How to Know When Your Real Estate Market is Getting Bad

"Real Estate is not a passive investment business. If you don't add value, you fail"

-Marcel Arsenault

Value adding strategies typically surround increasing rents, decreasing expenses or repurposing the asset i.e. office to apartments. I would like to propose another value-add strategy, Market Trend Analysis,  that if used effectively can help you make and avoid loosing capital.

Market Trend Analysis is a value accretive strategy as it can help investors identify a downward or upward trending market so that they can make an educated decision as when to sell or buy an investment asset. For the casual real estate investor, the early market indicators are difficult to ascertain, as they may not have a research analyst on their investment team.  So, let's simply use the indicators and the process. I am going to share 5 basic trend indicators that you can easily monitor to understand the direction for investment market based on a flip or buy and hold investment strategy.

Flip Market Indicator Chart (Seller Perspective)

INDICATORS

WHAT IT MEANS

IMPACT

SUPPLY Consists of all the supply on the market consisting of active and new listings.

Growing: NEGATIVE

Shrinking: POSITIVE

DAYS ON MARKET Indicates the number of days it takes for an asset to sell.

Growing: NEGATIVE

Shrinking: POSITIVE

ABSORPTION RATE Calculated by dividing the total number of available homes/assets by the average number of sales per month. Breakeven point is 6 months for residential and multifamily assets.

Growing: NEGATIVE

Shrinking: POSITIVE

LISTING DISCOUNT Calculated as a ratio of sale price to active listing price.

Growing: NEGATIVE

Shrinking: POSITIVE

RENTAL ASK TO CLOSE PRICES Calculated as a ratio of closed rental price to ask rent price.

Growing: POSITIVE

Shrinking: NEGATIVE

The impact column will help an investor ascertain if the balances of the indicators are pointing in the right direction to either sell or buy investment assets. The exercise is both an art form and a science. Investors will be able to gain access to the raw data they will need for this analysis through their local MLS or through a Realtor team member.

Buy and Hold Indicator Chart (Seller Perspective)

INDICATORS

WHAT IT MEANS

IMPACT

CAP RATE Calculated as investment asset net operating income divided by sale price

Growing: NEGATIVE

Shrinking: POSITIVE

RENTAL ASK TO CLOSE PRICES Calculated as a ratio of closed rental price to ask rent price.

Growing: NEGATIVE

Shrinking: POSITIVE

SUPPLY Consists of all the supply on the market consisting of active and new listings.

Growing: NEGATIVE

Shrinking: POSITIVE

ABSORPTION RATE Calculated by dividing the total number of available homes/assets by the average number of sales per month. Breakeven point is 6 months for residential and multifamily assets.

Growing: NEGATIVE

Shrinking: POSITIVE

LISTING DISCOUNT Calculated as a ratio of sale price to active listing price.

Growing: NEGATIVE

Shrinking: POSITIVE

Both the charts above analyze the key indicators from a seller point of view. If you are a buyer, you can use the inverse for all indicators to help identify a market that is ripe for buying opportunities.

Market Trend analysis can be a powerful value-add strategy when monitored and utilized as a part of the overall investment business plan.

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This article is Copyright 2014 BiggerPockets, Inc


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