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In macroeconomics, the economic cycle refers to a repeating sequence of economic events: expansion, peak, contraction, and trough. The expansion and peak represent the economic “good times,” while the contraction and trough make up an economic downturn or recession.
Economic cycles can significantly affect the real estate market. They impact the availability of credit, property values, rental prices, and the financial resources of buyers or renters. Here’s a closer look at how economic cycles affect the performance and viability of real estate investments.
How Economic Booms Influence Real Estate
During periods of economic expansion, the general populace tends to experience increased employment rates and higher income, which can significantly boost demand for real estate. Increased real estate demand will necessarily increase property values and rental prices. Increased values can make purchasing new properties more expensive, especially as the economic boom continues or accelerates and central banks raise interest rates to cool off inflation. However, the rising market can increase returns to real estate investors, including developers who benefit from higher property values and landlords who benefit from higher rental prices.
Challenges in Real Estate During Economic Downturns
Conversely, economic downturns mean reduced income and financial resources for many as people lose employment and businesses experience lower revenues. As a result, the real estate market can experience downward pressure on prices as demand dries up. Furthermore, commercial real estate can experience more significant adverse effects as tenants go out of business or downsize to smaller spaces.
However, economic downturns can present opportunities to real estate investors. First, creditworthy investors may obtain less expensive financing as central banks decrease interest rates or increase the money supply to stimulate the economy. Reduced property values also enable investors to buy in at the low end, providing stable cash flow or the opportunity for significant gains as the economy recovers and real estate prices rise again.
Real Estate at Peaks and Troughs
Investing in real estate during economic peaks and troughs may come with various challenges. Investors who buy property at the peak risk purchasing properties at inflated prices. When the economy contracts from the peak, investors who bought over-inflated property may have trouble generating stable cash flow or obtaining a return on their investments. Depending on the property, investors may experience sharp value declines, which can put them underwater on mortgages or commercial financing.
Meanwhile, buying during an economic trough can make it challenging for real estate investors to generate an immediate return as property values and rental prices reach their lowest values. However, the trough represents the best opportunity for long-term growth, as investment performance will only improve.
How Working with a Real Estate Attorney Can Help You Navigate Economic Cycles
The various stages of the economic cycle can present challenges and opportunities for real estate investors. Working with a seasoned real estate attorney can give investors a leg up as they seek to maximize returns. Real estate attorneys will help you understand your legal options and potential strategies for financing real estate investments at each stage of the economic cycle. Legal counsel can help you negotiate contract terms that provide protection and flexibility as an investment progresses through upturn, peak, downturn, and trough. Your attorney can help you avoid pitfalls that may doom a potential transaction or leave you with a less advantageous deal than you had hoped to negotiate.
Contact a Real Estate Attorney Today to Discuss the Economic Effects on Your Real Estate Activity
As a real estate investor, you need an experienced legal advisor who can help you understand your rights and options as you invest throughout the economic cycle. Contact LeFountain & Wollman P.C. today for an initial consultation to discuss how our firm can give you the guidance and support you need to protect your financial interests in your real estate investments.