Real Estate Fundamental & Technical Analysis

Any good investor will tell you that there are 2 kinds of research you can do on an investment:

Fundamental analysis and technical analysis.

Fundamental analysis gathers a number of facts together about the investment, including history, industry, decision-makers, demographics, market analysis, etc.

Technical analysis looks at trends of recent purchases of similar investments to try and extrapolate what the future will hold.

Now here’s the deal: Technical analysis is easily automated and therefore incredibly popular among stock market, commodity, forex, and real estate investors. Unfortunately, too many people put too much stock in the results of technical analysis. Frankly, without fundamental analysis, technical analysis falls short.

The best advice I can possibly give you, even if you decide never to invest in international real estate, is to do fundamental analysis. Build a solid foundation of fundamental analysis and you’ll find the technical analysis will be understood easily, quickly, and effectively. Ignore it at your own peril!

So let’s look at each of these types of analyses to determine what you can do to learn about an investment.

Fundamental analysis should look at some of the following information:

•Who is the property developer?

oWhat is their track record with other properties in the past?

oDo they turn a profit?

oDo their investors walk away happy?

oDo people invest with them again and again?

oDo they finish projects on time, on budget, and within promised parameters?

oWill the developer be able to purchase building materials, bring them in, and have the labor to build while maintaining affordability? These are 3 big areas that can increase a price and put a project in jeopardy.

•Where is the property?

oWhat has happened in the area to suggest that it could grow? For example, why are the developers choosing to build there instead of somewhere else in the world?

oWhat are other properties around it selling for? Is this area growing in popularity? How do you know? Will it grow more? When will it reach capacity? What factors would you look to in order to feel that it has reached its capacity.

oHas interest been strong on those other investments? Why or why not?

•What is the property to be used for?

oIs this something that will be supported by other construction in the area? For example, will a rental location be filled with staff because the area is growing quickly and needs lots of people? Or as another example, will a hotel get booked up because the government is working hard to market the country and prepare beaches and other tourist attractions?

oIs the property appropriate for the demographic who it will be marketed to? For example, if the property is a building of condos marketed to seniors, are there senior-appropriate services nearby?

•Competition

oWho else is building right now? What is their track record? You want to see this because if just one never-heard-of-before builder is building, you might not be as attracted to a project as you would be if several big-name builders were all creating projects in the same place.

oWho else is investing right now? Is it the Donald Trumps of international real estate investing? There’s a good chance you’ll want to get in on the same deals they do.

oWhat will the “end user” competition be like? Will there be dozens of buyers clamoring for a single unit? That will increase prices and potentially earn you a good return. However, if there is not enough demand, the result would be the opposite.

These are just some of the questions you want to research when doing your fundamental analysis. They are hard questions and require some hard work, which is why a lot of people skip this step altogether.

The second, and more popular, but in my opinion, inferior type of analysis is technical analysis. Technical analysis looks at historical pricing and tries to identify patterns which are then forecast for the future.

What makes this method inferior is that pricing information is not always readily available, nor very accurate, on projects like this. After all, if it’s international real estate investing we’re talking about, just what historical pricing do you use? Perhaps you could look at other projects to help you form a baseline but that number will never be completely accurate because:

•No two projects are the same: to get the best number you need to find an impossible-to-find project: one that is built in the same place by the same developer during the same market conditions in a nearly identical location. Easy task? Not at all!

•Even looking at a similar project can skew the numbers because a completed project is experiencing a different point in the market than a project which could hit the market in a few years… when demand is different.

However, if you manage to find a few projects that are similar, and wish to draw an average price from those in the hopes of creating an approximate baseline, here is what you’ll need to do:

Chart the project along a timeline with the baseline or average cost of several similar projects. Watch your project for similar movements and if your project makes drastic changes that are different from the other projects, then use that as a warning flag for you.

The most important thing you can have is information and frankly, you can never have enough of it. Every piece of information should inform your opinion and you should act on it by doing the following:

1.“Does this piece of information change my opinion of the risk level of the project?”
2.“Does this piece of information change my opinion on the reward level of the project?”
3.Do I still feel that the risk/reward ratio is within the acceptable parameters I’m comfortable with?
4.Given my answer to question 3, should I hold the line or should I implement an exit strategy right now?