Real estate is one of the few investments that has withstood the test of time. Although it is never guaranteed to be profitable and should always be carefully vetted, property is an asset that humans have an inherent demand for. So long as we exist, there will be a market for it. After all, people need a place to live and work. This article will highlight a few tips for prospective investors to keep in mind.
Have you noticed that the biggest cities have the most expensive properties in the world? What do places like New York, London, Moscow, Tokyo and Hong Kong all have in common? The answer: a dense populace. In fact, one of the first points of due diligence should be to consider the growth rate of the local population. Real estate prices are generally the result of supply and demand. If there are lots of people and not a lot of space for them to live, then housing prices in the area would increase. Conversely, if there is too much inventory on the market then values would decline. Therefore, it is crucial to look at whether the local populace is expanding. If it is, then that is positive for real estate speculators.
However, you should also contemplate what fuels the local economy. If it is mostly the result of a single industry – or even a sole company – then there is heightened risk. If that industry or business declines, it can wreak havoc on the market. This was the case in Detroit after the collapse of the automobile industry in the early 2000s. The population fell by nearly half a million people and housing prices collapsed. In Canada, the province of Alberta was thrown into recession after oil prices plunged. Fort McMurray, alone, saw its population dip by 11% in three years.
Note: I frequently share stats like these on my LinkedIn page. If you’re interested in real estate, whether via equity or debt, please feel free to connect with me.
Real estate investors should also be aware of what kinds of properties may be in demand. Some areas are more conducive for rental opportunities, while others may be more attractive for selling homes to buyers. In general, rental units become more popular during a weak economy. During downturns, people usually have less disposable income. They may not be able to save for a down payment or qualify for a mortgage. As such, market forces cause them to rent. When the economy is strong, though, the reverse can become true.
In addition, investors should factor in all expenses that might be involved in a project. People commonly include just the cost of mortgage payments when calculating prospective returns. However, it is prudent to also think of property taxes, potential breakdowns and repairs. Further, there should be enough financial bandwidth to sustain a temporary loss of tenant. For instance, if the deal might implode as soon as a renter moves out, then it may not be worth the risk.
In some ways, property can be a relatively predictable investment – at least when compared to other opportunities. But it would be a mistake to assume that all of it is the same. Instead, real estate varies per type (residential, commercial, agricultural, etc.) and geographies. It is possible and even common to lose money when making investments of this nature. One has to look at the details and make cautious assessments before going forward.
About the writer: Alexis Assadi is the Chief Executive Officer of Pacific Income Capital Corporation, which serves as general partner to Pacific Income Limited Partnership. He is a mortgage lender across Canada and thus intently follows various property markets. Alexis Assadi advocates for investor education and encourages readers to perform complete due diligence. He believes that risk can be mitigated through care and thoughtfulness.