Everyone who invests in Real Estate wishes they had a crystal ball to see into the future. Some people seem to always be in the right place at the right time when picking the Real Estate markets they enter. What do they know that we don’t?
We need to first accept the fact that Real Estate follows trends, imitates what happens elsewhere, and is somewhat predictable over time. With this in mind, the best way to predict the future is to study the past. Focus on universal trends that apply to any geographic target we are researching – homebuyer behavior. Why do people buy homes? People buy because of location, use, cost, emotional appeal, pride of ownership and to make a statement. All of these are human emotions and all are predictable. In fact, selecting a property that is likely to go up in value is pretty easy. The problem is knowing when that will happen.
Timing is extremely important, and short-term speculation is much safer than long-term speculation. We look for properties that are suffering from short term problems like back taxes, physical distress and so on that could offer quick payoffs. We have immediate remedies to these short term problems that can produce profit for even the “Newbie” Real Estate Investor. If there are back taxes, we can buy the Tax Lien Certificate and make money on the interest. If the back taxes are not paid back we can foreclose on the property, fix it up, and sell it. We can buy properties at Deed Sales, fix them up, and sell them. You can find these “one off” deals in any market, anytime in the United States.
Human behavior and “one offs” aside, let’s look at systems and trends that can lead to picking a “Target Market”.
In real estate, increased costs to do business in a market occur for many different reasons. Some of these could include costs to obtain building permits, to meet new environmental standards, or to construct roads and new facilities. If you choose to enter a Real Estate market where the local infrastructure is older and where property tax collections are down, somebody is going to have to pay that bill. Make sure that it is not you. You may be tempted to enter a market where the prices of Real Estate are extremely low. In doing so check out these inflationary items listed above. City, county and state fees to operate our Real Estate business are not a budget item we can control.
During the latest “Real Estate Boomî many counties and towns across the country improved local infrastructure with the increase tax revenues being collected. Remember, “Infrastructure” is the total of all elements that make up a community. This includes roads, public and private facilities, shopping centers, theaters, banking systems, airports, jails, schools, hospitals and so on.
Government Control and Regulation Changes
Building codes, zoning rules and restrictions, and other factors that are within the scope of governmental control can create windfalls (or tidal waves) for property owners. With todayís economy the government needs revenues now. The flood gates for any development are opening up and government officials are rolling out the red carpet to Real Estate Investors and Developers. The trick is to buy ahead of the “Boom”. Other than doing your homework and research there is no secret formula to know when that “boom” is going to hit.
Economic Conversion is an event whereby a property owner makes a change in the usage of the real estate that allows the net rents or after rehab sale price to be increased. When these types of changes are made the economic return on the invested capital increases. In laymanís terms, we are partially changing, or completely changing the original use of the property to increase profit. It is important that you study all options available when thinking about making any kind of change to the property. For example, it may be easy to increase the resale price or rents to any given property by making improvements. The trick is to make sure the costs of those improvements improve and are not a detriment to your cash flow.