What Makes A Strong Real Estate Market?

When you consider investing with a Lead Investor in a certain market, you must evaluate how strong the market is. Don’t let the flashy OM (Offering Memorandum) fool you. You absolutely have to know the market. It seems like a lot of work but, in the Internet Age today, the information is at the tip of your fingers. All you have to do is know what you are looking for. In this article, I will lay out the critical factors that will help you determine what to look for, as well as where to find the answers.

Let's start with the five main factors that you must take into consideration when you evaluate a market:

1. Population growth – A solid market is one that has population growth. Markets that have flat or negative population growth can indicate a problem, while markets that continuously have people moving into them is a sign that there will be more demand for apartments. One of the markets with the highest population growth is Dallas, TX, while the Providence, RI market has shown no significant population growth at all.

Where to find information? Simply Google it! For example, search “Jacksonville population” and you’ll see the trend. Focus on the last 5-10 years.

2. Job Growth – Population usually follows jobs, and a great market is one that adds many new jobs each year. I usually look for markets with an unemployment rate that is lower than the national average (4.1%). In addition to evaluating the city job growth, you need to pay attention to any major industry or employer that may be responsible for more than 25% of the market, because if the dominant industry or employer is in trouble so is your property (due to layoffs). A solid market is one that has steady job growth and a diverse economy.

Where to find information? www.city-data.com andwww.census.gov

3. Rent Growth – A strong multifamily market is a market that has increasing rents. If rents are in a downward trend, then your property might suffer from declining rents as well. This is also a rule of thumb, and each investment is unique, but generally speaking I try to stay away from markets that have a declining rent trend.

Where to find information?www.census.gov has information on the average rent in the past several years in major cities.

4. Appreciation Potential – The lion share of the profits is made when you sell the property. This is why appreciation is key. I look at markets that have strong appreciation potential, and if property values are increasing, it is more likely that I’d be able to sell my investment at a significantly higher price than when I bought it. This is why I believe that you make money when you sell a property, not when you buy it. A word of caution, though: real estate is a cyclical business, and even markets with strong appreciation can suffer when the economy turns. A market with increasing prices is not a guarantee that you’ll make profit when you exit, but it’s a safer market to be in when you buy.

Where to find information? Many large brokerage firms offer free reports that show rents and real estate prices. You can find the reports from reputable companies such as CBRE, Marcus and Millichap, Yardi Metrix, etc.

5. Landlord Friendly State – Landlord-friendly markets have a direct impact on real estate and the return of the investments. Some states, such as California, are very tenant-friendly, which means that it can take up to 9 and even 11 months to evict an non paying tenant while, in the meantime, you pay for the mortgage and the expenses. Other states, such as Texas and Florida, are landlord-friendly and provide owners with a quick eviction process.

Where to find information? Simply Google: “How long does it take to evict an nonpaying tenant in …”