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The Science Of Property Investment

– Contributed content –

24 April 2017. If you want to make money from property it pays to approach it with a scientific mind. It’s not just pot luck to turn a buck – you can use science to measure and predict risk financial success like in any other business.

House made of money

(realwealthaustralia.com)

Research and statistical analysis has just as much place in real estate as it does in the sciences. If you love to pour over risks assessments and value indicators then read on because property success is all in the numbers.

Like all good risk assessments and predictions the only way to analyze your potential property investment is to look at the raw data. Property is all about location and that is a good place to start pulling your statistical evidence. There are several geographical factors you will want to consider and measure before making your informed investment decision. These include:

  • Type of property available – You will need to know the mix of the housing stock in a given area to understand your investment options. Look at the number of rooms, the age of the buildings, the size and layout of the homes available, whether there are facilities such as a garden or parking or whether it is a managed building compared to a single property. You could even look at the mix of construction materials if it differs from traditional brick construction – these are just some of the questions you can ask of your data to give you an understanding not just of the property available but also the value potential and the types of people that might want to live in the area.
  • Client demographic – Once you know the type of property stock you can start to get a feel for the people that might be attracted to an area. This then gives you another set of data to analyze as you compare income, spending habits and the lifestyle required to attract that clientele.
  • Area facilities – What facilities an area has to offer will determine its attractiveness and the potential value of a property there. To what extent depends on what you have found through your study of the social demographic you wish to attract or that is likely to be attracted to your property. The value of the location of entertainment and leisure activities, good healthcare, education and transport services can all be measured by comparing the real estate market of areas with these facilities to areas that do not have them.
  • Recent population growth – This is another key piece of information as it suggests an historic growth in popularity which can be determined and extrapolated to understand how this might increase in the future. An area growing in demand is likely to be a good investment opportunity.
  • Number of current and previous vacancies and the speed in which property changes hands in the area – Like population growth, understanding how property changes hands in a given area can be used to predict how your investment might perform on the market.

This data is readily available through your realtor and online and can give you an indication as to a) whether the value of your potential property is likely to increase and therefore make you money b) the attractiveness of your property deal to your potential clients and whether you are going to be able to realize the value you have placed on your property investment.

Investment strategists do this by considering the historic data of both a given area and your target clientele to understand buying habits and predict trends. This data can then be applied to any similar area or even extrapolated to predict multiple investment opportunities.

Once you have an idea about the area and property in which you might place your investment you can consider the financial factors that will impact the amount of return you are likely to see, these include:

  • The volatility of the local real estate market – Like any investment in a certain industry it is advisable to understand how it has performed historically and what legal, economic and political factors might impact it in the future. This could have greater significance to your investment options than any others if the raw data suggests a decline in the local real estate market that isn’t governed by the other trends you have uncovered.
  • The historic risk of leasing or selling in an area or to a certain demographic – Some areas perform better than others when leasing or selling. High worth areas might be likely to attract cash purchases whereas more modest urban settings might favor lease terms. You can also measure the level of return and return period of leasing versus selling and match it to your financial goals.
  • The type of investment term – There are lots of investment opportunities in property and your return can sometimes be impacted by the type of investment you have chosen as much as the house or area in which you have placed it. Consider options such as net-leased investment versus triple net-leased investment properties and research the proven risks and benefits and how well these terms have performed in certain areas and with social demographics.
  • The length of investment – There are long or short-term investment options that carry risks and benefits to both. The longer the investment term the more homework you will need to do to protect it.
  • Acts of god – Another financial risk marker is understanding what other unforeseen circumstances could have a negative impact on your investment. Being unforeseen it is difficult to accurately predict acts of god such as earthquakes or floods but once again you can turn to the historic data to get an idea of the future. If you are choosing to invest in an area at risk then understand what insurances and protection you should have in place to help best protect your money.

You can review all of the data associated with these financial factors and overlay it onto the knowledge already gained from the geographic and demographic studies. This will provide you with a comprehensive risk assessment and strategy that whilst not guaranteed can give you some confidence when placing your money. So making money from property really is more judgement than luck.

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