The principle of supply and demand affects every aspect of consumer expectation. In the following post, Travis Cadman explains the concept of buyer demand in real estate investment. Travis Cadman is the co-founder and CEO of Investar USA, a Phoenix, Arizona-based real estate investment firm.
The law of supply and demand is pretty basic and intuitive. Essentially, if you have a product or service that people want, you can monetize that product or service. If you have a product or service that people want, but there are others who are also able to provide the same – or slightly better – product or service, then you may not get an ideal return for that product or service. If you have a product or service that no one wants… well, you get the idea.
While there are variables to the principle of supply and demand when it comes to real estate, the idea is generally the same. When you have property that people want, then you are in a seller’s market. If you have property that relatively few people want, then you are in a buyer’s market. The trick to being a successful real estate investor is being on the sales side when in a seller’s market, and on the buyer’s side when in a buyer’s market. “Buy low, sell high,” as the saying goes.
But how do you know when it’s time to buy or sell property? You have to pay attention. This doesn’t necessarily mean following trends. Following the pack can be a disaster, and it’s pretty much why relatively few investors actually “buy low and sell high.” There’s an apocryphal story about an industrialist who, after listening to the man shining his shoes offer stock picks, sold all of his stocks – right before the stock market crash of 1929. “When your shoe shine man starts offering you stock tips, it’s time to get out,” he reportedly said. Sage advice.
When investing in real estate, what supply and demand factors do smart investors notice? Here are a few:
Economists may offer a macro-view into buyer and seller behaviors, but they might not address circumstances that affect sub-market conditions. Smart real estate investors keep their ears to the ground in sub-markets, paying particular attention to factors that have an effect on job growth, property values, and overall quality of life.
Interest rate hikes.
How easy will it be for buyers to buy? When it becomes more expensive to make monthly mortgage payments, property values tend to fall, though not in all markets.
Legislation and tax policies.
Whether tax credits, grants, and/or subsidies will be available has a significant effect on demand, but it is critically important to keep an eye on sustainability. Tax incentives may generate temporary demand, causing investors to make serious miscalculations.
Conditions that influence real estate supply and demand are complex, and although it is important to keep an eye on the above factors, the effects may not be cut-and-dry. Consult a real estate investment professional to ensure you’re making the best decisions for your budget and goals.
Travis Cadman is a real estate investor with over 30 years experience in single and multifamily investing.