Newbie here! My wife and I have decided to start our strategy of exiting the proverbial “rat race” through real estate investing. We are currently interested in short-term rentals and buy-and-hold rentals. All the time we hear people stating to make sure you “know you market” and “understand your local market” and various other verbiage similar to that.
What exactly does “knowing your market” entail? And what are some steps in the right direction to learning more about your local market?
I’ve been advise to join a REA in my area which i plan to do, but other than that don’t know much more on info on getting me to the right direction i need to be in.
Any advice is greatly appreciated!!
Great question! I feel like this is a term (or terms) may be misunderstood as the definition can be subjective.
I like to think I know my markets pretty well, at least I like to think so. Here are some items I would include in your quest to define this term:
1. Knowledge of Specific Areas within a City or Town ~ You should be able to answer the following questions with a degree of certainty: How much are comparable rentals going for? How long are rental or sale listings "sitting" on the market? What are the demographics for this area? Historic sales in this market for the last 2-3 years - this can reveal trends and potentially "gems" in a tough market.
2. Development & How it Will Affect you? ~ If your looking in a city, look for potential developments - this will take a little time to accomplish. This can include university expansion, new businesses (i.e. the Amazon HQ2 Fiasco!), train stations, etc... You ever hear the phrase "follow the money"? Doing this will allow you to proceed in tandem with big investors or city development projects. Finding properties that align with other investment sources will provide you security when you make your investment.
3. Who do you want to rent to? ~ Families (should be good schools around)? Young professionals (bars, coffee shops, downtown)? University students (trains)? A mix? Again, this comes down to demographics. What type of rental are you looking to purchase and hold? Are the rentals top of the market, mid, or below market? Now pair the financials with the demographics and you begin to paint a more vivid picture.
Lastly, I would recommend, as I've seen on these forums many times before, walk around and "get a feel" of the area. Talk to people or visit the local bar or coffee shop:I know this sounds cliche, but invest your time before you make a decision and invest your money. Due to my style of investing (which many may disagree with) I like to ask myself: Would I like to live here? Or, Would I feel comfortable collecting rent in this area? It helps clear things up a bit when balancing all the tedious details than come with an investment like this.
Best of luck my friend!
@Michael G. provided a lot of good information, being able to accurately answer all those questions will prove you're an expert of your area.
Being able to familiarize yourself with a target market has become a lot more efficient with all the tools online. Rentometer is a good practice to get familiar with rent prices. Taking a deep dive into those automated reports will be beneficial.
@Connor Stark is correct! With the technology out there and available to us today, you can really dedicate some time and perform a thorough analysis. I use numerous websites for cross-comparison purposes and even go to city or county websites to access more reliable sales information.
If your still starting out, and are unsure of where to begin, this is it! You will begin to gain confidence and knowledge this way; it wont be long till you know every listing by block!
One way of beginning to gain an understanding of your market it by looking at the relevant data.
Data sources such as the American Community Survey, also known as the annual Census, can help you judge a location by considering key market indicators, which I list below.
Whether you are interested in long distance investing or looking to buy in your backyard, this information is invaluable.
Some of the metrics that the survey provides and that I find valuable to understand are:
- Home Values
- Household Incomes
- Rental Vacancy Rate
- Homeowner Vacancy Rate
- Poverty Rate
- Educational Attainment Rate (High School/GED & Bachelors)
- Number of Housing Unit
- Rent to Income Ratio
- Rent to Price Ratio
- Population on SNAPS (supplemental nutrition assistance program) percentage
- Property Tax Rate
- Median Age of Buildings
- Number of Structures by Units (SFR, Duplex, Triplex, Quadplex, etc...)
- Median Rents by Number of Bedrooms
- Unemployment Rate
- Employment Sectors Percentages
Also take into consideration the direction in which each of these market indicators are trending. This will better help you get an understanding of not just where market is today, but also where it may be heading.
Note that the sub-market selection will have more of an impact on price as well as investment performance than the city itself, this being smaller locals that compose a larger macro market.
Since this is your first investment, I don't suggest trying to find the highest cash flowing property however. The reason being that this will likely be in a D/F neighborhood, which will expose you to more risk than needed when starting out.
@Michael G. this definitely sounds like a lot of good information to start with as it gives me more direction as to key things to focus on. I always hear people saying “know your market” but it would never be explained. This helps a lot!!
@Art Perkitny thank you! I will begin to dive into the Census in a effort to better familiarize myself.