Top 4 Factors to Consider When Evaluating a Real Estate Market
It’s easy to get overwhelmed by the amount of data available when assessing a real estate market. Media sources create lists like “10 Best Rental Markets” to help simplify the stats, but sometimes you’re looking at a specific market and you want to evaluate it for yourself. How should you do that?
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As a turnkey provider and real estate investor of more than a decade, I’m well versed in weeding through the data to determine if an area is ripe for investment. Here are four indicators I give weight to when evaluating a market.
Note: I want to be clear that when I evaluate a market, I’m doing so with my turnkey business in mind. So it’s important for me to understand what the returns will be like in that market both for my company, which is flipping the houses, and for our clients, who will own the houses as long-term rental properties.)
How to Choose the Best Markets for Real Estate Investing
It’s imperative to understand if, on average, home values in the market you’re considering are going up or down over time.
We don’t need a hockey stick graph here. In fact, huge spikes or dips in property appreciation can represent a volatile market and should give you pause. But a historical approach will help you identify how the market has performed over time and predict how it will perform in the future. Minimizing risk is the name of the game, so a market with large spikes and dips indicates more risk for your investment.
If a long-term rental is one of your exit strategies for the properties in that market, you want steady property appreciation over time. Some small decreases are normal—real estate markets, on the whole, are cyclical and will experience these declines. But is the trend line going up at a steady pace? If so, this is a plus for moving forward with investing in this area.
NeighborhoodScout.com is a useful resource for statistics on real estate markets. It’s a great place to start when looking to track property value trends.
Average Property Expenses
When evaluating, you need to understand the expenses associated with an average property in the market you’re considering. Add up principal, interest, insurance, and taxes, and compare that amount to the value of the home.
Ensure you make note of the taxes because it’s a number that is out of your control—and it directly impacts the net cash flow you can produce from the property. You’ll always have taxes, even when the property is paid off in full. These aren’t going away.
A good rule of thumb is for the taxes to land between 1 to 1.5% of the value of the home.
Age, Style, and After Repair Value
This one will be tailored more toward your own specific investing strategy. Depending on what you are looking for, you want to make sure the market you’re evaluating has a big pool of those types of properties.
My company tries to buy houses in Kansas City that were built after 1940. So, when I evaluate a market, I am always looking around to understand if that market has a lot of properties built in this timeframe.
You need to be clear on what you’re looking for before you evaluate a market. This will help you be specific about what types of homes you’ll want to see the most of. This includes the style of home you’re wanting (whether it’s single family, multifamily, ranch, duplex, or something else) and the price point you need the home to be after you’ve completed your renovation (ARV).
Understanding who is living in the market and what is driving them to the market (and keeping them there) is very important. One of the biggest drivers is employment. It’s also one of the biggest factors for people staying.
For these reasons, it’s good to know what the employment rate is in the market you are evaluating. You can find this information through the Bureau of Labor Statistics (BLS.gov). Compare this rate to the national average to get a sense for how your market is doing on average overall.
Additionally, I recommend giving preference to markets that have multiple industries driving their employment. Who are the biggest employers in the city, and how many people do they employ?
Do your research. Wikipedia is actually a good place to start for this information, though I recommend verifying any info from there with other reputable sources.
Having only one large driver of employment in a city is a concern. Think about what could happen if something shifts in their main industry and it’s no longer a viable source of employment for locals. Find a market with a diverse set of industries and multiple well-known, attractive, large growing companies, and you’ll be in a much better situation.
In Kansas City, where my company invests, we experience the benefit of this very indicator working in our favor. With Cerner, Garmin, Sprint, H&R Block, Hallmark, and more large employers in diverse industries, it’s no wonder we see residents continue to flock to our city.
It’s Go Time
Evaluating a market depends mostly on understanding your goals and needs from that market. I highly recommend writing your goals down, sharing them with those around you, and gaining an understanding of the specific market conditions you need to be successful.
Start with the indicators I’ve mentioned in this article, and you’ll be well on your way to understanding if a particular area is right for you.
What other factors would you recommend considering when choosing a market to invest?
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