Real Estate Investment Overview

Investing in real estate has advantages and disadvantages, and you as an investor must determine if an investment is suitable. Breckenridge and overall Summit County can be a great place for buying an investment property. In fact, the majority of the clients I work with are investors. However, let’s start from the beginning.

While federal income taxes are an important consideration when weighing an investment in real estate, the property’s operating economics are more important.

Timin is important in real estate investment. A good property purchased at the wrong time may result in substantial losses to the investors. Many investors also understand that a rapidly appreciating real estate market can make even marginal properties show acceptable returns. Before deicing which type of real estate is right, you must understand the current economic trends.

Trends in the business economy may either originate from or result in changes in the real estate market. The condition of one directly affects the conditions of the other. Changes and trends in the general economy fall into four basic categories: seasonal variations, cyclic fluctuations, specific cycles, and random changes.

Seasonal Variations

Changes that recur at regular intervals at least once a year are called seasonal variations. Such changes arise from both nature and custom. For example, In Colorado, most of the constructions stop during the winter months. Another example is that the population of mountain resorts during the skis season increases. Such changes affect the general economy and the real estate economy.

Cyclic Fluctuations

Business cycles usually are defined as wavelike movements of increasing and decreasing economic prosperity. A cycle consists of four phases:

• expansion
• recession
• contraction
• recovery

Production increases during expansions periods. High employment levels, wages and consumers purchasing power increase demand for goods and services. Prices rise because of greater demand and credit is easy, making more money available for purchasing.

Recession happens when in two successive quarters the gross domestic product (GPD) declines. The GPD is the sum total of goods and services produced by the United States. The four major components of the GPD are consumptions, investment, government purchases, and net exports.

Contraction begins immediately after a recession. The economy shakes the consumer confidence and as a result, they reduce spending in anticipation of lower earnings.  Slower sales cause reduced production, worker layoffs, and unemployment. Prices are reduced to clear out inventories of unsold goods.

Recovery defined as two successive quarterly increases in the GPD, begins when consumers, lured by lower prices, venture back into the market. As business activity increases, confidence begins to return. Slowly, production facilities gear up to meet the new consumer demand, capital begins to flow back into business enterprises, and companies start to hire additional employees. Finally, as the gradual rise in employment generates more spendable income and increasing demand for more goods, the business cycle again enters the expansion phase.

Specific Cycles

Specific cycles are wavelike movements similar to business cycles. They occur in specific sectors of the general economy, such as the real estate economy, and in individual sectors of the real estate economy, such as housing starts and real estate sales. Specific cycles do not always coincide with cycles of the general business economy, as the business cycle actually is a weighted average of all specific cycles.

Regardless of the state of the national economy, certain areas boom in recessions and stagnate in prosperous times because local demand runs counter to counter broad economic trends. Colorado has long been affected by the cost of oil and gas, which has often created a boom and bust cycle.

Random Changes

Random changes are irregular fluctuations of the economy. They can be caused by legislative and judicial decision or by strikes, revolutions, wars, fires, storms, floods, or other catastrophes. These changes, impossible to predict or analyze, may affect one or more sectors of the aggregate economy. They may influence all industries in an area or one industry nationwide.

Real estate activity, especially constructions, is very vulnerable to labor strikes, political changes, and natural disasters.

One example of random changes in regard to real estate is the zoning ordinance. For example, change allowing undeveloped land to be used for industrial purposed that would stimulate construction activity locally. Government policy changes and changes in tax laws also can cause random changes in real estate activity on a nationwide scale.

You as an investor must be aware of what is happening on both the national and local levels and have contingency plans to cope with events as they occur.