Economic Characteristics in Real Estate Field
1. Degree of Home Ownership
In a newer single family residential neighborhood, or "bedroom community," the odds are pretty good
that the homeowner will live in the neighborhood.
But after the neighborhood has stabilized,
homeowners start to move out and tenants start to move in. At this point, the neighborhood may start
to deteriorate because renters don't have the same pride of ownership that owners do. They generally
aren't of the mind to sweep the gutters or pick up stray trash. And why should they be? They don't
have a long-term financial stake in the neighborhood.
Most lending institutions will bend over backward for homeowners because they represent stability,
morn, apple pie, a white picket fence, and so on. They are substantial members of the community. On
the other hand, banks aren't too enthused about speculators or absentee landlords because they tend
to be less reliable.
If you're in a rental area and the properties are only half rented, the area will deteriorate. This
has happened in numerous communities around the country, such as Kansas City, St. Louis, Detroit,
Chicago's East Side, and New York City, just to name a few, where many housing projects are largely
unoccupied, even though there is a housing shortage, because the area has become so dilapidated and
run-down. Unattended property naturally detracts from the values of the surrounding real estate. To
change things for the better, you have to give people an incentive to change their attitude, such as
the option to buy their building. Ownership is a motivating factor because it gives people a stake in
determining their own destiny.
If you are in an area with high rental rates and can see that the rents are increasing, then you know
that the value of the real property is increasing along with them. Whenever 1 see a sign for a
rental, I always ask how much the rent is. And then l note how long it takes to rent it. I used to
write this information down and keep track of it pretty carefully. Rental rates are especially
important when you have a lot of competition and you need to keep your own rents slightly lower than
the place down the street because you're just getting by and need the rent to make your payments. In
many situations, real estate values will increase more rapidly than the rents. It only takes one
person to pay a high price for a property, but it takes a large group of people to pay higher rental
rates, pushing the average up.
2. FAMILY INCOME CHARACTERISTICS
The income levels of people in a community directly influence real estate values. If people in
community are prosperous, then values are generally high. When the oil market bottomed out, the local economies of Galveston, Midland, and Houston in Texas, as well as Oklahoma City, all took a real shellacking. Moreover, many industries that were dependent on the oil industry went out of business, so all types of workers lost their jobs, lost their income, and had to foreclose on their real estate. When contemplating an investment, make sure that people in the area are gainfully employed and will continue to be employed. Ideally, find a location where the incomes are substantial and
diversified and where the conditions exist for steady growth. If you consider the demographics of the community and the influx of people into the area, you'll find that as the wages go up, the price of real estate also goes up.
3. Percentage of Families on Public Assistance
Generally speaking, the more people who are on public assistance in a neighborhood, the less likely that properties will rise in value. When I did my appraisal of the redevelopment project in National City, California, l discovered that 50 percent of the people in the area were on public assistance or welfare of some kind or another. That kind of data, which is readily available from the county and state, if not the local newspaper, is a red flag for the potential investor. The local real estate prices in these areas may be cheap, but they're not likely to appreciate.
An important thing to consider when buying investment property is how much spendable income the people in the neighborhood have and what their attitude is toward living. Are the big money makers gangsters who bring in $200,000 a year by selling crack cocaine or are they mechanical engineers making $100,000 a year designing high-speed transit or the national aerospace plane?
