Understanding the Twelve Keys that Drive Real Estate Values

1. Mortgage interest rates

Low interest rates allow a greater proportion of renters to become homeowners, which in turn can lead to an increase in home sales and therefore push prices higher. That said they don’t significantly increase mortgage costs (on a $100K mortgage a quarter % increase in rates only increases the payments by about $14).

2. Net Wealth Effect Increase in Disposable Incomes

This is one of the most important indicators. If a town’s average disposable income is increasing faster than the national average real estate prices are poised to do the same thing. Key Indicators: a) increased average income; b) decreasing income tax rates; c) increasing retail sales. Be wary of towns where demand is driving values upward while the average income is remaining flat. Go to www.rbc.com, then to economics to find the housing affordability index. As a rule of thumb a well-balanced market for investors is a market that has a housing affordability index of about 33%.

3. Increased Job Growth and In-Migration

It pays to read the newspaper regularly in the towns you invest in. Be on the lookout for announcements of new jobs, major expansions, or new employers moving in. Find areas where the population is growing faster than the provincial average and gaining a good reputation. Also look for Immigration- people from other countries moving into the area, and Intra-migration- people moving from other parts of Canada into the area.

4. The Real Estate Doppler Effect

It is often much more profitable to invest in areas surrounding the boom than to buy property in the heart of it. Use this factor to identify areas that are poised for a strong increase in demands. Smaller cities, outside of areas that get the effect, usually take 6 months to catch up. Look for towns where redevelopment is occurring. Older untouched neighborhoods in these areas can sometimes be hidden gems that aren’t immediately affected by a boom.

5. Local, Regional and Provincial Political Climate

Business friendly politicians generally equal real estate friendly investment areas. Look for regions where development is wanted, not shunned. Look for areas with forward-looking economic development offices where they sell the area to potential employers. Progressive towns attract business while other towns lose it.

6. Critical Infrastructure expansion

Here’s another reason why reading local newspapers in areas that you pan to invest in will pay off for you big time. Look for planes, trains, highways, sewers, land annexation or expansion plans. But remember… DON’T BUY UNTIL YOU SEE SMOKE! Never buy based on rumors alone. Trains and rapid transport are huge (i.e.: towers that spring up at subway stops). Buy within 800 meters of the station, or exit/entrance etc.

6b. Increased cost of labor and materials

This occurs in areas of high in-migration and infrastructure expansion, labor and material costs will increase dramatically. Look for regions where there is a marked increase in these costs as a sign of future value increases. The value increases occur around six months after the cost of new building increases.

7. Areas of gentrification and renewal

If chosen correctly this consistently provides the biggest bang for investment dollars. This is best defined as areas that are moving up from one economic class to the next, often described as “tough, yet funky”. In these areas, you’ll witness a mix of run down to well-kept, recently fixed up properties. Often you’ll see these areas mentioned in the news. Every city and most towns have areas like this. The local perception is the hardest to change, so often locals miss the opportunity. Insight: Look for Doppler Effect gentrification areas. Never be first into an area you believe is going to be in transition. Renewal areas take more due diligence but are worth the effort.

THE ACTIVE FACTORS

These Factors we can influence. Each affects the overall value of a property.

8. Maximizing value and zoning opportunities

Sophisticated investors look first at properties physical attributes, and then they examine how they may be able to change the property to optimize profit way beyond just renovations. IE: an old hotel that is converted into loft apartments, taking a single family home and converting it to a duplex. You need to know zoning bylaws and tenant regulations to make the transition successful. A small percentage of properties will have this potential, but make sure you have the required finances and expertise before taking this on, or find a partner.

9. Buy wholesale; sell retail

You can buy properties at wholesale any day of the week in any town across the country. There are companies whose sole business is buying properties this way. I.E. Buying an apartment building and turning the apartments into condos in an area where condos sell for 80K, and you can buy the building and do the conversions for an average of 50K. Development of raw land also falls under this. Another way is to buy properties that are going to foreclosure. In Canada, accessing these properties is tougher than in other countries. In the US, it is very easy. The best market is the pre-foreclosure market where you proactively advertise to buy such properties.

10. Stand out from the crowd

Quality marketing is a real estate investor’s best kept secret. You must be proficient to get above market rents and values for your properties. I.E. Two similar houses where one is properly marketed can easily sell for 5-10% more than the other can. Matching your message to your prospective target is critical.

11. Renovations and sweat equity

Areas in transition are great sources for homes that need improvements. Look for well-built but neglected homes. Keep the work simple and in line with what a renter or owner is looking for. Improvements can also be landscaping and exterior work.

12. Speculation, jumping the gun on a wish & a prayer!

Speculators forget about economic fundamentals, and neglect doing homework once again, proves emotions lead to bad decisions, and is the downfall of most real estate investors.

Match potential investment areas against the 12 components. In today’s market you are looking for at least 7 of the 12 components to be in-line before purchasing.

Other Possible Due Diligence Steps

* Pick up the local newspapers
* Drop by the public library
* Pay attention to business moves
* Study housing prices
* Look at vacancies
* Visit the local Chamber of Commerce
* Visit local business owners

-- Heather