You are looking to invest in a property; however, with today’s ever-changing real estate market, you don’t know when it is a smart time to invest. Sure, the deals look amazing and you can’t really see any major red flags that are glaring at you, but have you ever truly studied the market that these properties are in?

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

After all, it just may be that the market itself is the main reason you should be particularly leery when it comes to purchasing an investment property.

The Types of Markets

OK, for starters, before we get into all the nitty gritty details surrounding the things that might be impacted by the market out there, here is a brief explanation of the three main types of real estate markets out there.

Related: Flipping Levels at an 8 Year High: These 5 U.S. Markets Are Seeing the Highest ROIs

• Growth Market: Just like the name suggests, these markets are on the rise. With the population moving upwards and trending well, these markets are booming.
• Stable Markets: These markets are stable, steady, and aren’t really going to go anywhere. They won’t really fluctuate upwards or downwards, and they won’t be growing at a very rapid pace. Oftentimes, there will be just enough growth to keep up with inflation.
• Declining Markets: Hold on tight because these markets are on a downward slope. With the population and jobs market decreasing, it is wise to be careful.

So what exactly is the reason behind the differences seen across these three different sorts of real estate markets? Well, for starters, there is the industry, the job opportunities, and overall, the general desirability. Obviously, the real estate market can change due to any of these three reasons, but drastic change generally doesn’t occur over a rapid timeframe.

The Effect of the Market

Now that you know about the different types of real estate markets out there, I will be discussing with you how the direction of the market can really affect the ownership of investment properties.

Profit

What do you want to achieve with your real estate investment property? Are you envisioning yourself trying to sell it in the future? Perhaps you are looking to achieve profit via appreciation. Or maybe you want to hold onto property for cash flow.

Related: The Lesser Known Home Price Index That’ll Give You Unique Market Insight

Well, regardless of what you want to accomplish, there is no doubt that the direction of the market will have a major impact on all of the things mentioned above. For example, a property in a declining market will most likely lead to a decrease in value. This in turn is the starting point to a large number of events, such as not receiving appreciation, losses if you wish to resell, and the possibility of a decrease in rental rates.

Rentability

Basically, if your property is in a growth market, you will be blessed with a continuous stream of higher quality tenants (obviously, it depends on the neighborhood too, of course!), and in general, everything will be moving forward in a positive direction. On the other hand, if you find yourself looking at an investment property in a declining market, you should be starting to feel a little concerned about the chances of finding quality tenants among a decreasing selection of possibilities.

How to Tell if a Real Estate Market is Wise to Invest In

General Population Trend

Is it increasing or decreasing? If it is increasing, then the number of properties available to people occupying the space will be less, hence the demand will increase.

Jobs and Industry

It is important that the number of jobs is constantly increasing and that the industry in the neighborhood/city is going strong. Oh, it is also important to note that things such as universities and even sports teams can fall into this category to some degree! In addition, if there are large corporations headquartered near your property/area, such as Eli Lilly, NCAA, Microsoft, etc., this is a good sign that this market might be a good one to invest in.

General Desirability

Is there anyone who actually wants to live in the market? This might sound like a no brainer and such a generic thing to say, but this is honestly one of the most important factors out there. After all, how could anyone possibly assume that a real estate market is wise to invest in when nobody in the population actually wants to live there and there are no signs that the number of people living there is going to increase by much?

Conclusion

When choosing a market, it is always best to select one that is best aligned with your investing goals. For example, an investor who only wishes to go in it for the cash flow instead of banking on appreciation should probably opt for a more stable market. It’s difficult to tell whether a given market is wise to invest in, and there is certainly no guarantee. However, so long as you follow these steps and keep thinking straight, you are sure to make good, well-informed investing decisions.

How do you go about studying and choosing markets for investment purposes?

Leave your tips below!