Many believe that real estate is typically one of the soundest investments anyone can make. That might be the case when you are looking for your family home — 3 to 5 percent annual appreciation on your home sounds pretty good.
It’s more attractive when also taking into the account the intangible benefits of finding a great home in a safe neighborhood where you and your spouse can raise your kids.
However, as far as investment returns are concerned, 3 to 5 percent returns typically don’t cut it for most real estate investors.
Double-digit returns are what most investors are looking for — in many cases, double-digit returns starting with a 2 or 3. This is where the ride begins. How do you find these opportunities?
As a former real estate developer and real estate lawyer for two decades, I have used a few guiding principles when identifying new real estate development opportunities.
The overriding theme is pretty simple — no matter how sophisticated of a real estate investor you are, real estate investing can be a roller-coaster experience — so be prepared to do a lot of work if you are getting on this ride.
During our development days, we always made the greatest returns by identifying areas that were at least one to two years away from being the next hot area.
Contrary to popular belief, you will not find these areas by consulting typical metrics such as “trends in property values” or “days on the market.”
Although that information is great to understand the historical trends of an area, it will not help you find the next hot areas. If metrics are already showing increased desirability of properties in the area, chances are you’ve missed the boat on snagging a good investment opportunity.
From my experience, investing in this space requires some good, old-fashioned, boots-on-the-ground due diligence to really understand the dynamics and potential of the area.
Here are five essential tips that I believe will help you uncover neighborhoods and signal good investment opportunities:
1. Public improvements
In whatever city you think you want to invest, check out the county’s records for current and planned public works projects. Certain projects, such as road widening and landscape beautification projects, indicate areas the city intends to develop due to increased growth and demand.
Being ahead of the population growth curve is important when looking for areas with increasing property values. It’s also important to understand if these public improvements will result in long-term special assessments that might affect the properties that you are considering.
For example, a county’s extension of a sewer line to accommodate new development might require that all nearby property owners pay a fair share of the cost. Understanding and factoring in these off-site costs are a significant part of any investment proforma.
2. Rezoning and building permit records
Land use regulations in cities and towns generally govern the type of properties that are allowed in certain areas. When buying an investment property, you should look at the applicable zoning laws to understand how potential developments in the future might increase or decrease property values.
When a property owner wishes to use land in a way that is not permitted by the zoning of their property, they must request to rezone their property to the appropriate classification.
These land rezoning proposals and building permit applications are usually public record and are great indicators of proposed future development.
You should even plan on attending public hearings and neighborhood meetings to hear the details of the discussions around proposed developments. Understanding neighborhood feedback is important when studying restrictions on future development.
For example, the community might decide that they don’t want a turn lane or a stoplight into a proposed development, and that restriction could be a part of the new rezoning for a property. These types of restrictions generally restrict certain classes of commercial or retail development that require dedicated turn lanes — which, in turn, affect values.
3. Infill development
Most urban communities have a significant amount of small-lot pockets of land or underutilized development that, for whatever reason, has been passed over in the course of urbanization.
Infill development refers to developing vacant or underused parcels of land or redeveloping existing properties within an urban area. When scoping out a neighborhood likely to turn around, you want to see some infill development.
There should be a significant number of lots or properties that remain undeveloped or underdeveloped, but some infill activity is a healthy sign.
4. New retail
Retail chains such as Starbucks and Trader Joe’s are the well-known tell-tale signs of gentrification. A review of building permit applications, as mentioned above, might reveal that a Starbucks is being proposed nearby. And a new Starbucks being proposed for an area is a good indicator of an up-and-coming area.
But people should also be paying attention to where the national big-box retailers are going. Look out for the construction of new retailers such as Costco, Target, Wal-Mart and Home Depot. The arrival of big-box retailers often precedes an influx in population.
5. Word-of-mouth insights
Old-fashioned word of mouth is still one of the best ways to go when it comes to gauging the growth of a neighborhood. Make it a point to speak directly with locals, neighborhood residents and shop owners.
You will be amazed at what you learn, and in many cases, this local insight will affect your investment decisions and returns in one way or another.
You should also browse crowdsourced information-sharing websites, where people who live in the neighborhood offer their insights on how it’s changed, grown, and gotten better or worse. You can find insight on new developments, amenities and lifestyle information.
One last thing to keep in mind: Patience is a virtue — especially when investing in up-and-coming neighborhoods. Remember that you will not see strong returns overnight or sometimes, even for a couple years.
These opportunities are best suited for those investors who can handle the stress of a little uncertainty and, if needed, can hold the property for a while.
Before making a decision, take the time to follow the steps above, and most of all, hit the pavement and talk to locals, either in person or virtually on platforms.
I believe that following the tips outlined above will help you make the smartest real estate investment decisions possible.
Sanjay Kuttemperoor is the Founder and CEO of WikiRealty. You can follow him on Sanjay’s LinkedIn Profile.