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Market Analysis Filtering System

Posted on Wednesday, October 31, 2012

 Over the last few weeks we have discussed how to find prospective deals.  Now that you have a few prospects potentially spread across various towns or states, the next question that you as a investor need to address is which market has a higher competitive advantage between your various prospects.

 

The profitability of income producing properties is highly dependent on the geographic area in which the asset is located. This becomes another filter tool. So how does one analyze an economic region/market area? The best way to analyze a market area is to complete a supply and demand study coupled with economic driver analysis.  

 

I.               Economic Driver Analysis

One of the best ways to identify a growing geographic market is to find markets where both economic employment is growing and profitable businesses are clustered within the geographic area. A widely accepted approach in completing the economic driver analysis is referred to as a location quotient.

 

[Regional Employmentindustry]/[Regional Employmenttotal] <> 1.0

[US Employmentindustry]/[US Employmenttotal]

 

If the industry that is being analyzed is greater than 1.0 then that industry would be identified as a base/driver industry for the geographic area. If you are trying to decide between two or more areas, pick the area that has the greatest number of base/driver industries. This is a tedious process and needs to be completed at the metro area level but once it is done you can identify areas that have future growth prospects of employment that is a leading driver for higher real estate prices.

 

II.             Supply-Demand Analysis

Supply and demand drivers of each market area affect real estate investments profitability. Each asset type has different demand and supply drivers. Since my expertise lies in multifamily asset class, I will give you a demand-supply factors table that I have utilized when analyzing market areas:

 

Key Demand Drivers

Key Supply Drivers

Number of Households

Vacancy Rates

Size of Households

Construction in progress

Median Household Income

Foreclosures / Shadow Inventory

Affordability (Price-Rent Ratio)

Age & Combination of existing stock

 

The above analyses will help you filter real estate prospects by profitable market areas so that you can identify real estate investment gems within your prospects. Next week I will show you how to start using some basic real estate finance to compare between filtered real estate investment opportunities.

 

Until Next Week- Happy Investing Fellow Investors!

 

Ankit

Questions: Tweet me @Ankit_RER  

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