The Four Factors Affect Real Estate Investing
Four Factors Affect Real Estate Investing
Like every other type of investing, real estate investing is affected by a variety of factors. Some of these have a direct and obvious effect; for example, rising interest rates lead to lower property values. Others, such as changing demographics, have a less focused impact that affects values over time.
Four factors affect real estate investing
- The Economy
- Interest Rates
- Government Actions
1: THE ECONOMY
The overall state of the economy can have an enormous impact on real estate investing, but the type of effect depends on the type of investment. In general, real estate values will flourish in a robust economy and shrink in a sluggish economy. Real estate investments, though, can thrive in any kind of economy, and some do even better when the economy is down.
How a Slow Economy Affects Real Estate Investments
Different sectors within the real estate investment world aren’t impacted the same way by changes in the economy. Some types of investment real estate are greatly affected during an economic slowdown; therefore REITs and funds specializing in these areas could see big price drops. Well-managed funds could snap up distressed commercial properties for a song, holding them in anticipation of the inevitable economic resurgence. Specific types of real estate that tend to buckle in a slow economy include:
- New home construction
- Shopping centers
2: INTEREST RATES
Interest rates may be the biggest driver of the real estate market, because they directly impact the ability to buy property. That’s especially true in the residential real estate market, important to landlords and house flippers: when rates are low, it costs less to take on a mortgage so people are more likely to buy, and that increased demand can drive up real estate prices. When rates begin to rise, mortgage costs go up, and that makes prospective homeowners less likely to buy, which can eventually lower real estate prices.
When it comes to real estate, people matter, and that’s what demographics are all about. Essentially, demographics are statistics about the population and its subgroups that help describe group behaviors. Demographic factors include things like:
- Income level
- Marital status
- Family size
4: GOVERNMENT ACTIONS
Federal, state, and local governments can have a measurable impact on both demand for real estate and property values. They can boost demand in an area by offering tax deductions, tax credits, and subsidies to drive investor interest. They can steer policy and legislation for specific effect, like the introduction of the first-time homebuyer credit in 2009, which encouraged home sales in a sagging real estate market.