This is the second in an 11-part series of understanding the key ingredients in all successful real estate transactions.
Two things move prices—supply and demand. That’s it!
Shocking, but true.
In Ken Fisher’s book, The Only Three Questions That Count, he states that supply and demand are about eagerness. Eagerness is an emotion.
When emotions enter into the decision-making process, interesting things begin to happen. For example, how many times have you heard someone say they made an investment and that as soon as they bought, it went down in value? They hope it will come back up, and when it does, they are going to sell?
So how are intelligent decisions made in the ownership of real estate? If an owner does nothing on any given day, they have made the decision by default to keep/hold their investment. Perhaps there’s nothing striking in this, but they have made a decision. Is it the right decision? Should the owner continue to keep/hold the property? Would they realize better rewards by selling, leasing, or exchanging? We can’t know without further analysis.
Step 2 in our 14-part series is “Completing the Decision-Making Process.” Let’s take a look at the foundation for making the correct decision.
Real Estate Market Analysis is the study of the supply, demand, and price of real property. Demand is measured by the amount that consumers will pay for a property, and the influencers of demand are the population, employment, and income within the area that generates demand. So market analysis begins with understanding the data on these.
Supply analysis is understanding the amount of competition from existing, under construction, and proposed developments in the region. Price depends on the decisions of the owners and is influenced by the amount of demand.
Location Analysis is the study of the linkages between a subject site and other competing sites. For example, the location of a manufacturing site depends on its accessibility to labor, materials, energy, and proximity to markets versus competing locations.
Financial Analysis is the study of how well an investor’s goals will be achieved. This includes estimates and forecasts of income, financing, acquisition costs, future value and taxation. All analyzed to generate financial measures (IRR, FMRR, cap rates, cash on cash) to determine if the investment decision is favorable to keep or hold, buy, sell, lease, or exchange.
With a clear understanding of these areas of analysis a consumer of real estate can make better informed decisions regarding the direction they should take on investing their money.
Hoping to make the right decision is not a strategy.