Analyzing Properties and Areas

When analyzing properties and weighing alternatives for long-term investment you must diligently seek out all available information to aid your decision-making process. One of the first things to consider for any real estate purchase is location. The area's local chamber of commerce can be invaluable in this regard. They'll be privy to information on any planned future developments - whether public or private in nature - and will likely also have studies concerning the community's future growth, as well.

As a general rule, people usually make money by dealing in areas where they understand both values and prevailing trends in a marketplace. When investors suffer large losses, it's often because they've gone outside of their area of expertise. It's therefore wise to pick a particular type of property to specialize in, and get to know several areas where your choice of property can be found. Then, as a forward-looking investor, you'll need to determine the desirability of those areas twenty years from now. If you don't think that a particular area's desirability will improve or at least remain the same, then it probably isn't good for investment appreciation. However, it could still offer opportunities for flipping (buying and reselling fairly quickly) properties to realize a tidy profit.

Property areas tend to go through three distinct stages: integration, equilibrium, and disintegration. During integration the area is under development (keep in mind that early users will often also determine the nature of future development). After being developed, the area generally goes through a period of equilibrium in which the character and use of the area remain, for the most part, unchanged. Finally, the area will begin to decline or disintegrate, becoming less desirable.

Occasionally, however, an area can be rescued and revitalized from this final stage. For instance, significant appreciation opportunities may exist in older communities that are beginning to experience the process of gentrification, which is the conversion of an area by the introduction of younger and more affluent residents into the locality. Positive telltale signs of this progression can be seen where buyers are renovating properties for their own use.

These stages of development hold true not only for geographic areas, but for individual properties as well. They illustrate the principle that change is indeed constant; it must always be expected. The sharp investor should continually keep in mind that property uses and values do not remain the same. To find what stage of development a property is in, look at the area and what's happening there. You should consider any changes that have occurred within the last twelve months, the last five years, and the last ten years. Knowledge of developing trends during these times will give you an excellent indication of what will likely happen to the area in the future. The study of trends and changes is invaluable in deciding when and what to property purchase, as well as when to sell.

For example, positive indicators might be low vacancy rates, evidence of remodeling or expansion of existing structures, and the replacement of existing buildings with newer ones. In areas where commercial tenants are thriving, there generally will be few changes in businesses or ownership. On the other hand, a high tenant turnover in a commercial location - as well as frequent ownership changes - typically indicates marginal or losing operations. When businesses in an area aren't doing well financially, maintenance often gets deferred. And because of rent collection problems, owners tend to reduce property expenditures to a minimum.

Other negative markers to be wary of are decreases in both retail volume and the percentage of owner-occupied housing in the area. Higher fire insurance rates often accompany increasing crime rates. Additionally, buildings in a severe state of disrepair, and abandoned or fire-gutted structures; graffiti, especially gang symbols (these both usually indicate very serious problems for an area); and conversions of large homes into apartments (unless the property is in the vicinity of a college or university) are all unfavorable indicators of declining values.

In most urban settings the greatest residential growth generally tends to be limited to just a few localized areas. Specific pockets within the locale as a whole typically have greater growth potential or desirability. These are the areas of preference for investing simply because the law of supply and demand causes values to rise with increased demand for the properties. When making decisions about areas to invest in, consider the following general guidelines:

  • Better homes tend to be built outward from a community in the same general direction, especially if toward higher ground.
  • Commercial property tends to grow outward along major transportation routes.
  • One early major development in an area will affect the nature of later area developments.
  • Small service industries tend to gather around major industries.
  • Popular recreational facilities such as parks and golf courses will increase the desirability of an area for housing.
  • The close proximity of colleges, universities, and medical facilities will also increase the desirability for housing in an area.

Concerning residential property, you should consider its location in relationship to jobs, schools, shopping, public transportation, freeways, and recreational facilities. Further, it's generally best to buy the least expensive property in a good area. The values of the surrounding properties will actually work to boost the value of your property. This is known as the principle of progression. The opposite is called regression; it occurs when you own the most valuable property in an area. The lower neighborhood values will tend to pull the value of your property down. To illustrate, let's consider the example of a builder who constructs a $600,000 house in an area full of $150,000 homes. Obviously, the lower home values in the area will make that property difficult to sell at its higher price. Conversely, if the house had been built in an area of $1,000,000 homes, it would likely be sold very quickly even at a price higher than its value.

Finally, don't fail to regard the fact that the existence of present or former chemical dumps, landfills or waste disposal areas can adversely affect a region's property values. Additionally, the presence of a nuclear power plant or even a large chemical manufacturing operation can reduce values and might affect them even more radically in the future. And, businesses that emit significant amounts of dust or unpleasant odors (such as stockyards), or those that cause noise or heavy truck traffic, may also negatively impact residential values.

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