Did you know that the dynamics of markets (a.k.a. cities) for real estate investing changes? They change all the time actually. One year there may be a market that everyone is buying in, like an investor feeding frenzy, but that market will change, guaranteed. Especially if it experienced an investor feeding frenzy.
If you are already trying to tie what I’m saying to your situation and it’s not making sense, it may be because you only invest in your local area. If that’s the case, that is totally fine. This explanation is more for those who are willing, or interested, to invest outside their local market.
A Quick Blurb on Investing Outside of Your Local Area
This could easily turn into a long blurb with a lot of arguments back and forth about whether it’s better or safer to invest in your own backyard vs. invest long-distance, which is likely to forever remain a heated debate, but I’m not going to hit that here. Of course a lot of that debate will hit on too, where is your own backyard? If it’s somewhere in random Arkansas in a cute little suburb, it might be just fine to invest there. But if Los Angeles is your own backyard, it doesn’t make so much sense.
But regardless of all the different sides of the debate, I want to point out one argument for investing outside of your local area, which will lead further into this discussion about the markets. That argument is-
If you always want the best possible returns on a real estate investment, you have to be willing to change what market you are buying in because the best market to buy in is always changing.
The Dynamics of a Real Estate Market
For simplicity purposes, understand that I am talking only to the investing side of real estate. What I say may or may not be different if thinking of real estate as a whole, but know that I am thinking of investing markets. Also to keep it clear, I’m thinking mostly of rental properties. For flipping or any other facet of investing, you’ll have to adjust the information accordingly.
The most basic way to think of a real estate market is by picturing a bell curve.
You’ve probably thought of real estate in bell curve fashion already because of the famous line- “buy low and sell high”. That means buy when the market is at the bottom of the curve and sell when it’s at the top. It’s probably the most fundamental rule in real estate if you are seeking to land a profit. This rule pertains to what I’m about to explain as well, so keep it in mind. What I’m going to do though is change the wording a little bit. I want you to look at this bell curve and think of it as an “Expansion Cycle”. A market is going to expand and contract continuously. The level of that fluctuation is actually what can make a market so advantageous for investors. The fluctuation in the picture above suggests a fairly dramatic growth and decline. If you continue the line on further and that same pattern continues, you have a market that grows hard and dies hard in terms of real estate. The alternative to this pattern is a much flatter line. It still grows and declines, but at much less dramatic levels.
Both versions of the Expansion Cycle, the more dramatic one and the less dramatic one, exist in real life real estate markets. Remember how Phoenix, Memphis, and Atlanta were sooo popular for investors at one point? Investors are even still buying there now, but remember a couple to a few years ago when those cities were all the talk? They were like the hot spots, had to buy there, feeding frenzy markets. Do you know why those cities became so advantageous for investors? It is because those cities followed the more dramatic bell curve version of the Expansion Cycle. Those cities, when the big market crash happened, crashed HARD. What was pseudo different about those cities than other markets that crashed so hard was their potential for extensive growth back up the Expansion Cycle. This assumed growth was due to industry, job growth, population growth, and other factors that showed solid evidence that the city would not only recover from the crash, but recover to very high levels. Some cities around the nation may have crashed hard but they didn’t, and still don’t, have the industry or population to support a bounce-back. Phoenix, Memphis, and Atlanta did.