WHERE AND WHEN TO BUY The two factors determining real estate value are location and timing. When you begin to study the market, you start out with a large field. Just as a stock market investor starts with a potential investment field consisting of thousands of stocks, real estate investors also face a large number of possibilities and need to narrow down their choices. Location and timing are concepts that are broadly understood by investors. In the stock market, you have market sectors, size of companies, capital strength, and competitive factors; these are the "locational" aspects of picking stocks. In real estate, location means the specific property and its immediate neighborhood, and also the city or town and larger region where the property is located. With all investments, timing is everything. If you invest money when prices have peaked, your timing is poor; but the tendency among investors is to have the most enthusiasm and confidence at exactly those moments.
If you invest money when prices are depressed, your timing might be good (only time will tell). But the tendency among investors is to be cautious and uncertain when prices have fallen. So the old advice to buy low and sell high applies to all markets, including the real estate market. You face some artificial indicators when you look at real estate valuation. In a generally strong market, there may be a tendency to believe that all real estate is going to appreciate and that it is impossible to go wrong. Of course, you may see the same false euphoria in the stock market; but in real estate, regional trends may support this belief. Because real estate does not trade on an open exchange like stocks, it is difficult to spot short-term trends or to quantify them, and it is even more difficult to narrow down the location of a sensible real estate purchase. These artificial indicators can mislead you if, in the search for valid data about the local market, you do not distinguish between broad and narrow forms of analysis.
Mistakes in this area are of three types: 1. Reviewing regional or national data on real estate trends. The information about real estate that is easiest to find comes from sources like the National Association of Realtors (www.nar.realtor.com) or the U.S. Census Bureau (www.
census.gov). Also check Zillow (www.zillow.com), Realtor.com (www.realtor.com), and Multiple Listing Service (www.
mls.com). All of these sources are extremely valuable for all real estate investors, but the statistical and demographic real estate trends reported on these sites are regional and national. Real estate investors need to get down to the market supply and demand factors right in town. Average pricing trends for a section of the country or the entire nation are not of any use in timing a decision to buy investment real estate. All trends are local. 2. Application of irrelevant data to the specific market.
If you are interested in buying rental property, you should also make sure that you study the applicable data. For example, if you want to purchase a fourplex and rent out its units, the decision should be made on the basis of prices, rental rates, and demand trends for similar properties. Local demand trends for single-family houses, raw land, or commercial property are not useful. While local trends for different types of real estate do tend to move in the same direction, there are no guarantees. Local economic forces, such as growth in jobs or an active tourist industry, may affect commercial property values, and increased prices of raw land may reflect a growing retirement demographic. At the same time, rental property may be lagging for a variety of reasons. 3. Misreading one form of supply and demand when your concern should be for another.
The natural tendency of investors is to look to real estate because market values are rising. Most begin with the purchase of a single-family home as a rental. Some people move into this market when they decide to buy a larger home; instead of selling, they convert their present home to a rental with the idea that the tenants will "pay the mortgage" through rents. However, a strong demand for owner-occupied housing might not support a strong demand for rentals. It is possible that owner-occupied trends may be very strong, while rental demand is soft. These two markets are entirely separate. Factors influencing rental demand, even when single-family housing demand is strong, would include overbuilt apartment units. In that situation, housing prices may be rising at far above the national rate of inflation, while vacancy rates are high and market demand for rentals is soft.
The supply and demand cycles for home ownership and for rentals are distinct and separate. The question of where and when to buy is a strictly local one. It is not enough to study regional trends; you need to look at the trends in your city and, more specifically, in a particular neighborhood. Even in cities with only a few thousand residents, markets may differ vastly based on specific location. Before committing to real estate investments, it is essential to research the attributes of a neighborhood and how prices are trending, the types of rental demand and market prices for properties on a neighborhood-to-neighborhood comparative basis, and what factors influence those values (access to transportation, shopping, jobs, and schools, for example). Analyzing real estate values requires comparative analysis, and many useful calculations certainly help. But as a starting point, you need to know the market firsthand. This is why a majority of first-time real estate investors tend to buy properties close to where they live.
There are practical reasons for this, of course, but it simply makes sense to invest on familiar ground, literally speaking. You are most likely to understand the real estate trends within a few blocks of your own home and far less likely to understand the forces at work somewhere else, even in a city or town only a few miles away. Excerpted from THE REAL ESTATE INVESTOR''S POCKET CALCULATOR, Second Edition: Simple Ways to Compute Cash Flow, Value, Return, and Other Key Financial Measurements by Michael C. Thomsett. Copyright © 2018 Michael C. Thomsett. Published by AMACOM Books, a division of American Management Association, New York, NY. Used with permission.
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