The Real Estate Market:
Tips for Franchise Investors
JUN 29, 2023 by PAUL MARVEL
Without a doubt, there's money to be made with real estate. Since you're thinking about opening a real estate investment franchise specializing in flipping properties, it's worth the time and effort to understand how the local market works.
To that end, educate yourself on a few key aspects of the market. This includes knowing what can impact that market, conducting a market analysis, and the importance of location. You'll also need to know how to research a property's past, and how to go about financing the purchase and upgrades. Here is more information that you can put to good use.
Factors Affecting the Real Estate Market
There are a number of factors that influence the local market, but it is possible to combine them under four broad categories. It doesn't matter whether you're talking about commercial or residential real estate; each category will exert some influence. Understanding how each one exerts that influence can help you decide if a given property is worth considering.
*Demographics: This has to do with the composition of people residing within the area. You'll want to consider factors like average income, age, gender, increases and decreases in population, and movement into and out of the area.
An example has to do with the impact of the baby boomer generation on the local residential real estate market. Beginning around 2010, the first of this generation began to retire. This led to an exodus from some residential areas, while spurring population increases in others. Given that this demographic covers just under 20 years, this particular demographic will exert influence for at least through 2030.
*The Economy: What's the economy like, and where is it projected to go while you're in the process of preparing the real estate to flip? This is a question you need to answer before making any choices.
Here, look closely at national indicators like the GDP and what influence it has on the local market. Do consider local employment rates, the price of goods and services, and in general how healthy the local economy happens to be. Simply put, there must be money circulating with relative freedom in order for people to buy anything, including real estate.
Keep in mind that some properties weather economic downturns better than others. For example, flipping an office building that already comes with tenants would likely be easier than enticing buyers for a hotel that you just refurbished.
*Current Interest Rates: Local interest rates matter in more ways than one. You may need short-term financing for the purchase and upgrades, and it stands to reason that lower interest rates means less money to pay back. At the same time, interest rates and their projected movement will matter to potential buyers.
Buyers will likely be looking at longer-term financing than you needed. For this reason, consider what sort of trend is expected with interest rate fluctuations. You can bet potential buyers will be watching too.
*Governmental Policies and Subsidies: There may be subsidies designed to motivate buyers who are interested in restoring older properties and bringing an area back to prosperity. That's of interest to you and anyone who wants to buy the property once you're done with the renovations.
Tax credits for you, and for those who will follow, is also something to consider. Could you receive credits for installing energy efficient windows, heating and cooling systems, and other elements? If so, then there's money to be saved, and the potential to increase the market value of the property.
Incentives for first-time property buyers may be in effect. This can apply to commercial as well as residential properties. That could help you, and could benefit whoever wants to buy the property once you finish with it.
Your goal in evaluating all of these factors is to determine if the properties under consideration represent sound property investment franchise opportunities, or if the timing is off for some reason. Assuming you find there's a lot of potential to flip the property in the short term, the deal is worth looking at closely.
A market analysis is all about developing a comprehensive look at what you could accomplish by acquiring, restoring, and selling a property. The goal is to determine if the time, expense, and effort has a good chance of paying off in terms of the net profit the venture will create.
An effective market analysis will involve looking closely at all the factors related to the purchase. Along with the four areas already mentioned, there are other points that will help you develop a more detailed look at what to expect if you move forward with this deal.
- Do consider competition within the local market. How many other entrepreneurs are purchasing properties with an eye toward selling them after making some improvements? How many of those enterprising individuals are dealing with properties similar to the ones you have in mind?
- Look closely at the relationship between the current supply and demand in the local market. The property may be available for a great price, but that does little for you if there's no demand in that neighborhood or that part of town.
- Think about who is most likely to be interested in the property, and how many in that particular demographic are looking? For example, would the property be an ideal starter home for someone in the early years of a career? How about a place that's perfect for retirees who want to downsize?
This all tracks back to using the analysis to develop an image of the ideal buyer. Assuming there are plenty of locals who fit that image, then the property is worth considering.
Location, Location, Location
The importance of location must be clear in your mind. Depending on the intended use of that property, you only want to focus on opportunities that are likely to result in reasonable returns within a shorter time frame.
For example, a successful house flipping franchise involves finding distressed properties in desirable neighborhoods, renovating them, then selling at a price that yields a reasonable return. No matter how good a job you do, the return will not be great if no one wants to move to that neighborhood.
The same goes for commercial properties. Renovating a strip mall or shopping center accomplishes little if the location doesn't entice tenants, or if there's not enough population nearby to support those businesses.
Take a close look at local zoning laws, and what they allow on those properties. Think about traffic to and from the area, what other businesses, parks, schools, and other features are found close by. You may even want to find out if the area is poised for gentrification or some other sort of renaissance. What you learn will tell you if spending time and effort on the property is worth it.
Financing Real Estate Investments
How do you finance flipping properties? The last thing that you want to do is tie up your own financial resources in a venture. A better solution is to seek funding that can be retired over a period of time. You do have several options to think about.
- Business lines of credit: Depending on your reputation, you may be able to establish a line of credit that covers most of the costs. This is not the solution for those who are just beginning, but it may work well for someone with a proven track record.
- Standard Mortgages: With this option, go for one with a shorter term, but with installments you can manage with ease. Make sure there's no penalty for paying off the mortgage early.
- Small Business Administration loans: You may qualify for a loan, based on the type of property you want to acquire, and the overall cost.
- Angel Investors: Assemble your own investors and commit to providing them a fixed return once the property sells. Make sure you can work this so that everyone, including yourself, is likely to make money off the deal.
- Commercial Real Estate loans: If the property in question is commercial, there may be loan options that work well for you. As with mortgages, make sure you can manage the installment payments, and there's no penalty for an early loan payoff.
There is no one right financing approach for every situation. Look closely at the terms, and go with the approach that provides the most benefits for you. That means knowing what sort of commitment you're taking on, how competitive the interest rate happens to be, and how long it will realistically take you to honor the commitment.
You've addressed the property's potential, how you will finance the purchase and renovation, and what sort of return to expect. There's one more area to address before you proceed: conducting due diligence on the property's history.
What do you want to know? Specifically, you want to ensure there are no irregularities related to the property description, the transfer of title in years past, and the proper zoning of the property. This will go a long way toward avoiding complications down the road.
A thorough assessment of the property's condition is also in order. That means assessing everything from the foundation's condition, the wiring and plumbing, and even the condition of the water table on the grounds.
This is important, since you don't need any surprises while the property is being renovated. Surprises mean additional expenses. By knowing all you can about the property up front, it's easier to create a budget and stick to it. That also means having a better chance of realizing the amount of net profit that you seek.
The bottom line is that you want to be sure a property has an excellent chance of generating sufficient profit before you invest in it. Make sure you know the property's condition well, have an eye for what sort of buyer would be interested, confirm the demand is there, and ascertain what sort of sale price you could command.
Do make sure you can secure reasonable funding for your venture, without committing the money in your personal accounts. If you're sure the market conditions are right, there will be those interested in the restored property, and the rewards will be worth the effort, then you will find it easy to justify the Red Barn Homes franchise cost, set up your business, and begin searching for properties to renovate.