Those who consistently make money in real estate know the market. They know the locations and the history. They know what new developments are planned. They know the transportation and the schools. They know everything about the area where they invest. They have to know it all.
Staying ahead of the competition in real estate investment means doing your homework. If you are new to the business, it can be daunting, but in this article we'll teach you six tricks that the old pros use to get ahead of the trends instead of chasing them. (To learn about the perks of real estate investing, see our "Exploring Real Estate Investment Tutorial" and "Investing In Real Estate.")
Study Local Pricing
The first things to study are the current price trends in the area. For example, a potential investor should look to see if the price of homes is accelerating faster in one area than in others. Next, check to see if the average home price is more than in other neighboring towns. This will provide an idea of where the biggest demand is. Another reason to study these trends is that, over time, you will start to develop a sense for which prices are "fair" for certain properties and which are overheated. For individuals looking to buy properties at the lowest cost possible, this knowledge can be invaluable.
Realtors and real estate agents are a terrific source for this information, given their access to the Multiple Listing Service (or MLS). The local newspaper, the internet and the town hall may have a record of recent sale prices as well.
Get Pre-Approved for a Mortgage
There is a host of benefits you can enjoy by getting pre-approved for a mortgage. Chief among them are financial benefits. For example, most lenders will lock in an interest rate for you once you are pre-approved for a mortgage. This can be a help if interest rates start to rise while you're house-hunting. Further, if you are able to be pre-approved for a mortgage prior to finding your dream home, then you become a preferred buyer in the eyes of the seller: You've demonstrated you have serious financial backing.
Look for a Catalyst
One sign that an area is up-and-coming and that it will be desirable in the future is the development of new infrastructure. When you see roads and schools being built, it's a sign that the community is set for a growth spurt, and investing in a growing community can be very profitable. In addition, certain types of development, like new shopping centers, may be extremely attractive to homebuyers, and may also help keep the tax base low.
Spotting new developments can be as easy as looking out your car window as you drive by. Telltale signs of land clearing, surveying or the beginnings of construction in and around major roadways are pretty big tip-offs. Also, look for widening of traffic lanes, the installation of turnaround lanes and the erection of new traffic lights. All suggest the possibility of development, to accommodate more activity.
Next, visit the town hall at the municipality or the county level, and speak with the road and the building departments. They should be aware of any major projects slated to begin in the area, and they may even be able to provide you with a connection at the state level so you can find out if any state-owned roads or properties are slated for development as well. Real estate agents also have a general idea of what new projects are about to be undertaken. (For added insight, see "Profit With Real Estate Land Speculation.")
Explore Low-Tax Alternatives
If there are two towns side by side – one with high property taxes (or with progressively rising property taxes) and the other with low property taxes – the one with the lower taxes will usually be more in demand.
Real estate agents can help you determine which areas have the best and worst tax structures. In addition, a simple call to the local tax assessor can reveal how much the town charges in taxes per $100 of house. The assessor can also let you know when the last time the area was evaluated by the township.
Also, you'll want to watch to see if a reassessment is set to take place in the near future, as it may mean that property taxes are about to go up. Beware of towns and communities that are becoming overcrowded; signs include schools filled to capacity and perpetually gridlocked roadways. This could mean the town will have to do some major construction to accommodate the influx of people. And how do they pay for that construction? Tax dollars. (For more on property taxes, see "Five Tricks For Lowering Your Property Tax" and "Property Taxes: How They Are Calculated.")
Check the School Rankings
Nearly every state ranks its schools by how well students in each district fare on tests in math and English. Sharp-eyed investors should look for schools that are moving up or are atop the list. These areas are often desirable to parents. Access to quality education is a big selling point to homebuyers.
There are several ways to find this information. Check our your state's board of education website. Also, PSK12.com has public school rankings for most states in its free section. Visiting the schools yourself is also a good idea. Schools that rank the highest are usually quite eager to provide information.
Watch the Outskirts
If the properties in a major city or town have become overpriced, the areas on the outer fringes most likely will soon be in demand. Areas in close to major bus and rail transportation are even more desirable. Nearly any area that is about to install a major train stop or a new major bus route will see its proverbial stock go up in value.
To find out what's planned, you can check with the local railroad or bus company to see if they will be expanding service in the area. The local town hall or planning department will also have this information.
The Bottom Line
It pays to do your homework and to tap local resources to determine which areas are hot now and, more importantly, which ones will be hot in the future. Much of the information is out there and free for the taking – you just have to be willing to do the leg work.