Resources - Investing
REAL ESTATE MARKET TYPES
Understand the different real estate markets and choose what works best for you!
The chart below lists the characteristics of each investor type and recommends the best investment options for each. Investor types are listed in order from most risk averse to least risk averse. Take a moment to review the chart to see how investor characteristics and timeline impact the investment recommendations for each investor type.
When investing in real estate, your goal is always to build wealth over time. How much wealth and how much time will depend on each investor’s personal circumstances. The best returns on real estate are realized over years or decades, not over months.
At RINO INVEST, we recommend that
investors approach every real estate purchase with the expectation that it will be a long-term investment.
But time is money and investing money entails risk. How can you tell if the investment property that looks good today will truly be a solid investment for years ahead?
While it’s impossible to accurately predict the future value of a single property, it’s possible to estimate the likely value based on the type of market where the property is located and
long-term trends in sales prices.
What is a Market Type? Why Should I Care?
You may have heard the saying that all real estate markets are local. This intuitively makes sense when you stop to think how widely the cost of housing varies from state to state and city to city. You would not expect to pay the same price for a home in Nashville as in New York. This is because the market factors that influence real estate pricing vary in each city.
We can identify market types by observing long-term trends in demand, supply, and actual sales data. With this information, we can determine the type of real estate market we’re looking at and make educated predictions about how our investment will appreciate over
time.
There are three real estate market types: linear, cyclical, and hybrid. Let’s learn a bit about each market type.
| Linear | Cyclical | Hybrid | |
|---|---|---|---|
| Details | Linear markets have a flat growth curve over time, so you won't see major price increases or decreases. While prices may trend up or down in any given year, linear markets avoid the price spikes or crashes typical in other market types. | Cyclical markets tend to have large price moves over time. There are noticeable peaks and valleys in property values over time, and when price levels become unsustainable, prices crash and the cycle begins again. | Hybrid markets offer a combination of solid linear growth interspersed with occasional downturns and upswings in prices. |
| Example Locations | Midwest and Southeast Birmingham (AL), Memphis (TN), and South Bend (IN) | The east and west coasts of the US, where incomes are high and there is little land availability for new development. | Phoenix (AZ), Las Vegas (NV), Chicago (IL), Seattle (WA), Minneapolis-St. Paul (MN), and Detroit (MN) |
| Appreciation Behavior | Annual appreciations tends to be lower, so your property values in a linear market will grow slowly over time. | Boom and bust cycles can last from 7-10 years, depending on market conditions. | Appreciations is similar to linear markets with occasional bursts. |
| Expected Returns | Linear markets tend to offer the best capitalization rates and cash-on-cash returns of any market type. | Cyclical markets tend to offer very high returns (>20% annual) during the upswing with almost similar negative returns during the downswing. | Hybrid markets tend to offer slightly better returns than Linear markets but with higher risk. |