How to Get Started With Real Estate Investing

One of the first things that you must do to get started as a real estate investor is to know what is taking place in your market. You must know what is happening in your market so that you can tailor your investing strategy to your market. You need to approach your real estate investing business as a business. Think about this idea for a moment…

When a new major retailer (Walmart, Home Depot etc.) is looking to open a brand new facility in the area, they will do market research beforehand. They are going to do some demographic research to see if the store would be able to sustain itself before they move forward. In a similar manner, you are going to need to do a little bit of research to ensure that you are using the right techniques with your real estate investing business.

Once you know what is happening in your market, you can adjust your strategy accordingly. Based on what is going on in your area, will seller financing be a good strategy? What about wholesaling or lease options? Each of these strategies are more effective under certain market conditions and when you align your strategy with your market conditions, you will increase your success significantly.

So, the real key is to know which indicators will provide you with the most useful information.

Key Indicators

Jobs – Employment s a key factor that drives the real estate market. Generally speaking, people will want to live nearby their employment. So, as jobs are moving into an area, this will increase the demand for housing and rentals. If the area does not have many jobs coming in, you will also see a decreased demand. Since the real estate market is controlled by supply and demand, the number of jobs coming in to an area gives you a very good idea of the demand. You have to know this to know what is going on in your area.

You can obtain a lot of information from the city planner. They can tell you about new companies that are moving into the area, how many jobs they are creating, and the income range for those jobs. This is valuable information to have as a real estate investor.

Occupancy Rate – A factor to understand the demand for rental properties in the area is the occupancy rate. Vacancy is a key factor to know whether rental properties are in demand in your area or not. This is another perfect example of why you must know your market prior to investing. If vacancy rates are very high for your area, investing in rental properties is probably not the best idea for you. You would have a harder time finding a tenant. The property would be vacant for a while and you would continue to make mortgage payments. This is why it is critical for you to start your investing business by knowing your market. This will save you a lot of time, money, and heartache later on.

Property management companies are a good place to obtain occupancy rates. Call them and let them know that you are an investor and considering several properties in the area. They will see you as a potential client and they will usually be happy to provide you with the information that you are seeking. Another alternative is to look in the newspaper each week to see the homes for rent section. Over time, this section will give you an idea of what the demand for rentals is for your market.

Rent Incentives – Rent incentives can be a key indicator of the balance between the supply and demand for rental properties. As a general rule of thumb, the fewer rent incentives you see, the more demand there is over the supply. When the supply of rental properties is greater than the demand, you will see many landlords offering some sort of incentive or promotion. They are trying to give a potential tenant a reason to choose their property over the rest of the competition. So, when you see a lot of rent incentives, it means that the supply of properties is greater than the demand for rentals. You will see incentives like a low deposit, a few months of free rent, cash towards buying a home, or some other sort of offer to get them in the property.

Incentives are easy to spot as you are looking at properties on the Internet, in the newspaper, or any other method where you can find them. The important part is that you see a lot of incentives. It will not just be one here or there.

New Units Permitted – When someone is going to build a home, they must obtain a building permit from the city. Your city will have information on the number of new building permits that have been issued over the last month and the last year. Every home that is built adds to the inventory. Since supply and demand are the factors that are driving the market, the building permits add to the supply.

As an investor, if you see that there are a lot of jobs coming in (demand) and there are not very many units permitted (supply), then that means that you have found a hole in the market. You could start looking at developing some land and building new houses to meet the incoming demand. See how this information can help you get started on the right foot and see the opportunities in your market?

The city planner has the information on the number of new units that have been permitted. As you might have noticed, the city planner is an extremely valuable resource for you as an investor. Most real estate investors overlook the value of what the city planner can offer. It is highly recommended that you spend a little time with your city planner to know what is happening in your area. You can make a lot of money using their market knowledge coupled with your investing strategy.

Inventory for Sale – This indicator refers to the existing homes that are currently on the market. We are trying to measure the supply and demand in the area. The supply is going to be the total of new units that have been permitted and the existing homes for sale.

