Understanding the economic fundamentals of real estate is vital to your long term success. Without doing this research you are just speculating and that usually ends up badly!
As a new real estate investor you must decide on where you are going to invest and there are several economic fundamentals to determine the best investment area for you.
You will need to roll up your sleeves and start doing some research on the area you want to invest in. Duplicate this process for each area you are considering...
Coaching tip: If you do not like to do this sort of thing and it is not the best use of your time you could delegate the task to someone that is good at research. But for learning purposes you may want to do the first one yourself.
Note: Additional info sources, other than Economic Development or City Planning Offices are listed below each question.
Here is a list of vital questions that you need to know the answers too before buying investment property in any area...
Passive Economic Influences:
Is the area’s average income increasing faster than provincial average?
Is the area’s population growing faster than the provincial average?
Is the area creating jobs faster than the provincial average?
Does the area have more than one major employer?
(Where to research answers for the questions above: Statistics Canada, Provincial Government Economic Web-sites, Local economic research firms)
Is the investment property in an area that is going to benefit from a Boom’s Ripple Effect?
(Visit surrounding towns and regions. Is the real estate boom occurring in the surrounding region more than where you’re looking? If yes, this is a sign of potential boom in your target area.)
Has the political leadership created a ‘growth atmosphere?
(On-line or city hall. Read the minutes of council meetings; speak with mayor or Councillors to see whether the leadership is focused on bringing new jobs and growth to the area.)
Is the city Economic Development Office helpful?
This is a key question. If the E.D.O. is difficult to deal with for you, you can often assume that they will be the same for potential employers looking to move into the region.
Is the area’s infrastructure being built to handle the expected growth?
(Local town planning department. Look for expansion of water treatment, sewers, commercial and industrial space, etc.)
Is there a major transportation improvement occurring nearby?
(Local town planning department.Trains, planes and automobiles. Will the region become substantially more accessible with the transportation improvements? Make sure the improvement has begun – don’t say YES until you see building.)
Is the area attractive to ‘Baby Boomers?
(Does it provide lifestyle options: parks/water/recreation, family infrastructure?)
Is a short term perceived problem occurring that will disappear?
(Negative media stories, short term layoffs, etc.)
Are Mortgage Interest Rates lower than the 10 year average?
(Not sure? Check with your Mortgage Broker or banker)
Is there a noted increase in labor and materials cost in the area?
(This will drive up the value of new construction, thus lifting the value of existing homes.)
Many neighborhood specific answers will require an on-site visit to get a real feel. For now you can do a virtual tour using Google maps.
Never just believe the person who is selling you a property to answer these important questions. Dig Deep.
Is the neighborhood an area of renewal or gentrification? (Renewal and rebuilding)
(City Planning Department – Area Redevelopment Plan. Articles in media about ‘taking back the neighborhood’, increased pride of ownership)
Is the Zoning of the neighborhood poised to change?
(City Planning Department – Area Redevelopment Plan)
Will the property value benefit from a new development nearby?
(Visit surrounding neighborhoods, look for new or re-development.)
Is there a lot of speculative investment in the area?
(Has a major announcement driven values upwards, is there an increased amount of investment money pouring in?)
Are there amenities in the region that would attract your ‘exit’ target buyer?
(Before you buy, always think of who you will be selling to make sure the property will attract that person)
What are your general observations of the neighborhood and tenant profile?
Remember, you don’t have to live there, your target tenant does.
Real Estate Market:
Are there currently sales over list price in the area?
(realtor.ca or your buyer’s agent realtor)
Is the property located in a Buyer’s Market?
Are there more active listings than the 5 year average?
Do you have a quality realtor who understands the investment real
Estate market in the region?
Do you have someone to Impeccably Manage the property?
What is the average vacancy rate in the area? (CMHC STATS)
Key Facts & Figures
As you complete your Property diligence, you will often uncover key facts and figures. Keep these for future use.
What are average rents for similar properties?
What is your tenant profile?
Does the potential Tenant Profile fit my target market?
What percentage of the listing price does the annual rent total?
([monthly rent * 12]/ listing price *100 = %)
Can you increase the annual income? If so, how? (Increase rents, add legal suite, rent garage, improve property, add separate meters, solar panels, etc)
What other ways can you increase cash flow?
At what purchase price does the property make sense vs. the income it generates?
Do you believe you can get an offer accepted at the price you need to make it work?
Now that you have done a lot of the preliminary due diligence on the region/area, the neighborhood and the property, you must make a decision on whether to move forward with the rest of your due diligence or abandon the property.
You’re looking for a region/area, and property that has as many positive points as possible. The more positive points you have the stronger the fundamentals are for that property’s future.
Remember, this is just the beginning of your due diligence. It is set up to give you a very good overview of the property’s potential. It is critical that you complete all YOUR Diligence BEFORE you invest your hard earned money into an investment property!
If you would like help with this you can book a complimentary coaching session by clicking HERE
Until next time always remember
" The More You C.A.R.E. The Less You Work"
Your real estate-based wealth coach,
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