Three Key Factors Real Estate Investors Must Look at When the Market Changes

By Lisa Vander, M.Ed.

Many real estate investors see a changing market as a signal to panic. However, if you focus on three key factors, you can be successful in any stage of the real estate cycle, whether the market is appreciating or on the decline. These considerations will keep you ahead of the game during unexpected market shifts, when less experienced investors most often lose out.

Before making critical decisions regarding your portfolio, you must first identify your investing strategy. Your personal investment goals will determine which strategies and theories are best suited for you and your family.

If you are a short-term investor actively involved in short sales, buying discounted properties or managing flip-and-turns, your strategy will focus on increasing immediate profits while simultaneously minimizing costs and expenses during a market downturn. Therefore, your primary considerations should be real estate values and timing of the real estate market.

Long-term investors are more concerned with efficiently managing their properties and being able to sustain them as vacancy rates increase and rents and property values decrease. “Slow and steady growth” and “the ability to stay in the game” are the long-term investor’s mottos.

Determining whether you are a short-term or long-term investor will help you to know which factors you must focus on during market shifts. As a short-term investor, you will want to take heed of drops in real estate prices while also keeping an eye on increases in the average length of time properties are remaining on the market before they sell.

Because short-term investors are not planning on holding properties for a full market cycle, it is imperative that they sell their real estate while the market is hot, i.e. when values are at their highest. When real estate values are going down, short-term investors must wait and position themselves to purchase newly discounted properties at a good price.

While the timing of the real estate market is critical for the short-term investor, it’s less significant for the long-term title holder. Long-term investors must consistently focus on and evaluate the rates of return being generated on the equities held in each real estate asset. When market conditions improve, long- term investors need to evaluate the new equity acquired through appreciation.

On the other hand, when market conditions decline, long-term investors can continue to efficiently manage their holdings by focusing on making any necessary property improvements. This will help in achieving the primary goal of sustaining the property by hedging against higher vacancy rates, rental reductions and dissatisfied tenants.

When selling an investment property, it is crucial for both short- and long-term investors to carefully consider where the proceeds from the sale will subsequently be placed. The short-term investor, who sells property when prices go down, will need to strategize about where to “park” their cash, as they will likely not be putting the money into another property until the market heats up again.

For short-term investors, a wise choice might be to take the proceeds from a sold property and put it into a low yielding money market account. Another option could be to place the profits in a savings account while the market continues to drop and until the next discounted property comes along.

Too often, short-term investors make the common mistake of spending the profits made on real estate investments to support or improve lifestyle, rather than reinvesting it. For this reason it is important to determine in advance where you will be placing any money you acquire from sold properties.

Long-term investors typically sell or exchange a real estate asset only when it is no longer performing according to their plans, intentions and future goals. Therefore, each individual property should be evaluated annually on how well it is performing and then sold only when another, more profitable opportunity is available, one that will serve to increase the overall rate of return the investor’s real estate portfolio is generating.

While short-term investors must be aware of spending lump profits, long-term investors often fall prey to frittering away the monthly cash flow generated by their properties on slowly improving their lifestyles or maintaining their quality of living. With slow and gradual growth being the aim, long-term investors should continue to reinvest profits into their portfolios to speed growth and returns.

Regardless of the type of investor you are, the keys to success are to keep informed about what to look for, stay aware of changes in the real estate market, and be prepared to act on your plan when necessary.

Lisa Vander, M.Ed., is a national speaker, real estate investment advisor, and founder of Pacific Blue Investments, a real estate investment advising company located in Solana Beach, California. Through workshops, mentoring programs, real estate sales and tracking software, Pacific Blue Investments specializes in educating clients about creating wealth through real estate investing as an alternative to the stock market.