Do your (market) research!

Before we choose any market to invest in, we really have to do our due diligence.  Whether this market is the market you live in or 3000 miles away, I recommend this very crucial step before you consider even looking at any given property.

There are several different things you will want to look at before considering any investment.  Of course, feel free to add and/or subtract based on your level of comfort and investing style, but these are just some of the things we will usually look at.

1) Prevailing industries in your market. Today, if you invest in Detroit, you may have a tough time.  I know many successful investors there, however, I know many people who are having a rough time, too.  The car manufacturing industry, one of Detroit’s prevalent industry’s, is contracting.  Take a look at an article from BusinessWeek by clicking here.  Population, and, in turn, vacancy is highly influenced by jobs.  More than anything, jobs are what fuel economies.  Currently, with the US unemployment rate hovering in the 9.5% range, we’re having difficulty moving out of the depressed economic environment.  If people don’t have money to spend, they’re going to move to a place where they have more opportunity, like Indianapolis.  One of the top industries in Indianapolis is in biotechnology.  With the current baby boomer generation coming closer to retirement, biotechnology has become one of the strongest industries in the US.  Click here to view an article by Ernst & Young.

2) Market Median Prices vs. US Median Prices.  If prices in your market of interest are cheaper than the US median home price, it is highly likely that they will move up.  Cities that are run well and have plans in place to stabilize their markets will naturally become more popular for people to move to.  Stabilizing neighborhoods through small business incentives, city-wide rehab plans, development of public transportation systems all create jobs.  And, as I explained earlier, jobs drive growth.  And, growth drives prices.  Corrections happen because values are too high to be sustainable based on the amount of income created in the market.  This is what has happened in previously booming markets such as Nevada, California, Arizona, and Florida.

3) Market volatility. If you live on the coasts, east or west, like me, you’d realize that housing prices can fluctuate to a great extent.  Historically, if you take a look at larger markets such as the NY metro area and the LA metro area, you’d see the housing market index’s (produced by the Federal Housing Finance Agency–click here for an explanation) peaks and valleys are further apart than in more stable markets such as those in the midwest and south.  Click here for a look at this index.  I personally like markets that won’t move up or down as much to ensure stability and growth in my investments–after all, don’t we all want that?

4) Owners vs. Renters. This is something you want to look at in any market’s neighborhoods.  We invest in markets where the cost of ownership is cheaper than renting.  Oftentimes, the reason renters rent in certain neighborhoods is because their financial and credit situation does not allow for home ownership.  We can capitalize on this by providing these renters with safe, clean, and functional housing that allows us to cash flow.  In many markets throughout the country, you can buy a home and rehab it for less than $50K, resulting in a mortgage in the $250-300 range and receive rents that are upwards of $850 a month.  Your yearly cash on cash returns are anywhere from 10-30%.  It’s a no brainer!

5) Government plans and projects, short term & long term. It is always important to take a look at what city and county governments have in store for your market of interest.  Every 20-30 years major metropolitan areas come up with future plans for their cities, counties and even neighborhoods.  The plans are usually available through a simple online search.  Click here for a sample.

These are just a few of the areas we analyze before ever getting involved in any markets.  We have a few more topics that we explore, but they are all usually market specific.  So, now that you know what we look at, go out and get the information for your markets.  Armed with this information, you will have confidence in your investments, and your lender, private money and buyer contacts will undoubtedly grow.