External considerations

Let’s see the external considerations with supply and demand, so supply is the amount or the number of existing as well as upcoming competing inventory.

The other thing about supplies is you don’t want to just look at the direct competition.

So if you’re in a market where there are a lot of apartments and you’re thinking about buying a home to rent, well, you may be competing and you’re probably going to be competing against those apartments as well.

So you also want to look at substitutes supply that you’re going to be competing with.

On the demand side, if you’re looking at selling, potentially selling a new investment, say, a new home, you want to look at a recent volume of purchases as well as the pricing.

so you want to look at the trend over the previous three, six and 12 months to really

see where it’s going so that you have a good idea of where you think it’s going.

So, for example, if the pricing has been trending down, well, that gives you some anticipation about what you might expect in terms of the sale price.

You might have to be much more conservative about what you can sell it for. And also, if the trading volume, how many that’s been selling has been kind of trending down, then maybe the market is not as hot.

But if the volume has been trending up and pricing has been going up as well, then maybe the market is picking up and there are more and more interested buyers.

So you may be selling in a growing market.

Now, if you’re looking at rentals, for instance, then you want to look at the rental rates, but you don’t want to just look at advertised rental rates.

So let’s say you’re looking at a potential rental income property in a certain market, then one of the ways you could get a good idea of what you can actually rent it for is to look at what the vacant rental properties in that market is currently asking for in terms of rent. But you don’t want to just look at that face value. You want to call a few of these places and ask whether they’re giving incentives.

Are they giving one month free?

Because in some weaker markets, they may be providing incentives and that actually lowers your effective rental rate that you can collect on that property.

So if the advertised rate is a thousand a month, but then you’re getting two months free, well, your effective rates are closer to 800 dollars per month.

Now, let’s look at the economic outlook.

And what we want to look at for this topic is both the micro and macro economic outlook.

So you want to get an idea of where the economy or the real estate market is going overall in the nation.

But you don’t want to just look at the king of the overall trends you want.

Also want to look at some microgrants, because there are some pockets that may be seeing something opposite or maybe better or worse than the overall national trend.

And one of the things that you can look at is employment trends, for example.

It may be that in the market you’re looking at, there’s a major employer that recently has broken ground.

They’re going to be starting to build a major new corporate campus that’s going to create 5000 new jobs in the area and that’s going to create demand for housing, for new apartments and new homes in the area that could trump any kind of or significantly counter any opposite macro trends.

So you want to look at the micro trends and kind of what’s going on in the local market as well, but relative to what’s going on in the greater market. And another thing is you want to look at any kind of major developments both in the near term and the long term. So, for example, if you’re thinking about building a retail center right across the street or within a mile, there is a major development of a green anchor retail center that is going to just draw a lot of traffic.

Your dinky little neighborhood retail idea might not be a good idea because you may lose a lot of traffic and you won’t be able to find tenants. So you want to look at any kind of major developments in the market in the very near term, because big major developments like new malls, new hospitals, and big things don’t happen overnight. They have to have approvals, they have to have permits. And it takes years to get through all that, especially for major projects. So look at that as well.

And in the very long term, developments could be looking at things that the city or even the state have directions we’re looking at funding to do.

For example, maybe there is a direction and there’s funding now over time that they’re going to do some high-speed rail and there’s going to be a major stop along the high-speed rail line.

And by having a major stopper station in this market long term, that means that may mean that people there, maybe more folks that can live further away to buy bigger homes and be able to commute to the city for work.

And that may mean more residents that will live in the area and higher rents and higher property values.

So you want to look at the kind of really long-term trends, especially if you’re thinking about holding the asset or holding the investment over a longer horizon. And you can get an idea of some of those things by looking at the city’s 10, 20, or 50 year plan. Now, granted, you know, not all cities will follow those plans, but at least that gives you an idea.

And if you, especially if you can corroborate that with major developments or plans from the state level or the national level, that you may be able to have more confidence in what’s to happen.

Now, let’s look at the market cycle where you are right now in the market cycle could determine whether you should make that investment or not.

So let’s look at how the market cycle works. Now, if we look at the asset value of something, let’s say a home value, it may start somewhere. And then if it’s in a market where it’s accelerating, it’s appreciating.

We will always go through highs and lows by being patient when the market is very fearful or they’re dropping a lot allowing you to be opportunistic. So the idea is if you’re conservative and you sell a little bit early and you sell when you have profits, you don’t wait too long and try to capture every last cent and risk getting caught in a down market where you can’t sell your property. It’s like catching a falling knife.

Right then by the time it drops, you’re going to be flush with cash.

You’re going to have more cash on hand.

And what that means is when property values drop, you have much more of an ability to do deals, to get things at pennies on the dollar and to ride out into the future for some major appreciation.

So how do you know where we are in the market cycle?

It’s called Case Shiller Index and it allows you to it’s a composite index of home values.

And you can see where it’s going by looking at its current value versus its previous value and looking at how it’s changing.

Are the index values getting higher and higher, but at a slower and slower rate?

That can mean that a hot market is now losing steam?

Or is it something where the values have stayed relatively flat but it’s now starting to increase and it’s increasing at an accelerating rate?

That may mean that the market’s about to go through an up cycle again.