The Three Step System for Real Estate Investors in the United States

Real Estate is traditionally one of the best investment vehicles available. Over the last century, investing in residential real estate and commercial real estate has proven to be one of the best ways to build wealth over time in the United States. And has outperformed just about every other form of investing over the longer term. What this has meant though is that the area has become increasingly competitive for would be real estate investors in the United States, and so it is increasingly important to be fully informed of the latest legislation, tax considerations and real estate investment strategies BEFORE dipping your toes in the water.

Here is the Better-News.info Three Step Real Estate Investors System to ensure that you are around for the long haul:

1/ Be ready to work with Real Estate Agents - Agents can either be some of your best friends, or your worst nightmare in the real estate game. You need to create relationships with them so that they call you first when a good new property comes on the market. They need to know that you are serious, and that you will actually follow through if they find you a property that appears to fit the profile you have described to them. This profile needs to be in terms of several different factors:

Price - The price has to be right for the type of property, the condition and the area.

Type - The agent needs to know if you are only interested in flats, six bedroom houses or commercial property. Be very clear with them about what you are seeking.

Area - The property can be just the right type. A great price, and in great condition. But if its in the wrong area, forget it! So make sure that your agent knows whereabouts you are seeking to buy property, so that you neither waste his time or yours in looking at real estate that you will never be interested in.

Condition - Are you willing to take on re-developments? Or are you only interested in new builds? Make sure that your real estate agent knows.

2/ Bank Owned Properties (also known as Real Estate Property or REO) – Banks take back ownership of properties because the owner failed to make their mortgage payments. And this can be a real goldmine if you tap into it correctly. Make contact with all the banks in your area and get on their books to be informed when they have any re-possessions that need to be sold quickly, and hopefully for a very reasonable price.

3/ Door to Door Marketing - Door knocking is a lead generation, qualification, and development tool used by real estate investors for years to gather information, build rapport, and negotiate with the seller. Fortunately it is also a technique that you can use. Get some cards printed up and leaflet an area you want to invest in with them asking for people to contact you directly. You may be surprised at how many responses you get.

Property Value Increases

Understanding how property value increases can be triggered is very important in real estate investing, since in most cases, high returns are achieved when the property appreciates a lot after its purchase. The important thing to keep in mind when thinking about property value increases within the context of a free economy is that when the demand-supply balance is disturbed, market rents and prices start moving accordingly in order to bring the market back into balance.

If we assume the market begins from a point at which space demanded is equal to the space supplied, prices should be stable. Economists describe this situation as the market being at equilibrium. If this balance is disturbed, either in favor of demand or in favor of supply, prices should start moving. In particular, if demand becomes greater than supply (due to non-rent/price factors) then rents/prices have to rise in order to force enough buyers/renters to drop out of the market and enough suppliers to enter the market so that the amount of space demanded equals the amount of space supplied. Similarly, if supply decreases while demand remains constant, there will be excess demand, which will again force prices/rents to rise. However, because of the durability of real estate, sudden decreases of an area's property inventory cannot occur in the normal course of events. An area's inventory of properties, however, may decline gradually if the amount of space build is smaller than the amount of space that "drops out" of the market due to physical deterioration and functional obsolescence.

If supply increases while demand remains constant, or if demand decreases while supply remains constant, there will be excess supply, which will force prices to fall in order to induce enough suppliers to drop out of the market and enough buyers/renters to enter the market.

Based on this discussion, we can identify two broad principles of rent and value increases, with the condition that the market is neither oversupplied nor undersupplied:

1) An increase in the demand for space or properties while supply remains constant

2) A decrease in the supply of space or properties while demand remains constant

To better understand the first principle of property-income and value increases, consider a nice residential community, called Paradise, with few vacant housing units and limited development under way, due to zoning controls. If, for some reason, demand for housing suddenly increases considerably so that the existing vacant units are far from adequate to cover it, housing rents and prices in Paradise will register strong increases.

Demand for housing in Paradise may increase considerably, due to a number of reasons, such as intensive office development in a nearby community, which brings a great number of new white-collar employees to the area. Since there is a tendency for people to seek housing close to their workplace, it is logical to assume that many of these new employees will seek housing in Paradise too.

An important characteristic of the supply of real estate, which explains why short-run increases in prices/rents can be very strong in response to a strong increase in demand, is the construction lag, that is, the lag between the time a real estate project is perceived and the time it comes out in the market. This lag, which is due to the time needed to complete necessary studies, de-sign, secure financing, get permits, and build a project, ranges from one to many years, depending on the size and nature of the development. This characteristic is very important, because if demand suddenly increases considerably, supply will not be able to respond immediately, unless lots of new buildings are about to be completed and enter the market. This is not very likely, however, if the demand increase is sudden or considerably greater than usual.

As a result of the supply's inability to respond quickly to changing market conditions, a strong increase in demand will originally create supply shortages, which will force prices to start rising, at least in the short-run. Because of the inertia/rigidity of supply, strong demand increases can trigger strong rent/price increases as long as the market is not oversupplied. However, as new supply starts to come out gradually, rent and price growth should decelerate, unless demand keeps rising faster than supply. As we have seen in the discussion of the cyclical behavior of the real estate market, property prices (and rents) seem to rise for a few years at an accelerating rate when the market comes out of the downturn, but after that, rent and price growth decelerates and turns negative eventually, due to a combination of strong supply growth and a slowdown in demand growth.