It is important to understand how real estate markets work, and the success and the failure of the business is determined.
It’s pretty well-known that almost all real estate markets increase in value over time. In fact, if you were to plunk down money for real estate at almost any time and place in the India or for a property in ahmedabad in the past 150 years, over the subsequent 25 years your money would very likely have increased in value. This is what makes real estate such a safe and profitable investment over the long term.
But, while real estate almost always trends upwards in value, it also almost always goes through cyclical periods (cycles) where values drop for some period of time before continuing their upwards trend. This is what a typical real estate cycle might look like:
there are two major risks that these real estate cycles pose:
- If an investor buys at one of the peaks in the cycle, his investment is likely to go down by some percentage before the next upswing occurs. During this period, rents may drop, vacancies may rise, and if the investor hasn’t planned for this temporary downswing, it could put so much financial pressure on the investor that he can’t afford to keep his investment;
- Real estate cycles can last anywhere from a year or two up to a decade or two. So, while an investment made at a real estate peak will almost certainly go up in the long-term (assuming the investor can hold it long enough), that “long term” could end up being 10 to 20 years. Many investors don’t want to wait 10-20 years to see positive returns, and additionally, the longer the investor needs to wait for a positive return, the more likely that the total annualised return rate will be low.
On the flip side of those risks, let’s say an investor is able to acquire property during one of the low points in the market cycle. With the typical real estate cycle lasting at least a few years, this investor will likely see his investment continue to appreciate for the during of the upswing in the cycle. If he then sells his investment around the next cycle peak, he can easily see returns on the order of 5x or 10x his investment.
For Example lets say that an investor has found a place in India or a place in Ahmedabad, where the real estate market is just getting ready for an upswing. The cycles in this case are different for different cities, which has to be kept in mind. There are external influences on each of the cities. If the investor invests in down payment for Rs 8500, he might expect his investment to increase by 50% in 3-4 Years. The investors equity might increase 6 times of his original investment.
While those are just numbers they are actually true numbers. Infact, you should ask a person when the boom happened, and the amount of return on their investment they gained during that period. While the investors, who invested at the top of the boom actually didnt see much appreciation in their money and they will face the two risks which are highlighted above.
- Real estate will generally tend to appreciate in value over time
- This appreciation, while likely over long periods of time, are not guaranteed over shorter periods of time due to the cyclical nature of the real estate market
- Understanding these real estate cycles — and what causes/affects them — can prove the difference between marginal long-term returns and huge short-term returns
Best of Luck and most important, start flipping.