If you're considering investing in real estate, you're on the right track -- long-standing financial wisdom dictates that real estate investment is a effective way to diversify your portfolio and bring in long-term, steady monthly income. However, there are good times to buy real estate and there are less-than-optimal times to buy. How can you make the distinction so that your investment gives you the most dividends possible?
The Real Estate Market Is Cyclical
Numerous issues factor into when a time is right to invest in real estate. The commercial real estate market is cyclical, with four phases: recession, recovery, expansion and contraction. The availability of capital is the primary force behind the cycle, and this issue itself is affected by a number of variables, namely the state of the economy, perceptions of the market, property supply and demand, and interest rates. Knowing where the market is in this cycle is the key to knowing when the most optimal time to buy is.
Recession and Recovery
Following contraction in the real estate cycle is recession -- this is when real estate prices drop and financing dries up or becomes too expensive. There is an increase in foreclosures, owners become extremely motivated to sell, and prices fall dramatically. By far, the recession phase is the most optimal time to buy real estate. After recession comes recovery, when the market is improving but still not at its best -- interest rates and property prices are still lower than average, but they're rising. If you couldn't invest during the recession phase, the recovery phase is your next best bet.
Expansion and Contraction
The expansion phase follows the recovery phase and is not an optimal time to invest. Equity investors and financing are easily found, and real estate prices steadily increase. If you're looking to sell, however, the expansion phase is the time for it. Next comes the contraction phase, when the market becomes oversaturated and prices begin to fall from their expansion-phase high. The decision to buy during this phase should be case-by-case and based on need, rather than a general desire for a high-performing investment.
Understanding the Cycle Is Key
Once you understand the cycle, knowing whether or not you should invest in real estate becomes much simpler. The recession phase is by far the best time to invest in commercial or residential properties, with the recovery phase coming in second. Additionally, if you plan on "flipping" properties, the absolute best time to sell them for a tidy profit is during the expansion phase. Otherwise, with the right management skills, you can rely on your investment to bring you steady capital for years to come.
Kate Savage is a writer and editor with more than eight years experience writing and editing professionally. She holds a master's degree in writing and editing as well as a bachelor's degree in English literature. Her writing has been featured on a number of websites, including eHow, GlobalPost, and SFGate.com. She lives in Portland, Ore.