Real estate professionals have been known to parrot that annoying “location, location, location” line in the ears of anybody who will listen. From their own point of view, this factor is paramount because it means that their commissions will be higher on a desirable location than it will be on other potential properties.
But the truth is that this meme is not quite as valid for investors as it is for agents. Yes, an investor wants to find a property that will make money, but they are likely to obtain a greater payoff if they can figure out what area is destined to become the next “location, location, location” setting. There is simply more blue sky in an up-and-coming neighborhood than in one that has already been bid up to the top. The trick, of course, is to find the next diamond in the rough before everyone else realizes it. Here are some factors which can help point the way:
The first thing you are looking for is some sort of favourable change in the underlying data. This means that you are searching for an area that is in transition. The standard term for this is gentrification but this is not always a correct description of the process. Turning an old warehouse district into a funky urban enclave is not really gentrification but areas such as these can be highly fertile ground for growing real estate profits.
Next off, you need to understand why some particular area is in transition. If you cannot locate a positive factor that explains the uptick, you may become the victim of a head fake on a neighborhood that is not really starting to take off. Transportation expansion is a good factor to consider when looking for the best real estate values. A new light rail line will almost undoubtedly provide an uptick in property values.
Rising income is a good indicator to watch for. If the area residents are experiencing a financial boom, then there is an improved likelihood of higher property values that will arise out of the desirability of living in a well-to-do area. Quite frequently, this rise in income results from some local industry that is now on the bounce and paying higher wages to attract talent—which wants to live close to their new jobs.
This jump in income generated another factor which affects real estate values. As an area gains cachet, it also advances as a desirable area for in-migration. Other people come to the area seeking what they perceive to be increased opportunity that may not be available elsewhere, and they are usually charged for the privilege of gaining entry. This is not always a cause and effect relationship. At times, in-migration into an area can then generate opportunities for the locals that were previously unavailable. Regardless of whether it’s the chicken or the egg, an influx of people into an area is a very sure sign of positive transition.
At times, the core area of this transition may have already topped out or become so prohibitively expensive as to not warrant investment, but rising areas tend to create waves of prosperity that ripple out from its center and form concentric circles of raised expectations around it. Housing prices can therefore be affected at a distance from the original district but the impact will diminish as that distance increases.
Another important factor that must be watched with the utmost care is the attitude of the local, regional, and national political authorities. Even very slight changes in the political outlook can either turbocharge or absolutely kill the prospects of an area that is set to boom.
Finally, no discussion of the most important factors affecting housing prices would be complete without talking about the impact of mortgage rates. Since most people do not pay cash for their new homes, changes in the mortgage rate can allow them to buy more or less of a house with the income they currently have. Prospective buyers should always keep an eye on rates, since there are times when they can profit immeasurably by delaying their purchase in the face of a likely drop in interest rates. Conversely, hurrying through a purchase before higher rates kick in can also be a wise move.
No matter what the situation may appear to be on the surface of things, it is important for people to keep stockpiling data. Not all indicators turn at the same time, and one of the best ways to master real estate is to be able to get into the game while other players are still hesitating on the sidelines. Don’t be the first one in the pool, but avoid being Tail End Charlie as well.
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