make a fortune when they sell.

However, you will be severely limited if this is the only investment strategy you know. Why? Because real estate market corrections don’t occur every year. In fact, the average time between housing market crashes is more than a decade.

If you decide to only buy investment property at the bottom of a crash, you will be sitting on the sidelines. All the while, other real estate investors build their portfolios with houses that produce rental income.

The truth is that the best time to invest in real estate is now. That’s as long as you implement the right strategies. This article will give you insight into how to invest in every phase of a real estate market cycle…

Introduction to Real Estate Market Cycles

Before we get into specific market cycle phases, it is helpful to understand how they typically operate as a whole. In general, home prices fluctuate in a sine wave, with the trend moving upward over time. For example, the value of a house at the peak of the current market will typically be higher than it was at the previous peak.

One characteristic of real estate is that it is much less volatile than other investment vehicles. Stocks, for example, are highly liquid, and investors can sell them at the push of a button.

On the other hand, real estate takes much more time to sell. The home buying process alone takes anywhere from 30 to 45 days. Even in a hot seller’s market, the time from which property owners decide to sell to when they actually close is typically a minimum of two months.

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.

We’ve broken an entire market cycle into these four distinct phases:

• Top Half of a Declining Market
• Bottom Half of a Declining Market
• Bottom Half of an Appreciating Market
• Top Half of an Appreciating Market

There are certainly sub-phases within these periods, such as stable times without much change in home prices. But the framework we’ve laid out can also be applied during these times. And this should help with answering the question: when is the best time to invest in real estate?

Top Half of a Declining Market

All good things must come to an end. 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.

The shift in supply and demand can occur from many causes. In the 2008 housing crisis, a high percentage of sub-prime home loans and homeowners’ mortgage payments increasing due to adjustable-rate mortgages caused a massive number of foreclosures.

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

How to Invest When the Housing Market Turns Down

Although many real estate investors panic when a downturn occurs, others see it as a massive opportunity to accumulate more rental property.

However, it is unwise to purchase rental property using traditional methods at the beginning of a downturn. This is because these methods, such as buying in cash or getting a bank loan, require a significant amount of money out of pocket. Even when getting a loan on an investment property, you’ll be required to put down 20% of the purchase price. If the value and rent price drop, your equity position and cash-on-cash return will begin to look bleak.

But what if you could buy rental properties with little to no money down? That would change the game! Instead of worrying about whether or not the house will appreciate, you can stack cash flow properties and use hardly any of your own money. This is all made possible by creative financing.

What is Creative Financing?

Creative financing in real estate means buying or controlling houses without using traditional bank loans or your own money. In many cases, a real estate investor will purchase a home and simply take over the loan balance and payment of the seller. This approach is called buying the property subject to the existing financing.

A slight alternative to that approach is called a wraparound mortgage. In this case, a new loan is created that “wraps around” the existing mortgage. By wrapping around it, it exceeds the original balance and monthly payment.

If a house seller does not have a loan on the property, you can set up a seller take-back in which you make monthly payments to the seller instead of to a bank.

In all these cases, the down payment is entirely negotiable between the buyer and seller. That is the beauty of real estate investing. These strategies take using other people’s money to a new level and allow investors to add massive amounts of cash flow to their portfolios.

Why Does Creative Financing Work in a Declining Market

Don’t misunderstand – creative financing can work in any market. However, a declining market provides opportunities for creative financing that aren’t as apparent in a seller’s market.

For example, there is much less competition for real estate investors in a buyer’s market. When competition is high, it is difficult to get a creative financing offer accepted because another investor will offer to pay cash at the same price. But when sellers are more motivated to sell, they are more willing to consider creative options to receive a higher price.

Many times a downturn in the housing market results from higher interest rates. By implementing creative financing, investors are able to take advantage of the previously low rates and still purchase properties using leverage.

Bottom Half of a Declining Market

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.

How to Invest Near the End of a Declining Real Estate Market

The one thing investors should have in mind at the bottom half of a declining market is accumulating rentals. The low prices will allow you to get great deals that cash flow now and provide tremendous capital appreciation in the future.

Creative financing is still a great tool to use during this market phase. Beyond the reasons given earlier, many homeowners at this time will likely be underwater on their homes, meaning that their mortgage balance is higher than the market value of their home. This means they are essentially stuck with no way to sell because they would have to bring money to the closing table. These situations are where short sales and foreclosures become rampant.

Instead, you can save the day by structuring a creative finance deal. Even if the house has negative equity, it still might make sense to take it on if it will provide good cash flow. By doing this, you will be able to acquire as many rental properties as you can while using none of your own money.

While creative financing should be a strategy you use often during this time, it shouldn’t be your only focus. A cash offer will work better for some sellers, so you shouldn’t limit yourself to only using creative financing. Sometimes making a cash offer will allow you to get a much lower price.

Bottom Half of an Appreciating Market

Once the real estate 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 mortgage rates are typically low 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.

Buying Rental Properties Early in an Appreciating Market

Once the market begins to build momentum in the upward direction, you can confidently buy rental properties with the outlook of future appreciation. The only trouble is that many other investors will be thinking the same way. Because of this, you will have to get creative to stay ahead of them.

This might mean honing your marketing strategies to find off-market deals. While deals are easier to find in a depressed market, it gets much more challenging when prices are climbing. The best real estate investors have learned how to find their own deals instead of waiting for someone else to bring them to them.

In general, as the value of a home goes up, the fair market rent increases too. However, values typically climb faster than rent prices. This is why it usually makes more sense to buy rentals near the bottom of the market instead of at the top.

Top Half of an Appreciating Market

This phase of a market cycle is typically when real estate investors have the most competition. That’s because everyone has seen the rapid increase in prices over the recent years. However, as Warren Buffet has said, “Be fearful when others are greedy, and greedy when others are fearful.”

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-on-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.

However, this does not mean you should pull back and not invest near the top of a market. It just means that you should adjust your investing strategy.

Flipping Houses in an Appreciating Market

The top half of an appreciating real estate market has been deemed by investors as a “cash-grab” market. Instead of growing a rental property portfolio at this time, many investors focus on quick-turn strategies such as flipping houses to quickly build capital.

One of the perks of flipping houses in an appreciating market is that many times the value is significantly higher when the house is completed than it was projected to be at the beginning of the project. In markets with extreme appreciation, it isn’t unheard of for the after repair value of a house to increase by tens of thousands of dollars over just a few months.

The fear of most investors in a market that has seen significant appreciation is that it will soon experience a correction. And this does happen periodically. The investors that purchased rental properties during this time banking on future appreciation can get stuck.

That’s why flipping is much safer at this point in a market because most house flippers try to complete a project in a few months. That isn’t enough time for most markets to see a significant decrease in prices.

You Can Make Money Investing in Any Real Estate Market

It’s true. While many people think it’s a good time to invest when the market is hot, a down market provides more opportunities to build an investment property portfolio.

The key to success in any market is having a broad understanding of investing strategies. On top of that, you need to know which ones to employ at different times. Here is a brief summary of the investing strategies we’ve suggested for each market cycle phase:

• Top Half of a Declining Market: Creative Financing
• Bottom Half of a Declining Market: Creative Financing and Traditional Rentals
• Bottom Half of an Appreciating Market: Traditional Rentals and Flipping
• Top Half of an Appreciating Market: Flipping

We hope this overview has given you insights into the world of real estate investing. And we encourage further study to prepare for the upcoming market shifts. We wish you the best on your investing journey. There are always lots of investment opportunities to consider…