Timing Your Rental Investments: A Guide to Market Cycles

Paying attention to market cycles is essential for real estate investors. Something to remember, however, is that real estate remains one of the most reliable wealth-building strategies around. With the right knowledge, precautions, and investment support, nearly any time can be a good time to invest. But understanding how market cycles work, and how they affect everything from property values to rental demand, can better position investors to maximize returns, mitigate risk, and build long-term success.

At Key Partners Property Management, we’re always following the market closely. We’re sharing some of our insights, particularly around those key phases of the real estate market cycle that impact your rental properties. Let’s take a look at how smart investors can adapt their strategies to take advantage of each stage.

Understanding the Real Estate Market Cycle

What are the most common real estate cycles that investors ought to be aware of? We can identify four main phases that are especially impactful on your rental property investments. You’ve likely heard of them before:

1. Recovery
2. Expansion
3. Hyper Supply
4. Recession

Each phase presents its own opportunities and challenges. Knowing how to recognize the signs of a cycling market and understanding how to craft a strategy that makes it easy to respond will ensure that you protect your investment goals as well as your portfolio. 

Phase 1: Recovery 

The recovery phase follows a recession and marks the early stages of market improvement. Vacancy rates may still be high, and rental rates may remain stagnant or just begin to rise. New construction is rare, and public confidence in the market is often low.

Things may not feel great out there in the larger economy, at least not yet, but this is actually an excellent time to invest for value. Distressed properties are often available below market value, and there’s less competition from other buyers. Investors who buy during recovery and hold through expansion can earn strong long-term gains.

Some of the things to look for in a recovery market include:

• Signs of rising rents and declining vacancies
• Economic growth indicators, such as improving job creation and wage growth
• Increasing property inquiries or showings
• Local government investment in infrastructure

Investors should position themselves to buy low and plan for renovations or repositioning. We recommend, during a recovery phase, that you focus on undervalued or overlooked neighborhoods. It’s also a good time to lock in favorable financing terms before those rates rise. 

Phase 2: Expansion

In this phase, the economy is growing, and there is some serious job creation happening to boost consumer confidence. You’ll find that the demand for rental housing increases, driving rents up and reducing vacancy rates. Developers begin building again, and prices rise steadily.

There are some impressive opportunities for investors, even as costs are higher. It’s a good time to enter the market if you’re new to investing, and it’s also a good time to expand and grow your portfolio. Investors enjoy the fact that rents are rising and tenants are looking for attractive, well-maintained homes. There’s also a strong potential for appreciation. Investors will enjoy predictable cash flow and rising equity in an expansion market. 

Look for the rise in construction projects and permit requests and approvals. There will be job growth and probably a growing population in the community to support the expansion. Rents will go up and cap rates will stabilize for investors. 

The strategies we recommend investors follow include:

• Focusing on cash-flowing assets in growing neighborhoods
• Scaling up, potentially with with multifamily properties
• Watching for emerging markets where expansion is just beginning
• Evaluating properties with long-term appreciation potential

Phase 3: Hyper Supply

After a period of expansion, the market often enters a hyper supply phase. New construction continues, but demand begins to plateau. Vacancies creep up, rent growth slows or stops, and the market becomes saturated.

But, there are still opportunities, as long as you remember that this phase requires caution. While it’s still possible to find good deals, overpaying or investing without a clear plan can lead to poor returns. Smart investors prepare for a potential downturn by optimizing operations and managing cash flow.

Look for the following signs to tell you that we’re entering a hyper supply market:

• Increasing vacancy rates despite new inventory
• Rent concessions or flattening rents
• Slower absorption of new units
• Local economic shifts or softening employment numbers

What should you do? We recommend that you invest in strong retention practices to reduce vacancy and turnover. Avoid any of those speculative flips or short-term temptations. Instead, strengthen your reserves for maintenance and unexpected costs. It might be a good time to refinance, depending on your position and the existing interest rates. 

Phase 4: Recession

During a recession, property values fall, vacancy rates rise, and rent growth may stop or reverse. Consumer confidence is low, and financing becomes more difficult. However, this phase also sets the stage for the next recovery.

While the environment may be challenging, recessions often present the best long-term opportunities. Properties can be acquired at steep discounts, and competition is lower. Investors with strong fundamentals and a long-term view can benefit significantly.

Watch for significant price drops in distressed sales or auctions. There will likely be declining rental rates, and economic indicators won’t be comfortable or positive. Construction activity and new development will be limited. 

This is the time to maybe acquire undervalued assets with long-term appreciation potential. Focus on stability and reduce turnover. This is a market cycle in which holding steady is the best thing to do. Maybe make some renovations to increase value. It’s best not to be over-leveraged when the recession cycle rolls around. 

Market Cycles Can Be Local

One important thing to remember: real estate is inherently local. A city, neighborhood, or asset class might be in a completely different phase of the cycle than the national market. Smart real estate investors will focus on and analyze local market data, including rental comps, occupancy rates, employment trends, and construction activity to identify where the opportunities are best. Your local property management resource can be invaluable when it comes to making plans for the current market and the future. 

We would be happy to serve as that local resource. Please contact us at Key Partners Property Management for all your questions about the Kansas City rental market and those in the surrounding areas.