When it comes to investing in stocks, some people prefer options like annuities because of they offer low-risk and predictable returns. These people are satisfied and comfortable saying, “give me a small return each year and I’m happy.”
Others are looking to hit a home run and are willing to take on more risk for the chance of larger returns. Investing in property is no different. There are some investment properties that are just inherently more stable and less risky. You pretty much know what you’re going to get out of it and you’re not likely to get anything more.
Other properties may have a huge earning potential, but for a variety of factors, may also be a much larger risk. The bottom line is that investors should understand their risk tolerances and gather the information necessary to feel comfortable that the properties in which they choose to invest are a good fit based on their goals and current financial situations.
What a lot of investors don’t realize is that a property today is not the same property that it will be in the future. There are a wide variety of dynamic variables that can cause the value of a property to increase or decrease over time. These evolving factors make it difficult to predict future property values and determine the risk associated with any given property investment. The smartest method for accurately assessing long-term property investment risk is to align yourself with experts who understand the complex interplay of variables that can affect a property’s value over time.
Let’s look at some of the factors that affect and change property values.
Take technology, for example. New, innovative technologies that pop up every day can transform “the next big thing” into “that’s so yesterday” practically overnight. If you bought a property, and your tenant was a Blockbuster video store, you’re probably wishing that you could have predicted that people would soon be accessing movies with the click of a mouse or the press of a button on the TV remote. Print media, like newspapers, continue to struggle as more people turn to computers and mobile devices for faster access to updated information. Thanks to digital music downloads, there are not many stores selling records, cassette tapes or CDs anymore. Even basic retail stores are being forced to adapt to hordes of consumers who are now doing the majority of their shopping from home in their pajamas, thanks to the Internet.
While changing trends can quickly ruin certain types of business, they can also fling open the doors of opportunity for new businesses. For example, the Internet shopping trend I just mentioned has hurt a lot of businesses, like small independent book stores, but Internet shopping requires the goods being purchased to be delivered, which has substantially increased the need for storage and distribution facilities.
Consumer behavior is also greatly affected by the demographic makeup of the population. As more and more baby boomers age, medical and health care-related products and services are in increasingly high demand.
Sometimes political and economic factors can alter the regional property landscape. In Wilmington, the fate of the film industry is in question. What will become of the studio lots and buildings, not to mention the lighting and equipment warehouses and other properties that are currently being leased by people and businesses that support that industry?
Other questions to consider include: What is the condition and age of the property, and will it appreciate or depreciate over time? Where are people moving, and what are the demographics surrounding a property? What are city planners planning in the area? Will there be changes in zoning ordinances, school districts, highways and roads that could affect property values? What are the current economic conditions and interest rates? Which competitors are nearby or planning to move in soon?
Some tenant businesses are inherently more stable simply due to the nature of the business. Grocery stores are stable because people need convenient access to all types of food. Hair salons will probably remain stable as long as people’s hair continues to grow. As a general rule, the service industry is typically pretty stable because it’s made up of things you can’t buy on the Internet.
Another interesting trend is that technology has made it possible for employees to be more mobile and versatile. Virtual connectivity has allowed more people to work from home. While this would seem to indicate a decrease in the need for office space, it’s uncertain how this fairly recent trend will play out or if more employers will adopt the virtual employee approach. Some businesses certainly believe that having a physical office or storefront is an absolute necessity for their operations and credibility.
As you can see, the value of a property can change, sometimes slowly, other times very rapidly, as a direct result of changes in a complex network of subtly interrelated variables. While there is no way to predict every change that could affect a property’s value, a seasoned professional with the latest analytical tools can offer valuable insight into events, circumstances and factors that may alter the value of a property. Before you invest in property, be sure you understand your own risk tolerances and gather as much information as possible about the value of the property today, and its probable value in the distant future.
Grayson Powell is a Managing Partner at Coldwell Banker Commercial Sun Coast Partners (CBCSCP). CBCSCP leverages the vast experience of highly-skilled real estate professionals and developers and specialize in selling, leasing and managing retail, commercial, and investment property. To learn more about CBCSCP, visit www.cbcwilmington.com or call 910-350-1200.
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