Skip to content
Welcome! Are you part of the community? Sign up now.
x

Posted over 4 years ago

Evaluating a Real Estate Market? Look for these 4 Things.

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 data down, but sometimes you’re looking at a specific market and you want to evaluate it for yourself. How should you do that?

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 a market 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 who is flipping the houses and for our clients who will own the houses as long-term rental properties.

Property Appreciation

It’s imperative to understand if, on average, the home values in the market you’re considering are going up over time or down. 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 room for pause). A historical approach here will help you identify how the market has performed over time and help you make predictions for 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’re wanting a steady property appreciation incline over time. Some small decreases are normal because 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 great resource for statistics on real estate markets. It’s a nice place to start when looking to track property appreciation trends in a market.

Average Property Expenses

When evaluating a market, you need to understand the expenses associated with an average property in the market you’re considering. Add up principle, interest, insurance, and taxes and compare that amount to the value of the home.

You want to make sure you take serious consideration of the taxes because it’s a number that is out of your control, and it directly impacts the net cashflow you can produce out of your 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 1-1.5% of the value of the home.

Age, Style, and Average After Repair Value (ARV)

This one will be tailored more toward your own specific investing strategy. Depending on what types of properties you are looking for, you want to make sure the market you’re evaluating has a big pool of those types of properties. For Bridge Turnkey Investments, we try 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 (single family? Multifamily? Ranch? Duplex?) and the price point you need the home to be after you’ve completed your renovation.

Employment

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 of people to markets is employment, and one of the biggest factors for people staying in a market is employment. 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 compares to the average overall.

Additionally, I recommend giving preference to markets that have multiple industries driving their employment. 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. Who are the biggest employers in the city and how many people do they employ? Having only one large driver of employment in a city is a concern. Think about what could happen to that city if something shifts in their main employment industry and it’s no longer a viable source of employment for locals. You don’t want to invest in a market that has only one big, driving industry employing a majority of its residents. 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 Bridge 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.

Now, it’s go time.

Evaluating a market depends mostly on you understanding your goals and needs from that market. I highly recommend writing your goals down, sharing them with those around you, and gaining and 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.



Comments (1)

  1. Returns are most important to me. Aka price-to-rent ratio.