The existing homes for sale are an easy indicator to measure. Any real estate agent with access to the Multiple Listing Service can tell you how many homes are currently for sale in the area. I highly recommend tracking this on a monthly and yearly basis. This will help you measure whether inventory is rising or falling.

Average Days on Market – The days on the market will tell you how long (on average) it is taking for homes to sell in your market. This will give you an idea of the activity taking place in your area and how quickly a home will sell. Market activity affects the balance between the supply and demand. The days on the market (DOM) can help you know how long it will take for the demand to catch up to the supply and vice versa.

The days on the market can also be obtained from your real estate agent that has MLS access. Let them know the areas that you want to focus on and it can give you that information. You will also want to track this monthly so that you can see changes going on in the market.

Summary

Now you can use this information to begin your real estate investing business. To be successful, you must know what is taking place in your area. These key indicators will help you understand supply and demand in your market. You will also be able to see opportunities in your market.

If you are tracking these indicators over time, you can also see changes that are occurring in your market. You will then be able to adjust your strategy to match the changing trend. Doing this research is very profitable, and it will make the difference between an average investor, and a great investor.

You can also get a real estate investing guide that will serve as a tool of how next steps to take beyond this article.

Reinventing Real Estate, Part 1: Online and Empowered Consumers Are Taking Charge and Paying Less

For decades, the real estate world turned in a predictable manner. The roles of buyers, sellers and real estate professionals were fairly well defined and transactions followed a predictable path of yard signs, newspaper ads, open houses and miles of paperwork.

Recently, online and empowered consumers have changed the game. Real estate professionals now face issues similar to the ones that have transformed the retail, personal finance and travel planning industries. As technology advances and new business models evolve, the real estate industry has begun to transform itself from providing traditional, carefully controlled “agent-centric” transactions to new “consumer-centric” practices. The following is a look at some of the recent industry trends and how buyers, sellers and investors can expect to benefit. The “Five Ds” that are driving change in real estate are:

1. Disruption – Over the past 10 years, the Internet has matured into a powerful platform for delivering real estate information, forever changing the interaction between buyers, sellers and real estate professionals.

2. Displacement – The popularity and acceptance of self-service and consumer-direct business models is being felt by real estate professionals, who are striving to develop attractive new offerings for Web-savvy consumers.

3. Demanding consumers – You now have more real estate knowledge, tools and resources at your fingertips than ever before. More savvy consumers tend to be more independent and demanding.

4. Downward pressure – Traditional real estate commissions of 5-6 percent of a property’s sales price are facing downward pressure.

5. Developing alternatives – The real estate industry is transforming itself to provide targeted services and exciting new options that add value for consumers.
Disruption

“We are going to see our industry go through dramatic transformation via the Internet and consolidation of agents and companies.” – eRealty Times Columnist Dirk Zeller

Some industry observers have adopted Harvard Business School professor Clayton Christensen’s term “disruptive technology” to explain recent developments in real estate. Though it’s easy to point to the World Wide Web and advancing technology as the main changes in real estate, that’s only part of what’s shaking things up. Essentially, the real cause of disruption is not just technology, but technology-enabled real estate consumers.

Web-enabled consumers

According to the National Association of Realtors (NAR), more than 72 percent of homebuyers now begin their home search online. The popularity of online real estate ads surpassed newspaper property listings back in 2001, and the gap is widening. Less than one percent of buyers first learned about the home they purchased on the Internet in 1995, while in 2004, that number passed 20 percent.

According to a California Association of Realtors (CAR) survey, 97 percent of respondents said the Web helped them understand the buying process better and 100 percent said using the Web helped them understand home values better. Web-enabled homebuyers like you are taking a more active role in researching homes and neighborhoods. You also now spend less time with real estate professionals once you have completed your research. Internet homebuyers also used the Web effectively to filter out properties that did not interest them, visiting 6.1 homes on average versus 15.4 for traditional buyers.

