Real estate investment has long been a stable and lucrative endeavor, a fact supported by numerous statistics. For instance, 63% of Americans own real estate, and in December 2023, investors accounted for 29% of all real estate purchased. This stability can provide a sense of security to potential investors.
Whether you’re a first-time buyer or looking to diversify your investment portfolio, grasping the dynamics of the real estate market and its influencing factors is not just crucial, but empowering. This knowledge gives you the confidence to make informed decisions, ensuring you make the right purchase and steer clear of potential pitfalls.
So what drives the prices in real estate became, as everyone knows, prices don’t always go up; they can come down too. The following factors can influence these prices.
Six Factors for Real Estate Investment:
1. Demographics
Demographics, the study of people and their characteristics, play a pivotal role in real estate investment and property prices. Understanding this influence can significantly enhance your knowledge and equip you to make sound investment decisions.
Looking at the demographics of an area means you can get a feel for the type of property that will be popular now and in years to come, i.e., is it predominantly young people who are starting families, meaning family homes will be more popular now and in the future or is the population made up of boomers or the silent generation meaning there is a high possibility that larger properties might be surplus to requirements? Or are the demographics pointing towards a massive student influx who will require smaller homes or apartments and will eventually age out of the area?
On top of this, you need to consider the average income in the area and population growth, too, as this will help dictate future prices. For example, if the area is experiencing gentrification, prices will naturally go up as the area will attract more people looking to make this their home; however, if the area isn’t as affluent, there is going to be a price cap on what people will expect to pay for the property when both buying and renting meaning this can impact your potential yield and profit from buying in an area experiencing rapid growth or vice versa one that isn’t benefiting from regeneration.
2. Location
Some zip codes will naturally fetch a higher price than others simply due to where they are. Investing in a desirable area can initially seem like a great idea; however, your initial investment and costs will be much higher than in the regions that aren’t in demand or don’t have the proper infrastructure, For example, let’s say Florida is on your radar for a second home real estate investment.
Choosing the right zip coral gables, for example, means that you will need to uncover which zip is right for you to purchase the right property. Do you want a zip that lands you downtown close to all the amenities or one that is closer to the University of Miami, or do you want a beachfront zip to offer you prime seasonal renting opportunities?
Location is a massive influencer on property prices, even within zip codes. Understanding how desirable a current location is and whether there are plans to regenerate or gentrify an area is crucial, as this can significantly impact the value of your investment over time.
3. Economy
The current economic position will directly impact the real estate market, but you probably already know that. Economic uncertainties or recessions will reduce demand, and while interest will likely fall early in a downturn, criteria for mortgages and borrowing against real estate will become stricter, making it harder to get approval and qualify for better rates and loans.
The opposite is true of times of a flourishing economy, as people are willing to spend more, and there is a greater supply of property as sellers take advantage of a seller’s market. However, buying in a seller’s market isn’t always ideal for real estate investment, as prices will become inflated in line with economic conditions, making investing the most costly. There is also a very real possibility that you can end up with negative equity if the market changes and the value of your property drops.
4. Interest Rates
It would be remiss to skip over the influence of interest rates on the real estate market. It’s one of the more important factors that will influence your ability to purchase or not to purchase property, be it your first home, first rental, or second holiday home with rental potential. In a nutshell, the lower the interest rates, the easier it is to afford, as the mortgage is lower. Higher interest increases the cost of a mortgage. However, lower interest rates can work towards creating a greater demand, which inflates prices, and the opposite is true of higher interest rates; lower demand and lower prices follow.
5. Supply and Demand
Supply and demand will, of course, determine prices in the real estate investment market. It’s pretty self-explanatory: the more demand there is, the more prices are going to rise, and the less demand, the lower the property prices to help them sell. Understanding the demand in the area you’re buying can help you assess whether you will pay higher prices to get on the property ladder and if it will be worthwhile.
6. Government Policies and Subsidies
Understanding any subsidies, tax credits, or deductions that are currently incentivizing people to buy can will help you see how this is going to impact the market. For example, if there is a first-time buyer tax credit as there was in 2009, more first-time buyers will be entering the market. This temporary response to the incentive can seem to indicate higher demand. Still, in reality, this is actually the case on the whole and is likely just a limited reaction that will phase out once the tax credit offer ends.
Real estate investment can be a valuable addition to your portfolio, and it should definitely make up a portion, even if only a small one. However, understanding what influences the market can help you make a more informed decision about the best investment type for you and when it is the right time to buy.
