Real estate prices fluctuate based on supply and demand, but because so many demographic, economic, and policy changes influence the markets, it’s virtually impossible to know what to expect.
Before the COVID-19 pandemic, for example, economists weren’t predicting a downturn in commercial real estate. Now, Morgan Stanley’s chief economist warns of a crash more damaging than the 2008 financial crisis. On the other hand, unexpected gains are common as well. In May 2020, Zillow predicted a drop in home prices and home sales followed by a slow recovery in 2021. But instead, a homebuying boom caused prices to skyrocket before 2020 came to an end.
With the ever-changing markets, what seems like a good investment one year can look like a poor choice the next. But even with all the uncertainty, there are some enduring truths in real estate that you can always depend on as an investor. And understanding these tenets can help you navigate the shifting landscape with more confidence.
1. Due Diligence is Essential to Every Deal
“Due diligence must always be done before you put any money into anything,” says Bradley K. Warren, Strategic Real Estate Investing Advisor at Real Estate Bees. “That is what most people fail to do, and it’s why they lose money when they invest in real estate.” It starts with market analysis to ensure a market is viable before you even look at properties.
You may need to analyze market rents or construction costs and get estimates from property management companies or contractors to form an ROI hypothesis. Due diligence also includes analysis of property taxes and homeowners insurance when estimating a deal’s overall performance and extends to examining the physical asset as well—for example, you may want a mold inspection in addition to a standard home inspection. The more thorough you are, the less risky your investment will be.
Warren also says to look at the track record of anyone you…