As a real estate investment firm, Gatsby Investment uses real estate market cycles to inform our decisions and strategies. It’s not that we’re trying to time the market; it’s just that we understand certain real estate projects perform better during certain phases of the real estate cycle.
Here’s a peek behind the curtain at our real estate investing strategy based on market cycles.
What are Real Estate Market Cycles?
Real estate market cycles are the never-ending circle of distinct phases that we see play out in the market over the long term. There are four phases that continuously repeat:
- Expansion. Steady growth in demand and values.
- Hyper Supply. A total misnomer, hyper supply is when demand far outweighs supply. This is what we typically think of as a seller’s market.
- Recession. Demand drops, leading to a slow market, and possible dips in property values. This is the typical buyer’s market.
- Recovery. Demand and prices slowly rebound to pre-recession levels.
Real estate cycles are ruled by supply and demand, which can be influenced by factors like:
- Interest rates.
- New construction.
- General economic conditions.
- Population shifts.
- Government incentives.
Interestingly, different cities can be in different phases of a cycle. For example, during the peak of the pandemic-fueled housing boom, many smaller markets were still in the hyper supply phase while large cities entered the recession phase. And now, while much of the country is slowing into a recession phase Los Angeles and San Diego are both among the top 10 hottest markets to watch this year.
It’s also worth noting that different property types can also be in different phases, even in the same market! For example, the rental market might enter recession earlier as renters become homeowners, but then it moves into recovery faster as would-be homeowners get priced out of the housing market.
For a deep dive into the real estate cycle, check out The Investor’s Guide to the Real Estate Cycle.
Gatsby’s Strategy for Each Phase of the Real Estate Cycle
Gatsby Investment is focused on low-risk investments with the potential to perform well in every phase of the real estate cycle.
For example, multi-family developments are a sound investment as long as there is enough renter demand to warrant building new rental units. Additionally, build-to-rent (BTR) projects work well in any market that has renters who want living spaces that feel more like a home than an apartment.
Having said that, we also want to capitalize on market shifts, so you’ll often see us take on special projects during different phases of the real estate cycle. Here are some examples:
- During the expansion phase, we might add local California vacation rentals to the mix. Vacation rentals work well in expanding markets when people have the financial stability to travel and enjoy a week or more away from work.
- During the hyper supply phase, we might increase our house flips, especially if we can add more value with an ADU (accessory dwelling unit) addition. This lets us use the market’s momentum to increase the value of the property by even more than the improvements.
- During the recession phase, we might explore more affordable housing options, such as Section 8 subsidized housing. These units are in exceptionally high demand in recessed markets when more people qualify for this program with its strict income limits.
- During the recovery phase, we might consider more distressed properties. Following a recession, there are often more properties with deferred maintenance issues or financial trouble, which gives us more leverage to negotiate a below-market purchase price.
Build Your Portfolio with Gatsby
Are you looking to build a real estate portfolio that performs well throughout each phase of a real estate market cycle? Take advantage of Gatsby’s strategy by investing with us!
Our pre-vetted deals are open to all accredited investors, even those who live out of state or out of the country. You can buy into our expertly-analyzed projects with low investment minimums, and leverage our industry experience to maximize your return potential while minimizing any risk.
We’re excited to serve you through every phase of the real estate market cycle!