Investing in real estate is a smart business idea.
Whether you acquire property for future profit or establish an agency to help people buy/sell real estate, land is an asset that will appreciate over time.
However, property is probably the most expensive asset you will ever buy.
In that sense, there is a high level of risk involved in terms of exposure and foregone interest.
If you want to mitigate risk and find success in real estate, you must consistently research new projects.
13 Factors That Affect The Value Of Real Estate Property
The value of real estate property can be influenced by 13 known factors. These factors can be grouped under three categories:
- Economic Indicators
- Employment Rate
- Gross Domestic Product (GDP)
- Income Levels
- Interest Rates
- Development/ Growth in the Area
- Level of Foreign and Local Investment
- Proximity to Schools
- Proximity to Business District and Commercial Centers
- Peace and Order
- Access to Transportation
- Tourist Destinations, Attractions, and Types of Activities
- Appraisal Value
- Comparative Market Value versus other houses in the neighborhood.
- Appraisal Value of the area as prepared by state-certified appraisers.
As you can see, a lot of considerations have to be made before venturing into the real estate business.
Like all types of investments, you have to put thought and strategy behind every decision you make in the property industry.
Conducting comprehensive research is important to minimize the risk of making costly mistakes.
Given the size of the required investment in the real estate market, you have to eliminate guesswork. You have to make educated and well-calculated decisions. Otherwise, you are merely gambling away your hard-earned money.
Yes, real estate is an asset that appreciates over time.
However, wouldn’t you prefer to park your cash in an asset with the potential to give you a sizeable return within four years than one that may take decades to bear fruit?
Why Real Estate Agencies Need To Conduct Comprehensive Research
Real estate agencies likewise should be cognizant and regularly updated on prices and developments in the property market.
As a realtor, you make your income on commissions.
Similar to real estate, there are factors that can affect the amount of commissions you can earn on the purchase or sale of property:
- Economic indicators
- Employment rate
- Availability of jobs
- Interest/ Lending rate
- Socio-economic condition; will the area undergo gentrification?
- Inter-state migration
- Availability of schools, commercial, and business districts
- Level of demand for property
- Availability of property for sale
- Foreign buying
- Local Legislation
- New laws covering the purchase and sale of property
- Amendments to taxes and other fees for transactions on real estate
- Changes in Commission Rates
Generally, areas that are high in demand will generate lower commissions but result in faster earnings because it is easier to make a sale.
In comparison, areas that are low in demand may present higher commissions but slower earnings because it takes much longer to complete a sale.
Agents are more willing to negotiate a lower commission as long as he/she can secure the property in the list.
Research will help you re-focus your business strategies. You will know which markets to target and how to bring in more potential buyers.
You will also have a better idea on how to negotiate commission rates with clients.
How Researching New Projects Can Lead To Real Estate Success
You may have heard some real estate investors and agents attribute their success to “gut feel”.
While intuition does play a part in decision-making, it should not be the determining factor. Besides, these real estate investors and agents have been in the property market for a long time.
What they refer to as “gut feel” is an ability to comprehend and analyse trends and developments in real estate.
Experienced investors and agents conduct their own research.
Perhaps those with intuition don’t spend as much time perusing charts and news reports. They have already developed a keen understanding of how the market works.
However, they still do some form of research.
Have you ever seen a bar chart showing the prices of real estate property over the years?
These charts represent the historical movement of property prices.
The market consists of traders, investors, fund managers, and speculators. The chart reflects the buying and selling decisions of the market participants.
Do you think the market participants base their decision to buy or sell property on breaking news?
The answer is “No”.
The saying, “Buy on news, sell on fact” does not apply to real estate because it is a long-term investment.
Here are a few reasons why conducting research can lead to real estate success:
- Improve Forecasting of Property Prices
When you buy property, you have to be in it for the long haul.
What happens in the property market today will have an effect on its prices in the future. It’s the cumulative effect of these conditions that influence the overall trend in real estate.
For example, if you bought property from Sydney in 2015, you would have gained 10.8% return on your investment in 2016. From 2015 to 2016, the average property price in Sydney rose from $778,500 to $865,000.
The question is: Would you have sold your property in 2016?
If you did, you would have missed out on even bigger returns when property prices in Sydney hit an average of $1,079,904 in 2017.
By selling your property in 2016, you would have realized an opportunity cost of $214,904.
Intuition alone would not have given you the basis for making your decision to sell or stay.
Research would have shown you that prices in Sydney were influenced by foreign buying from countries such as China, the United States, and Singapore.
You would have known that in addition to high demand, Sydney was short on available property for sale. Another factor was the Reserve Bank of Australia’s continued reduction of the cash rate which made housing loans more affordable.
Sure, you still would have made money.
However, you would have missed out on maximizing the value of your asset.
In real estate, the investment adage holds true: “Run your profits, cut your losses.”
- Identify New Opportunities
Pricing charts will look differently from one property to another.
The pricing history of Sydney will be markedly different from Tasmania. Sydney has the highest property prices in Australia. In comparison, Tasmania has the lowest.
Does that mean there are no opportunities to profit from property investments in Tasmania?
In a word, “No”.
There are always opportunities in the property market. You just have to know where to look for them. Research will help you find opportunities in new projects.
Property prices have been rising in Tasmania since 2011. The best cities to buy property in Tasmania are Hobart and Launceston which are expected to grow 13.4% and 9.1% this year.
Compared the growth potential of investing in property at Hobart versus investing in Sydney where prices are only expected to rise by 0.7%. Thus, investing in Hobart or Launceston would be more profitable than acquiring property from Sydney.
- Reduce Your Level Of Risk
All types of investment carry a level of risk.
Real estate is no different.
Because it will take time for your investment to show a significant return, you bear the burden of exposing your capital to opportunity cost and foregone interests.
However, there are ways of extracting profit from real estate while waiting for property appreciation.
For example, you could build on the property and lease it out to prospective tenants.
You don’t have to buy land. You could buy an existing building, such as a house or a condominium unit, and lease it out after putting improvements in place.
There is money to be made in the property rental business.
If you acquired the asset through a bank loan, rental money can help you offset the cost of amortization. Thus, renting property will lower your risk from acquiring a bank loan.
Property management can provide you with monthly recurring income. Research will help you identify the city which accounts for the highest rental rates.
In Australia, given the tightness of supply, property rental is the next best option.
As important as research is to succeed in real estate, it is an activity that takes time and effort.
If you own the real estate agency, your time is best dedicated to running the core functions of your business.
In other words, your business will be better served if you spend most of your time showing clients properties, negotiating deals, and building your list.
So how can you do research if you are constrained for time? Consider outsourcing research to a Virtual Assistant.
Virtual assistants are no longer limited to administrative duties or secretarial work.
You can find VA’s who are capable of handling technical tasks such as research. There are VA’s with experience in conducting research for real estate companies.
They can perform Comparative Market Analysis (CMA), research trends and developments, keep track of the latest real estate legislation, prepare presentation materials for prospects, update your CRM, verify titles and relevant documents, and review contracts.
The bottom-line is: If you want to succeed in real estate, you have to constantly research for new projects.
Research opens up new avenues for opportunities while reducing your levels of risk.