Real Estate Investing – Follow The Growth?
Real estate investing would be easy if you could tell where the prices were going to rise the fastest. But isn’t that pretty clear sometimes? Have you ever watched as the town you live in started to grow? Wasn’t it somewhat predictable where the new stores, businesses and houses would show up next?
There are usually some easy-to-spot factors that determine these things. In a town like Lone Pine, California, for example, there are huge tracts of national forest land or other government land on either side of town. Since nobody can build on this land, they are left with a narrow strip of real estate alongside the highway. As the area grew, it was no real surprise that vacant lots at the edge of town went up in value.
Of course, highways in general determine the direction of growth in many towns. It is certainly cheaper to build along an existing road than to install new roads to access other land. Stores want to be where the traffic is, of course, which is another reason that real estate fronting highways gets developed before other land.
Sometimes geography determines where the growth will occur. Certainly a town is more likely to grow away from an ocean than into it. Valleys with steep hillsides will fill up the flat lands first. Towns will generally grow where it is easiest to grow. Therefore, real estate in those areas will tend to go up in value more quickly than in other areas.
Real Estate Investing In The Path Of Growth
Of course, you could just buy real estate where things are already happening. That might not be a bad investment. But to really ratchet up your profits, you should be buying ahead of growth. Determine where the buildings and development are heading, and get out in front of it. Real estate that is in the path of the growth will sometimes double in value in just a year or two.
Years ago I lived in a town where real estate in general was appreciating at about 6% to 7% per year. Along one highway, however, the land values went up at almost 25% annually for several years. This means they doubled in value in about three years (and some parcels doubled again as quickly).
You can start by just looking around to see what is happening. But do your home work too. Has the population been growing consistently? Is there good job-growth in the area? Are there other reasons why people and businesses will be moving into the area. What are the most likely directions the growth will take?
At this point, the basic real estate investing formula is to buy in the path of growth and wait. The most difficult part of this plan, though, is not to see where to invest, but to get the timing right. The real estate might be worth ten times as much in ten years, but what if it doesn’t appreciate much in the next three? You might be paying finance charges and have other costs for a long time.
One way to minimize this risk is to buy property that will produce some income – preferably enough to cover these costs. If there is an old house on the property that you can rent out, for example, you might have a free-ride while you wait for a new mall developer to make you an offer. If it takes a few years, you’re still okay.
Just buying in the path of growth and holding on for big gains is pure speculation. it’s true that with enough homework, this can mean big profits. But investing in income-producing real estate lets you wait for your big gains, while limiting your risk.
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