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The most alluring thing about investing in real estate, for most people, is the basic understanding that land is a limited resource. If people need land and the world’s population is growing, then the basic law of supply and demand says this: The value of land is rising and always will.
In Other Words: “Buy land, they're not making it anymore” – Mark Twain
Not many of the other things people spend money on rise in value in this fashion. For instance, when you buy a new car, as soon as you drive it off the lot, the value of the car drops significantly. That’s because when it comes to cars, what people value more than anything is newness. As soon as the car moves from the “new” category in the salesman’s lot to the “used” category in a driver’s ownership, that major value factor is lost.
Likewise, there are many factors in real estate that people value more than others. But the key difference between property value and car value is this: You’ll rarely be able to sell a car for more than it initially sold for. But in real estate, this happens all the time.
It happens enough that many people turn profits and make a living buying and selling real estate. If you want to be one of those people, you have to learn to recognize the twists and turns of the market. Even though we all know that land goes up in value in the long run, it can go down in value in the short run, and you don’t want to be the one on the short end of the deal when it does.
Property value can be flattened or even pushed down by a wide variety of things, such as:
- Zoning laws (down zoning)
- Environmental conditions (presence of toxins, regulatory requirements)
- Tax reform
- Rent control
- Crime rates
- Economic downturn (national or regional)
Plus, there are a few other curveballs that can challenge the idea that property value always goes up. While land may be a limited resource in that there’s no more of it being produced, housing can still flood the market. In an ABC Nightline interview (3/26/2006), Yale scholar Robert Schiller suggested that an increase in the number of houses being built may soon cause a dramatic fall in prices.
Does that mean you should steer clear of real estate investing for a while? Of course not! That’d be letting fear get best of you, another excuse to wait, don’t wait to buy property. Instead, use this information to your advantage. For instance, when you’re scouting an area for properties, one of the things you should take into consideration is the rate of housing development. If, based on your research, you see that the supply of housing will soon exceed demand, then you might want to wait until that point passes, and then immediately swipe up opportunities to buy houses when property values have already dropped dramatically in the area. There might be a golden nugget hidden in that downturn, but you must be well-informed enough to spot it!
The ideal thing to do is to avoid bandwagons. In fact, stay ahead of the bandwagons. You don’t want to be buying apartment houses when apartment houses are the craze, perhaps because a New York Times article pointed to them as a golden opportunity and now everybody and their mother is looking to invest in an apartment house. You’ll have lots of competition, and the high demand will drive the prices up. You want to buy an apartment house right before they become popular, so you can be one of the sellers demanding a high price tag when everyone else is buying.
Look for investment opportunities with benefits that are not so obvious to the naked eye. Choose your properties wisely. Property value may not ALWAYS go up each year, due to a particular cycle, but it usually does for those who can recognize potential where others see waste over the long run.
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