A long-term real estate strategy is not difficult to establish and can provide returns that far exceed other investment opportunities. The key to getting started on such a plan is to understand two key local measurements for real estate. As covered in yesterday's blog How To Place A Value On Your Home, all you need to know is whether or not your population is growing and what basic construction costs are doing (rising or falling).
In order to keep the scope of this article relatively simple, we will define a long-term real estate strategy as one in which the goal is to buy real estate at a low price, sell it at a higher price, and have it "carry itself" during the hold time. Additionally, this plan will include a "buy strategy" and a "sell strategy" and will not be based on market timing, flipping, or any other active form of work.
The strategy that this article will contemplate is for the passive real estate investor, looking for an strong rate of return without having to take on a significant amount of work outside of his or her own current occupation. Thus, this is a look at how to increase "what you have" as opposed to "how to make millions overnight in real estate."
Population Growth Controls Real Estate Demand
As simple as this obviously appears, one cannot forget that if an area has more people moving in than moving out, the need for housing will rise. The opposite is true as well, thus determining what the long-term population trend will be for an area is the most important thing a long-term real estate strategy will consider. Again, for simplicity sake, I will assume we are looking at an area projected for long-term growth (such as Tallahassee, Florida). It is not important that the area be "booming," just so that it is growing at any pace.
The second key in our long-term real estate strategy relates to basic costs that occur in the housing market. Without going into a ton of research (which is not necessary), you have to decide whether or not costs are stable, rising, or falling. With minimum wage just receiving a large increase less than a year ago, I would think it is safe to say that costs of construction are rising, though the cost of land will be falling until local market supply and demand dynamics return to a balanced state.
So, in order to move forward, I feel safe to say that for the long-term, Tallahassee is growing and the cost to bring new homes to the market is rising. This is simple, but it is also the foundation to a successful long-term real estate strategy. You see, knowing this information, we can buy real estate and hold it long enough to guarantee our required ROI (return on investment).
Determine A Minimum Return On Investment
The biggest mistake I see from new investors is that they look at property before knowing what they want to do. They should develop an investment goal and then determine whether or not real estate even fits in the plan. Some things to consider:
- What is the investor trying to accomplish (wealth creation versus wealth protection)
- What risk posture the investor is willing to assume
- What other investment opportunities (non-real estate) are available
- What "Safe Rate" is available (CDs are paying less than 3%)
- What ROI makes a long-term real estate investment desirable
Considering that we can put money in a CD and get 2% or so, I cannot imagine investing in real estate with this as our desired return. The more work and the more risk an investment requires, the higher the expected ROI should be.
Assuming the investor has access to all "normal" investment vehicles, the investor needs to decide what minimal ROI makes real estate a valid choice for the utilization of investment capital. Once determined, the investor now has an unemotional target that he can use when deciding whether or not to buy real estate.
Coming Next: Real Estate Investment Example With ROI Analysis
Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.