Today, you can view photos and detailed information for hundreds of properties in the time it used to take to visit a single one. And the Web provides much more opportunity than simply moving print listings online. The growing availability of residential high-speed Internet connections has boosted the popularity of virtual tours and interactive maps, providing consumers with powerful and flexible visual search tools.

In addition to making home searches easier, automated valuation model (AVM) software is making a big impact in how properties are evaluated. AVMs, which generate valuation estimates by analyzing and comparing property information data, are becoming increasingly sophisticated and accurate. While not considered a substitute for human appraisals, AVMs are gaining popularity because they are inexpensive, easy to use and produce valuation estimates in minutes. Now AVMs, used extensively in electronic mortgage approval processing during the recent refinancing boom, are becoming available on real-estate Websites aimed at consumers. This is a significant development for independent sellers, who often find it challenging to price their properties correctly when selling on their own.

The MLS goes public

“In real estate, MLS data sits at the apex of the change, specifically the MLS information that is pushed to the Internet every minute of the day.” – Bradley Inman, Publisher of Inman News

Once an exclusive tool for real estate professionals, the multiple listing service (MLS) has in recent years become a very public platform for real estate listings. The MLS is the nation’s most comprehensive database of properties for sale – four out of five homes sold in the United States are listed on the MLS.
MLS properties are available to agents and brokers worldwide, and are now accessible via consumer Web sites such as Realtor.com, WSJ.com, Excite, Netscape, AOL and MSN. MLS listings also appear on local, regional and national brokerage Websites through Internet Data Exchange (IDX) agreements that allow participating Realtors to share listings and display them to consumers. Even though only licensed realtors can list property on the MLS, the system has begun to figure prominently for the $110 billion independent seller (for-sale-by-owner or FSBO) market. About 13 percent of real estate sales are now FSBO, conducted without a broker’s assistance.

Type “flat fee MLS” into any major search engine, and you’ll see dozens of real estate professionals willing to list your property in the MLS for a fee. If you are willing to pay a commission of 2-3 percent, you can attract the attention of thousands of agents who will show your property to prospective buyers. You can then reduce the cost of the sale to about half a traditional 5-6 percent sales commission, plus the cost of the MLS listing. If you find an independent buyer working without an agent, you could make a sale with no commission at all and pay only an MLS listing flat fee.
Displacement

Currently, about 2.4 million real estate licensees operate nationally, according to the Association of Real Estate License Law officials. The NAR has more than one million members, up from about 760,000 members five years ago. Many real estate professionals and industry observers expect a significant decline in this number because some tasks traditionally performed by agents and brokers can now be done more quickly and easily by Web-enabled consumers.

“Historically the fundamental driver of the real estate industry was the control of information. The real estate agent and the real estate office were the only sources of comprehensive information on which properties were for sale and those who might be interested in buying them. With this control revenues were practically guaranteed.

Moreover, because this exclusive control was akin to a monopoly by virtue of the multiple listing service (MLS) any firm of any size could serve the customer equally well. As a result, the number of real estate companies grew without regard to market efficiencies.

Simply put, the traditional model is too inflexible. Consumers are seriously questioning the value of a real estate agent. They frequently feel that many of the traditional tasks undertaken by the agents are now either no longer required or can be done by the consumer themselves.”

- Swanepoel & Tuccillo, Real Estate Confronts Profitability

The quotes above, from a popular report on emerging real estate business models and dwindling profit margins, highlight a number of issues traditional real estate professionals are now facing. And if the real estate industry has grown historically without regard to market efficiencies, the issue has only been compounded since 2001, as new agents signed on in droves, lured by low interest rates and skyrocketing home prices in many areas. It’s likely that the number of traditional real estate agents will decline, while new types of real estate jobs will be created to deliver value to Web-savvy customers.

NEXT in Part 2 of 2: – Demanding Consumers, Downward Pressure and Developing Alternatives