Many articles have been written about how to evaluate a real estate market, and they typically tell you to look at the same metrics, such as population growth, household income growth, and employment growth. Instead, let’s discuss a few unconventional tips that encourage you to be more forward-thinking.
What trends might surface in the future? How will your property fare in the wake of coronavirus? Where is demand coming from?
If your goal is to do a flip in a year or less, then you might not need to pay attention to market studies as much. But for those who are in the game for the long-term, this article is perfect for you!
Goal: Identify the Best Markets of the Future
The unconventional tips in this guide apply to properties of any type, including houses, apartments, retail, industrial, and office. By utilizing them, you’ll be able to identify forward-thinking cities that are both growing and resilient.
Keep in mind that you still have to pay attention to the bottom line, however. Investing in a great city doesn’t mean you can start blindly buying real estate and disregarding the fundamentals of investing.
Now, let’s get started!
Tip #1: Consider How Diverse Employment Is in the Region
Most people pay attention to employment growth and household income growth, but it’s also very important to know the major employers in the area. Employment diversity makes a local economy resilient to downturns in a particular industry.
The fall of Detroit is an example of a lack of employment diversity. Las Vegas is overreliant on hospitality and suffered greatly during the COVID-19 shutdown.
The importance of diversity is even more apparent in this COVID environment. Education, tourism/hospitality, and retail/restaurants are among the industries that have been affected the most by social distancing and lockdowns. You should especially avoid cities that are reliant on these types of employment until the pandemic is completely over.
Who knows how long this will last. Will there be a resurgence, followed by repeat shutdowns? It’s not worth the risk.
To analyze diversity, compare the percentage of local occupation to that of the nation. The larger the percentage relative to the national average, the more reliant the local economy is on that particular industry.
For example, the national average for the hospitality industry is about 10%. So if more than 10% of the jobs in a particular city are in hospitality, then you should be cautious.
Here are some resources to use in your analysis: Data USA, City-Data, and HUDUser.gov. And you can find national averages on BLS.gov.
Tip #2: Figure Out What’s Driving Demand for Property
The first tip is mostly a big-picture strategy for assessing a city as a whole; however, certain areas within a city can be less diverse than others, so you should dive in deeper before buying a property.
“Point source” is a term referring to a region within a diverse city that is reliant on a single institution, such as a large corporation, military base, or student housing. Anything that’s the main driver for your property’s demand.
Even if that large corporation is a notable company, like Amazon or Apple, the presence of a point source is still dangerous because large companies can move their office to another city anytime—say, due to a political or tax issue.
Another example of a point source is student housing, which can be very lucrative when the economy is right. When I studied at UCLA in 2015, I was paying $3,500/month with my friends for a two-bedroom apartment. (That monthly rent is probably closer to $4,500 now.) I thought if I could own a few buildings like this in the future, then I’d be rich for the rest of my life.
However, as I learned more about real estate and the importance of diversity, I began to believe less in student housing. Perhaps students will begin replacing traditional college with online education for convenience and lower costs. We don’t know exactly what the future holds, but in real estate investing, it’s better to prepare for the worst.
Last year, I passed on an opportunity to invest in a student housing project at a notable school and invested in an area with diverse employment instead. I’m glad that I made this decision, especially in light of coronavirus. The property I chose to invest in instead is doing quite well.
Diversity is king!
Tip #3: Think About Suburbs vs. Cities
Millennials, estimated at 83.1 million, and Gen Z, estimated at 90.6 million, are currently the largest generations in the United States; therefore, it’s important to understand their behavior and preferences.
Do they prefer suburbs or cities? What kind of buildings do they like? Is the city to which they’re currently flocking sustainable?
These are questions you should ask yourself in order to be forward-thinking.
A study by Ernst & Young shows 41% of 1,200 millennial homeowners surveyed live in the suburbs, compared to 31% in the cities. But is this really what millennials prefer?
A different study shows that 62% of millennials prefer mixed-used communities in urban centers close to shops, restaurants, and offices.
One possible explanation for these two contradicting results is that millennials simply couldn’t afford to buy a family-sized home in an urban center. Although homes in the cities are more expensive than those in the suburbs, the average household income is 10% to 15% less in the cities than in the suburbs.
City life just isn’t affordable anymore! No wonder the population in large cities, such as New York, Chicago, and Los Angeles, declined in 2018. People are simply moving away to more affordable metro regions like Phoenix, Arizona.
A conventional tip is to look at the income-to-rent ratio. It’s very important to invest in affordable cities.
If the cost of living in a city were comparable to that in a suburb, then I have no doubt (as a millennial myself) that more millennial homeowners would choose to stay in an urban center and live close to mixed-used communities and public transit.
What’s your solution for the rising cost of living? Perhaps co-living? (I’m interested to hear your thoughts, so please leave a comment below.)
Furthermore, both millennials and Gen Z show strong preferences for access to transit and environmental friendliness. We all know that cities have more pollution than suburbs, but did you know that cities have significantly less pollution per capita? Therefore, it’s actually much more sustainable to live in urban centers and commute by transit than to live in a sprawling community where driving is predominant.
Invest in a sustainable city that focuses on pedestrians, bikes, and public transportation, and you’ll see demand grow in the next decades. Although most of America is still car-oriented, more and more cities are beginning to transition to this more progressive concept. It’ll take some time, but let’s be hopeful.
Can you think of more unconventional ways to evaluate a market?