As a residential real estate investor, how do you determine what metrics are most likely to predict property appreciation? Some trends are harder to interpret than others. Using comparable properties can be helpful to get a macro-level understanding of the overall market but they can also cover up some underlying trends. Sales comparisons from six months earlier may have no influence on sales prices today as markets ebb and flow. Additionally, looking at the year-over-year appreciation for a market is useful for the big picture, but often does not tell the whole story.
Below are some additional factors to consider when attempting to determine the appreciation potential of a property and the economic feasibility of investing.
Location Times Three
Real estate’s most used phrase, “Location, Location, Location”, still rings true today and can strongly determine the appreciation of a residential investment. Regardless of the property type, investors should consider who the end users of the property will be and what those users value most. Specifically for single-family properties, distance to and the quality of nearby schools are top priorities for users. Many families are willing to pay a significant premium to be in certain school districts or near campuses.
Additionally, investors should consider the crime rate and proximity/quality of emergency services in the area, such as police and fire departments. Families are more concerned with neighborhood safety than other renters or buyers. So, before you invest, consider who you will market the property to. For investors acquiring apartments and properties that attract younger generations, proximity to retail, entertainment and amenities play larger roles. While the “retail-apocalypse” has been well documented, there are many stores and malls that still attract significant traffic through “experiences” that millennials desire.
Lastly, understanding the local employment opportunities can give investors greater insight into the potential future value of a property. Quality local employers and quality jobs can add value to a property and greatly increase the pool of prospective buyers or renters, saving valuable time on the market as a result.
There are so many factors to consider when undergoing a rehab project, including the effect it can have on the sales price of a home. However, not every project provides as much sell on value as the costs that go into it, especially with rising construction costs and a labor shortage. Kitchens and bathrooms with quality furnishings are often cited as very important to both renters and buyers.
Making sure appliances and finishes are of quality can often lead to greater sale or rental revenues than the cost of undergoing the project. Additionally, many houses are selling for above their asking price in markets with low supply because of defining features such as a walk-in pantry or breakfast nook. While tasteful renovations are highly subjective, factors like views, natural light, side yards, or extra garage space can all significantly drive up the value of a home in tight markets.
Even if buyers have different preferences over color schemes or other personal elements of a house, upgrades and unique features are more or less still appreciated and often attract an emotional connection from a buyer or tenant. The feeling of a house that can’t be replicated inspires buyers and renters to spend above market value on properties, and they are often willing to undergo small projects to personalize it in their own way.
Supply and Demand in the Market
For both landlords and fix and flip investors, the supply and demand in the market should always be considered when choosing investment properties. Investors focused on rental properties should be attracted to low vacancy submarkets as they will limit the amount of time between tenants.
Additionally, the costs and time associated with marketing a property for lease really add up. Every day that your property sits vacant, you are left paying for taxes and insurance out of pocket. The same idea applies to fix and flip investors. Looking at metrics like average days on the market in addition to comparing sales prices versus asking prices can often reveal details about buyer perception of the market. Some markets have individuals spending hundreds of thousands of dollars above asking price and paying significant portions in cash rather than risk losing the contract.
As I mentioned above, unique features are really effective at selling homes in tight markets because buyers risk never seeing a similar property. Areas where employment trends are negative can give an ominous warning to investors that the market will be light on homebuyers. Being able to anticipate trends in submarkets can be the difference between a property staying vacant for weeks compared to many months, which almost always leaves you with a deficit.
There’s no denying that investing in residential real estate is more difficult in our current climate than the post-recession market – but there’s still plenty of opportunities out there, and perhaps most importantly, plenty of money to be made. To do so in this competitive marketplace, investors must make educated decisions and take calculated risks – prices are high, but how high is too high? You be the judge. However, don’t forget to arm yourself with the data and knowledge to make the right investment decisions.
CoreVest is a leading provider of financing solutions to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions.