Most real estate investors think about good markets for investment properties in terms of the criteria we discussed in our previous post. Aside from a growing diversified economy, jobs, and rental demand, the following factors affect how real estate investments perform, sometimes substantially so.
Let’s first consider property taxes. Property taxes vary from state to state and within each state because various entities determine them. The state, its counties and cities and even school boards set property tax rates.
While Texas comes to mind right away when thinking of no state income taxes, the state has high property taxes which bring in revenues that other states collect in the form of state income taxes.
High property tax states, cities and counties affect the investor’s returns. Real estate investors need to know what the property taxes are for the specific markets they invest in.
Even though property taxes impact real estate investments, many investors still make nice return–even in higher property tax states–because there other tax advantages for them in the U.S. tax code. Those tax benefits in fact attract many real estate investors. Always consult a competent CPA and to assess your investments from a tax perspective.
Next, real estate investors glean a great deal of information from looking at the cost of living in the market they want to invest in for one because the market’s cost of living relates to affordability. For example, San Francisco’s high cost-of-living means that many average income earners have a more difficult time buying a home here.
Many cannot afford the high rental prices either. This barrier to entry defines this market increasingly as a luxury market.
When investors understand these cost-of-living implications, they guide them to the right investment property type and opportunities. Real estate investors understand the competitive landscape better, e.g. the kinds of prices they themselves must pay in such markets and challenges that can arise. Lower cost-of-living areas are often a surer bet for real estate investors. Markets with a lower cost of living are easier to mitigate. Their growth potential is higher.
Growth potential of any real estate investment market also relates to the city’s and areas growth pattern which stems from available land or building area considerations. Most cites either spreading out, often into the suburbs, or build up. Some have both happening at the same time
Growth patterns and urban planning and development go together. Investors who pay attention to them learn about the community, local issues, incentives and even zoning.
In summary, real estate investors do well to pay attention to these factors to become better investors and even more well-rounded individuals.