How the demand that drives investment property prices is created


Demand is one of the proven ways that investment real estate increases in value. The logic is simple. When someone (perhaps many) is interested enough to pay him more money for his property than he originally paid, value is added to the property by virtue of that demand.

In this article we will consider four economic principles related to demand. We’ll describe the circumstances in which they might occur and why they might increase demand for (and result in added value to) your real estate investment. Maybe even suddenly, when you least expect it, and maybe beyond your wildest dreams.

1) Scarcity of land

When your rental or commercial building occupies a parcel of land where land has become scarce, there is a good chance that demand for your real estate investment will increase.

This commonly occurs in metropolitan areas where little undeveloped land is available. Twenty years ago, for example, I saw three-story office buildings in Newport Beach, California, demolished and then replaced by twenty-story office buildings. In this case, due to the scarcity of land in such a prime location, there was a demand for this type of (smaller) buildings created by developers.

Likewise, I once sold a ten-unit apartment complex to a client who, five years later, resold the property for double its value to a hospital that wanted that specific location for expansion purposes. In this case, due to the scarcity of other likely sites in the vicinity, the hospital was willing to pay a considerable sum (not for the structure, but for the land) and allowed my client to walk away at a large profit. and profitability of real estate investment.

2) Ease of Transferability

This refers to the demand created by potential buyers when real estate investment can be easily financed. While a duplex you own, for example, may attract many buyers due to the availability of adequate financing, demand for your building could drop dramatically when you own (say) a thousand-unit complex where financing is limited to fewer buyers. committed. in real estate investment.

Therefore, the ease (or lack thereof) of transferring your property from one buyer to another plays an essential role in the demand for your property and, therefore, in the value that can be added to it.

3) Utility

This simply refers to the usability of the property and refers to its highest and best use. A commercial lot located near a rail freight yard, for example, might be better used for a manufacturing plant than an office complex, and therefore of higher value. Similarly, a single-family residence on an acre of land zoned for multi-family housing would likely be more valuable as an apartment complex site than as an individual rental home.

4) Request

This correlates with the upward desirability of the property, mainly due to general trends in the economy. Investors typically move their money from one investment vehicle to another based on the investment’s ability to earn returns. That is, when stocks are hot, investors put their money there; Likewise, when real estate moves, investors start buying.

We saw this gear change develop dramatically a few years ago when the stock market began to crash. Frantic investors pulled their money off Wall Street, and unless they were tucking it under their mattress, chances are they were investing it in real estate.

Of course, there is another (less spectacular) way to add value to your property, even when there isn’t an increase in investor demand. This is the real estate investment principle that governs all real estate investments. In other words, the prices of investment properties are directly related to the net income produced by the property. So in this case, because there is a demand for tenants willing to pay more rent to occupy your building, you generate more income and therefore increase the market value of your property.