Those locations where real estate prices tend to rise to the sky – and then fall back to earth – are known as cyclical markets. If you review property values in a cyclical market over a decade or longer, you’ll notice very defined peaks and valleys. In the good years, prices can increase seemingly without limit. And when the sales boom goes bust (which always happens, sooner or later), prices can drop quite dramatically.
If you choose to invest in a cyclical market, be prepared to commit yourself for the long haul. Price trends tend to play out over a number of years, so you’ll see the best returns by riding out the waves. Due to their volatility, cyclical markets might not be a good choice for investors who are highly risk averse. Risk-tolerant investors with a long timeline for growth may get the best bang for their buck in a cyclical market.
You can often find cyclical housing markets in:
Market forces pull and push prices in different directions as economic conditions change. The housing boom of the early 2000s sent real estate prices soaring in many locations. And when the price level become unsustainable to continue feeding demand, prices dropped quickly.
More recently, the global pandemic has upended real estate prices in many markets. Workers who are no longer tethered to an office are often moving away from expensive cities into more moderately-priced areas, or to locations closer to family and friends. As a result, several typically robust housing markets are starting to enter a period of higher vacancy rates and sliding prices, while some more affordable areas are seeing bidding wars for the first time in their real estate market.
You’ve owned a property in a Class A cyclical market for 15 years. You’ve never had a problem finding well qualified tenants. Your current tenant’s lease is up for renewal. They’ve done a bit of comparison shopping in the neighborhood and mentioned how much they liked the hard surface flooring they saw in nearby rental properties.
When you called today to ask them to re-sign, they asked if you’d consider replacing your home’s wall-to-wall carpeting with a newer floor, like luxury vinyl plank or tile. “If you can upgrade the floor, we’ll stay,” your tenant says. “If not, we’ll give our notice and move out at the end of the lease.”
While your property is well-maintained, you would have to agree that the interior cosmetic look is a bit dated. You follow the real estate listings in the neighborhood and have seen that owners who updated things like floors, paint, and cabinets were able to command top dollar for their properties.
Market details of your investment are shown below.
You’re starting to wonder: Do I need to make upgrades to my rental property? Will it be harder to find tenants now if I don’t?
Think about what action would you take in this situation. Then click the card that’s closest to your decision to see if your instincts are on target.
There isn’t an easy answer to this question because cyclical markets offer bigger risks and bigger rewards than either linear or hybrid markets. The real consideration here is: how much cost am I willing to pay? And will I get my money back?
If you plan to hold the property for another five years (or longer), upgrading may be a good decision because it will help you command the highest rent possible. If you plan to sell the property in the next couple of years and know you can rent it at a good price in the interim, upgrading may not be your priority.
In the end, it all goes back to planning. What is your financial plan? What is your investment horizon timeline? What return will you get on your upgrades? Once you’ve answered these questions, you’ll know which course of action makes the most sense for you.
Hometown: North Hollywood, CA
Favorite asset class: Real Estate
Education background: B.S. Marketing
Professional background: E-commerce and Marketing
Favorite quote:
“Stopping advertising to save money is like stopping your watch to save time.”
Henry Ford
Hometown: Nis, Serbia
Favorite asset class: Business
Education background: Science school Bora Stankovic
Professional background: TV production
Favorite quote:
“Opportunities don’t happen, you create them”
Chris Grosser
Hometown: Boston
Favorite asset class: Securities
Education background: B.S. Operations Management
Professional background: Sales and Marketing
Favorite quote:
“You do not find the happy life, you make it.”
Camilla Eyring Kimball
Hometown: Bothell, WA
Favorite asset class: Business
Education background: Bachelor’s in Communications and Anthropology
Professional background: Event/Digital Marketing
Hometown: Beaumont, CA
Favorite asset class: Real Estate
Education background: West Coast Ultrasound Institute Associate of Science in Cardiovascular Sonography, Current student at Colorado Technical University majoring in Business Administration with a concentration in Digital Marketing.
Professional background: Cardiology Technician
Favorite quote:
“Normality is a paved road: It’s comfortable to walk, but no flowers grow on it.”
Vincent van Gogh
Favorite quote:
“I don’t believe in taking right decisions. I take decisions and make them right!”
Sir Ratan Tata
Favorite quote:
“It’s not what happens to you, but how you react to it that matters.”
Epictetus
Favorite quote:
“Experience is making mistakes and learning from them.”
Bill Ackman
Matt Pettit serves as the Chief Investment Officer of RINO INVEST. He is a 2015 Graduate of Wofford College with a degree in Accounting. He also serves his country as a Captain in the United States Army Reserve.
Diego Castiblanco works as the Web Developer of RINO INVEST, He got his degree in Computer Science from The Universidad Distrital Francisco José de Caldas in 2017, he worked as a full-time Web Developer in UpWork which is one of the best freelancing platforms, he got the Top Rated Plus tag due to his dedication and professionalism serving clients from start-ups to big companies.