One of the most contentious things that a real estate investor can attempt to do is tell the future. We’re not talking about crystal balls and reading palms but predicting the state of a property within the next few years. However, estimation of the rise in property value is directly linked to many factors, ranging from viability in the current locale to the market factors impacting residential and commercial purchases.
What should real estate investors be aware of when they’re trying to estimate the potential future value of these properties? Below, 12 experts from Forbes Real Estate Council share several considerations that real estate investors should keep in mind as they evaluate.
1. Check Development In The Area
Take a look at development in the area. Is there news of companies expanding in the area that will bring more people to the area and increase the demand for housing? Try to be at the forefront of this news rather than in the midst of the chaotic mad rush. We’ve seen home prices appreciate rapidly with all of the companies moving and expanding in Austin and the lack of housing supply. – Kristee Leonard, The Leaders Realty, LLC
2. Start From Annual Net Cash Flow
There’s a simple rule of thumb I would recommend. In a “strong market,” with strong population and job growth, multiply the annual net cash flow by 20. In a “weak market,” with limited growth and a shrinking population, multiply the cash flow by 10. – David Welch, Robinson Weeks Partners
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3. Examine Income Stream Stability
The best thing for an investor to do is to look at the stability of the income stream. Look at whether the tenant’s business or job situation has been affected by the economy and pandemic. If you don’t see the tenant in a long-run position, then the same can be said for the property’s income stream. The future value is based on the lease and the tenant’s ability to fulfill the terms of the lease. – Michael J. Polk, Polk Properties / Matrix Properties
4. Hone In On Terminal Cap Rate
Hone in on the property’s terminal capitalization rate. Even modest swings can create huge fluctuations in disposition price. You’ll need to estimate the expected growth rate of net operating income once the property is stabilized. This estimate is dependent upon your understanding of the metropolitan statistical area, capital market and property niche. – Brian Spear, Sunrise Capital Investors
5. Understand Local Macroeconomic Factors
Understand the macroeconomic factors affecting the local economy. What businesses and industries are currently there to support the income of residents and what is coming? I like to utilize the product life cycle to determine if the real estate market and local economy is in the introduction, growth, maturity or decline stage when evaluating growth and upside potential. – Catherine Kuo, Elite Homes | Christie’s International Real Estate
6. Check Trending Keywords On Google
Watch Google search results for trending keywords for apartments and real estate in your target neighborhoods. Visit websites and study inventory in these particular areas. Find high-search volume with low availability of units to gauge the potential of upward rents and pricing. Establish extensive data logs and watch trends based on real-time availability rates (RTAR). – Demetrios Salpoglou, Boston Pads LLC
7. Look At Data Over The Last Year
In the past, an investor could look at historical metrics to evaluate how real estate had performed in a specific market through different cycles. The world is changing faster and differently than it ever has before and so many of those tests no longer apply. To gauge future property value, investors should look to data over the last year to see which markets were stable or appreciated during the pandemic. – Noah Grayson, South End Capital Corporation
8. Watch Out For The ‘Realtor Paradox’
If you are an investor, watch out for the “realtor paradox.” For some reason, every realtor in the world will tell you that their town, their listing or the neighborhood they sell in is the best “location, location, location” and a great place to invest. If every agent you ask in a different market says, “This place is best,” then you will recognize the paradox. Don’t speculate, invest! – Michael Thomas Chambers, Chambers Theory
9. Evaluate Implemented Technology
For investments into real estate investment trusts for multifamily buildings, commercial or any community, investors must evaluate whether the company running it is up-to-date with technology market changes. For them to run profitably, they should be leveraging technology. – Ashutosh Saxena, Caspar.AI
10. Rely On Trusted Professionals
Rely on trusted professionals and their tech and data. Most realtors and even mortgage brokers have access to sales history, trends and year-over-year growth tracking. Make sure you’re pushing to get reports and stats, not opinions. Build a trusted and reputable team around you and remember, they work for you and your best interest. – Chris Turcotte, Centum Financial Group
11. Track Supply And Demand
Start by tracking supply and demand. If supply is low and demand is high, you can reasonably expect property values to increase. One way to track this is to compare pending to active sales, and this is data everyone can now easily access. A higher proportion of pending sales will generally trigger a surge in values. – Kevin Markarian, Marker Real Estate
12. Have A Time Frame For The Forecast
You need to start with a time frame for your forecast. If you are thinking about a 20-year investment, I would look at the U.S. House Price index annual average growth rate for your market over the past 20 years. Then calculate the future value of the base investment price over your investment horizon using that rate. This is imprecise of course, but will be more accurate over longer time frames. – Megan Micco, Compass