In today’s vast and sophisticated real estate market, investors have opportunities to directly or indirectly access real estate assets worldwide. As real estate starts to recover as an investment class, it can become a daunting task to decide where to place your chips.
Before diving into to the juice of the actual deal, (asset returns; asset condition; asset location) it’s imperative to research the “market” in which that asset lies. Seasoned investors know different risks involved with each region; my goal is to get the average investor to think about the not so average due diligence questions.
For the purpose of this blog, we will focus on the continental United States, although the scope of this research approach can and could be applied elsewhere. Regionally speaking, we can divide this topic into four regions; the East; the Midwest; the South and the West. Each with its own nuances, you can imagine there are far too many to cover in this blog, so we will cover broad areas for investigation.
Are state laws friendly towards investors? Is this rumored to change and if so, how will it affect your strategy? Touted as America’s most disliked tax, (and known as a lagging indicator) property taxes vary state by state and tend to follow the direction of political environments.
Are the political heads competent enough to get things done? Double-checking on the leaders of your potential investment region is key before finding yourself in business with them. There is nothing more stifling to projected long term profit than city leaders who cannot respond to growth needs. A good place to start is the cities 5-10 year plan. Make sure your goals will fit into their projected plan.
Changes in demographics
Population changes are huge game changers as investors in natural gas states like Wyoming and North Dakota have found. Projections from independent and reliable resources such as The Brookings Institute are worth checking, on a regular basis. Places with stagnant or declining populations should have compensating factors and accompanied with well thought-out long term strategies
Diversity in population has proven to bring increasingly stable returns. We are finding dense populations and higher returns around urban more so than suburban areas for numerous reasons; diversity in food, shopping and entertainment experiences are a few of them. Americans love choice and convenience, these two amenities are luring them to the surrounding urban areas.
Seasons & Natural Elements
Weather will affect your bottom line. Consider the South where for all intensive purposes it rains a lot or consider the Midwest where the winters are most fierce, what type of additional expenses should an investor include in their calculations? For these examples biweekly grass trimming, winterizing and snow removal expenses are cash flow attackers. Investors in NV should think twice about buying assets with aluminum siding as hailstorms frequent the region and can damage the curb appeal once held.
Is the area predominantly developed? Does it have its infrastructure needs met? Is there a finite amount of livable and build able land? It is safe to assume property values will be higher in more developed areas. It can also be reasonably deducted that the more sophisticated the infrastructure, the more money needed to run that economy.
As you can see, this due diligence aspect can become as expansive or detailed as you want. It’s important to keep in mind that Investing whether in your backyard or out-of-state will require knowledge of your market. Once you’re financially involved with a real estate market it’s all about managing the experience. Putting a lot of the work in on the front-end can make that process more profitable and palatable.