Understanding the Real Estate Market as an Investor: What to Look For When Buying
Last week, we covered a few fundamentals regarding selling your property as an investor, whether as a quick fix-and-flip or as a long-term buy-and-hold investment. In this week’s installment, we’re going to examine the basic questions an investor needs ask himself or herself when considering purchasing a property as an investment or, more specifically, how to understand and read real estate markets. As every real estate pro knows, while there are macroeconomic variables which affect the entire real estate market, on a local level no two markets are alike. Therefore, the intelligent investor knows that they need to consider not only the condition of the property itself but also the particulars of the market in which it is located, since it’s the market and its characteristics that give a property its value.
Location and Pricing
We’ve talked about this before, but location is everything in real estate. For obvious reasons, the area in which a property is located determines its desirability for the potential homebuyer, and the characteristics of such additionally determine the pricing and salability of that property. You, as the investor, will want to pay close attention to the local market and its prices before investing in properties in that area. For example, what are the current price trends in the area, and what is their overall trajectory for the future? Perhaps more importantly, are prices in one area accelerating faster than prices in one nearby? The latter could be a double-edged sword; while faster price acceleration could indicate increased demand in one area, it may also eventually price some consumers out, resulting in competition between your property and one located nearby at a lower cost but with similar appeal. We’ve discussed the dangers of overpricing properties before (as well as the potential pitfalls of being inexperienced with prices in general whether you’re buying or selling), and doing your homework in this field will not only help you make an informed decision but will also give you a better and better sense of fair pricing as time goes on.
Development, Growth, and Infrastructure
To continue on the subject of location, a sure indicator of an area’s desirability – which has a direct effect on property prices – is the presence of development and new infrastructure such as schools, new roads, and community features such as parks and public utilities. These can indicate future growth and, by extension, desirability for potential buyers, and investing in growing communities is a smart practice for real estate investors looking for the largest return. However, growth is not always limited to public works projects; indeed, commercial development such as shopping centers and attractions are a huge incentive for most buyers because, in addition to convenience, they also lower the tax base. When scouting an area for properties, be on the lookout for roadwork (which may indicate an anticipated increase in traffic flow), construction, surveyors, or land clearing. You can also find information on newly issued permits and development contracts by visiting the town hall of that city or area and save yourself a bit of legwork – don’t say we never helped you out!
Schools:
Deserving of an honorable mention here are schools. Even though the subject is somewhat of an extension of the previous section, homebuyers as a demographic are overwhelmingly comprised of families either with children or planning on having children, and school choice wields a disproportionate amount of influence over where parents or expectant parents elect to move. Consequently, the quality of schools in the area will be a huge selling point which you can rely on as a seller, and as an investor you’ll want to keep a sharp eye out for school district rankings, bearing in mind that this is usually measured by test scores which are public information. Even if the school district in the area you want to purchase property in isn’t at the top of the list, upwardly mobile scores are a good sign because they indicate everything from future upward trends (increasing your property’s value) to recent investment (thus all but precluding future surprise tax hikes) to robust community growth that may very well sustain itself in the future. You can find this information in your state’s board of education website and several online resources that list school rankings.
Taxes:
If the Beatles song by the same name is any indication, nobody likes the tax man, including potential homebuyers. This is extremely important for you to bear in mind as an investor for two reasons: lower property taxes will lower your overall tax burden on your investment, and they’re infinitely more attractive to potential buyers. If you haven’t the experience, this is one area where it might help to involve a real estate agent, as they can often help you determine which areas have ideal tax structures. Regardless of whether or not you involve a real estate agent, you’ll still want to contact the local tax assessor to understand how much a town charges in taxes per $100 of property, and as a helpful hint, you’ll also want to know when the last assessment took place and when the next one is, because an imminent assessment may indicate that taxes are about to go up. In an earlier section we advised investors to be on the lookout for signs of development or growth, and when it comes to taxes be vigilant for overcrowded schools and poorly maintained roads and infrastructure, because it’s a sure bet that the local municipality will, at some point, need to remedy these things, and the only way to fund those projects is by raising taxes.
Keeping the Bigger Picture in Mind:
If you notice that the properties in a city or location are overpriced, don’t get too discouraged; this could mean that the outlying or fringe areas of a major city will soon be in demand, and it may indicate that now’s a good time to get in on the action. Here is where you’ll want to start expanding a bit, looking both to renters (as in, buying and holding the property as opposed to turning around for a quick sale) and beginning to factor things like public transportation into your calculations. Public transportation is particularly attractive to renters as they may be less likely to own vehicles, or less willing to drive, yet still want affordable housing in relatively close proximity to the job opportunities in the metro area. Additionally, as they grow in both size and economic stability, families tend to migrate to outlying areas in search of larger housing for less expense, with the tradeoff of accepting a longer commute. This, again, may make it worthwhile to consider buying and holding as the metro area develops and residents begin to migrate to the suburbs, which is a fairly predictable pattern.
Remember, investing in real estate is both an art and a science! It requires ingenuity, creativity, reasoned thinking, and disciplined research. By keeping these points in mind while trusting the data and information you find, you can turn investing in real estate into a profitable venture! Check back with us each week for tips and tools of the trade, and don’t forget to follow us on Facebook!
– Get It Right Solutions, LLC