For me, real estate investing is a long term game. Very long term. I have no intention to sell. I like cash flow.
The flip side is managing opportunities and risks over the very long term. It's a fool's game to predict the future. But I do think about the range of outcomes and their likelihood. And what that means for my investment.
Here's my list of long term opportunity and risk "buckets".
Net migration matters. More people arriving than leaving means prices will likely rise. More young people in that mix means there are more renters. Those young people can be further divided into students (high turnover, seasonal demand) and young professionals (lower turnover). Smaller households also increases demand.
Obviously the reverse is true if there is net emigration.
I think about government policy in a few ways:
- Home building: what is the trend of new homes being built and how sustainable is it?
- Zoning: are certain areas likely to be rezoned as commercial, high density etc.?
- Transportation: are trainlines, roads, subway stops or other transportation links planned in certain areas?
- Incentives: are tax breaks encouraging investment in "bad" areas (like the federal Opportunity Zone program)?
- Rent caps: is the local government more left-leaning and likely to introduce rent caps or other landlord-unfriendly policies (e.g. Airbnb restrictions)?
Some of these work in your favor, some against.
Flooding is a real risk in some low lying coastal areas. Whatever your views on climate change, some insurance companies will just not insure coastal areas. Others charge a premium for being within a certain distance of the shoreline. I think about a 30+ year investment horizon. FEMA maps and floodfactor.com are good resources to estimate likelihood and severity. You can find links at the end of this post.
Hurricanes, tornadoes, fresh water supply, earthquakes are all valid risks. Here in Massachusetts I worry zero about those. That might not be true for where you're investing.
I'll give a simple example of how I applied long term thinking about 12 years ago. I bought a condo in downtown Toronto at the bottom of the Great Recession. Toronto has historically had huge net migration into the city. Yes, there's been a lot of new buildings going up, but a lot has been outside the very downtown core where young people want to live-work-play without a car. There's no meaningful environmental risk. There is a subway station opposite the condo building. I stayed away from Airbnb'ing it in 2018 because the local government was becoming increasingly hostile to Airbnb's.
Fast forward to today and rents are up dramatically, and the condo value is up over 100%.
Spend 30 minutes to go through a similar check list before you even start looking. A five year proforma won't capture all these opportunities and risks. Even if you can't predict the future, don't be surprised by it.
For random takes on real estate investing you can follow me on Twitter @laziestlandlord