The Real Estate Investing Cycles | The Capital Growth Cycle

Of the real estate investing cycles, I believe as most seasoned investors do, that the capital growth (appreciation) cycle is bar none the best and strongest wealth building principle. And you all know my stance on real estate and the 5 wealth building principles. Fortunately, we are now positioned to capture the wave of this capital growth cycle as home values are in the upswing and have a ways to go. It is estimated that the country as a whole is still priced about 20 to 25% below normal. This represents massive opportunity.

When to buy - capital growth chart

Signs we are cycling from a strong cash flow market to a capital growth market:

  • Home values are rising
  • Days a home is on the market decreases
  • Builders are building again
  • Jobs are starting to rebound
  • Quality of Life improving

The Real Estate Investing Cycles | The Capital Growth CycleThis is where a lot of the markets within the U.S. are positioned today at the time of this posting. Seasoned investors know that the top cash flow opportunities are exhausted now and are focusing on capital growth investing. As this transition unfolds, it is where we separate the boys from the men (figuratively speaking) or should I say the diligent and purposeful investors from the hopeful “wanna be” investor.

This is the cycle that wealth is created

Wealth (the number 1 wealth building principle) is created from the home value appreciation. It is also the cycle that required deeper diligence to insure you are buying in the right area. Make sure you are buying safe and sustainable investments.

You see, in a perfect world everyone would buy at the bottom when it is a strong cash flow market to ride the maximum increase in home values. This way you get maximum cash flow while the values are increasing. The challenge is, so many people are waiting to make sure they do not buy until we hit bottom that by the time we DO hit bottom, the pendulum instantly starts swinging the other direction again. This is where we are now in most areas. Now that everyone truly believes we hit the bottom is when everyone wants to come out and buy. So be purposeful and remember the important attributes of a great and sustainable investment market.

O.K. so you are out investing and watching your home values increase, you continue to invest and then you remember back in the year 2003 and 2006 when everyone was investing only to lose it all in 2007, 2008. How do you avoid this mistake? How do you know when to put the brakes on and stop investing before it is too late? Learning to watch and identify these market indicators is huge. Here are a few pointers.

Signs to watch for:

  • Demand for housing is reaching its peak
  • Multiple offers on a property
  • Investors are buying up everything including the new construction properties

The number 1 thing to watch for is affordability. Always monitor the median income of an area and its correlation to home prices. The housing payment for a median priced home should not exceed one third of the median income. As an example:

If the median income is $45,000 a year, one third of this is $15,000 a year. Divided by 12 monthly payments equals $1,250 PITI. ($45000/3= $15,000/12 = $1,250)

The house payment for a median price home should not exceed this $1,250 a month. This formula represents a balance market. Home prices may surpass this, but you want to be in the safe zone. If the balance market is indicative of 1/3 of your income going to housing payments, you may opt to pull back when the market hits 28 to 30%. After all, as a capital growth investor, you want to ride appreciation, to stop investing in this market and move on to the next emerging market.

The first sign of a buying frenzy represents buyers all following the thundering herd. You do not want to be a part of this, keep an eye on the affordability index and know when it is time to start pulling back. The market will continue to increase for a while yet, but the buying frenzy is your clue that the pendulum is reaching the top and you want to make money on the growth. So do not be mesmerized by the high demand. It is this high demand that will give you the capital growth that you were seeking.

Pigs get fat and hogs get slaughtered.

Always remember this metaphor, simply put if you act like a pig and want to get fat (get wealthy) you can do this by being aggressive and purposeful and investing at the correct time in the correct safe and sustainable markets. If you try to get too fat, to stay in and continue to buy hoping the values will continue to rise so you can get fatter (wealthier) you are now acting like a hog (hogs get slaughtered)

If you want the straight scoop on the best markets poised for capital growth real estate investing, give me a call today 941-718-7761