Every investor has their favorite set of metrics when they analyze real estate. I believe there’s more to selecting a good investment than just numbers.
Most new investors use a simple Internal Rate of Return (IRR) or cash-flow model. In reality, there are several more metrics you must use to analyze real estate investments beyond simple quantitative metrics regarding cash-flow.
For example, if you only looked at a simple spreadsheet that analyzed cash-flow you would choose a low-priced home in Detroit over a low-priced home in Palm Springs, California everyday. In reality, the cash-flow might be better but the long-term demographics of Palm Springs, California are a lot better than Detroit, Michigan.
Let’s get started with these 10 unusual and nontraditional but important metrics:
Unusual Metrics to Analyze Real Estate
I’m listing this metric first because real estate is currently a part-time job right for most of you. You likely have plenty of opportunities to make money without going into debt.
If you are choosing real estate, make sure wherever you are investing you actually like going by and visiting your properties. I have found this to be a good indicator of long-term success in real estate.
In your effort to produce a passive income, be careful not to spend all your time getting there.
I knew an investor who used to be a Harvard Law Professor. He quit is job at Harvard in order to redevelop properties in the low-income areas of New Orleans, Louisiana. At that time, he managed almost 1,000 units.
He said one thing that really surprised me – that he spends more money on gas and travel time to visit all his properties than he does any other expense. He also stated this is very common with property managers and that if he could start over, he would choose homes in a single neighborhood.
His advice to me: “In your effort to produce a passive income, be careful not to spend all your time getting there.”
3. Climate Change
It’s easy to view climate change as a political topic since that is who I hear talking about it the most – politicians. However, climate change will cause radical implications for real estate over the very long-term. Whether you agree with that statement or not, read the UCLA research – it’s a very interesting paper: Real Estate Price Dynamics and Climate Change (pdf)
4. Politics & Taxes
When I used to own a hedge-fund, I had the opportunity to talk with several world-renowned investors.
To be honest, some of these guys were a little weird. One guy, that lived in Hong Kong said that the only real estate he owns is in Switzerland. His argument, was that even though property taxes are high in Switzerland the stability that the government offers is second-to-none.
Here are some questions to ask when deciding where to invest:
- Is the government pro-active and progressive where you invest in real estate?
- Are they improving the infrastructure and supporting employment growth?
- When was the last time property taxes increased?
As we have seen in North Dakota, there can be a surge in population that causes rampant price increases in real estate. However, if that surge in population is not sustainable and only related to one industry there can be horrible effects on the downside if that industry experiences a downturn.
6. Location, Location, Location
Though Lex Luthor is a fictional character, he was not incorrect when he said: “Stocks may rise and fall, utilities and transportation systems may collapse. People are no damn good, but they will always need land and they will pay through the nose to get it!”
Stocks may rise and fall, utilities and transportation systems may collapse. People will always need land and they will pay through the nose to get it!
– Lex Luthor
The majority of the successful real estate investors I know like to invest in geographically constrained areas. In my opinion, Manhattan is one of the best examples of this since it is on an island. These constraints are only exacerbated because of Central Park. As a result, the property prices are some of the highest in the country.
7. Investment Vehicles
If you are bullish on real estate, but don’t want to spend the time to own physical property you might want to change what type of investment vehicle you use.
For instance, consider investing in a partnership where somebody else does the work. Your returns are probably going to be lower but you will also experience fewer headaches.
You might want to even consider publicly traded REITs or real estate mutual funds. Again, your returns will probably be lower, but these investments are also more liquid.
My best friend has a saying:
A good deal, at a bad time, is a bad deal.
That’s a great adage to live by. I have had to pass-up on several real estate investments that would have made me and my family a substantial amount of money simply because it was bad timing. It would have required me to go into more debt than would be responsible. Additionally, I didn’t have any excess time to devote to these projects.
A good indicator of timing is bank-lending. I bought my first multifamily building in 2009, when banks were not lending to non-owner occupied real estate. They were trying to sell the multifamily properties they had taken back. Today, this lending environment has changed dramatically regarding multifamily properties.
Is the property next to a university, hospital, or business hub? If so, it will likely dictate the type of tenant who will want to rent your house. That can be good or bad, depending on the situation.
If you find an 8-plex apartment building next to a building, you could likely use Airbnb to rent each unit to families looking to stay near the hospital. If you buy a 10 bedroom 5 bath mansion next to a University, you could probably rent it as a sorority house, if you don’t mind the excess wear and tear.
I purposefully made this the last metric. Why? Because in reality, this is probably the first metric you pay attention to. However, there are several other metrics that you should be paying attention to as well.
If prices have risen dramatically over the past 4 or 5 years be very careful. Just like any other industry, Real estate is cyclical. Buying property at the top of the cycle with a substantial amount of debt is a formula for disaster. With real estate, it’s always protect your downside, so you can enjoy the upside.
Always protect your downside, so you can enjoy the upside.
I Practice What I Preach!
This article covers some big topics (i.e. Climate Change) and I always want to leave my readers with actionable advice. Specifically, how I personally have used the topics above to influence my real estate decisions. Currently, I only buy multifamily properties in one specific zip-code. The city I buy in is very progressive regarding employment growth and infrastructure.
Finally, I like to buy “C” rated properties and upgrade them to “B” properties. By following this strategy, I’m not competing with new construction “A” properties but I still have an appealing product for tenants who are on a budget. I also evaluate properties first with how much money I want to make per door in profit.
I then figure out if the financing strategy and price that I am paying can produce that monthly target profit.
What is your favorite metric to analyze real estate? Did I leave any metric or topic out. Let’s talk about it in the comments below!