What factors should you be looking at when evaluating a destination to invest in real estate?
Real estate can be a great investment. However, where we invest can make a big difference in how profitable it turns out to be. We’ve all heard about the importance of “location, location, location,” but the best locations often aren’t where many newer investors think. Plus, it is important to remember that this changes over time as well. Take a look at the following five factors for comparing destination options before making your next move.
- Direction of the Local Property Market
Before making an investment in real estate it is vital to understand the current trajectory of the market. You want to know at what point in the housing cycle this city is in, and where it is headed. This will help you to assess the real potential for profitably leasing properties, growing equity in them, and reselling for a profit. How do you find out these facts?
Good comparisons include looking back to when real estate prices were at their last peak or trough. For example; if you are looking at purchasing an investment property in 2017 you might look at asking and sales prices compared to the low of 2008 and the highs of 2005. You may also look at historical graphs and their trajectory.
Know your four stages of the real estate cycle:
- Recovery
- Expansion
- Hyper-supply
- Recession
- Affordability
Affordability is probably the most important factor when evaluating property markets. The presence of affordability means sustainability and room for growth in property values, rents, and profits. Once housing becomes unaffordable then defaults begin, performance declines, people have to move away to find somewhere cheaper to live, demand decreases, and oversupply can become a major issue.
How do you assess affordability? Compare local renter and buyer incomes to prices. How much of their income is taken up by rent or mortgage payments. Typically lenders and landlords like to see borrowers and renters making around 3x the housing payment in gross monthly income. At sometimes we’ve seen this stretch to around 55%. At this point any fluctuation in income can result in defaults quickly.
- Economy
Looking for signs of economic growth is important. Perhaps even more important is looking for a flexible and diverse economy. Are there multiple industries supporting the market? Is this a city well known for being able to innovate and reinvent itself to stay ahead of changes? We’ve all seen what can happen when a city is solely reliant on one industry like auto manufacturing or oil.
- Timing
More important that recognizing the current position and outlook of a property market is matching that with your own timing. How long do you plan to hold a property in this destination? Are you planning to fix and flip fast, or hold until you pass it on to your heirs or a foundation? Some cities may be hot now, but may lack the gas to go the distance. Others may be just about to begin growing. Which matches your strategy best?
- Risks
What specific risks might real estate investors face in this city or neighborhood? Is crime high? Is vandalism and property crime a threat? Is it prone to terror threats? What about natural disasters like hurricanes, flooding, tornadoes, and earthquakes? What about rising sea levels or major economic changes? There is risk everywhere to varying degrees. What are your odds? Are there measures you can take to effectively mitigate that risk? For example; great insurance, choosing newer buildings which are constructed to the latest codes, etc.
There are many great places to invest in real estate, just make sure you are investing wisely in the best cities, which best match your individual timeline and strategy.
About the Author:
Kaya Wittenburg is an international real estate expert, and founder of Miami based Sky Five Properties. A speaker, former Versace model, and consultant to leading developers in the most fashionable markets Kaya is consistently sought out for his insights on real estate and design.
