How to Choose the Best Markets for Real Estate Investing

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You are looking to invest in a property; however, with today’s ever-changing real estate market, you don’t know when it is a smart time to invest. Sure, the deals look amazing and you can’t really see any major red flags that are glaring at you, but have you ever truly studied the market that these properties are in?

After all, it just may be that the market itself is the main reason you should be particularly leery when it comes to purchasing an investment property.

The Types of Markets

OK, for starters, before we get into all the nitty gritty details surrounding the things that might be impacted by the market out there, here is a brief explanation of the three main types of real estate markets out there.

Related: Flipping Levels at an 8 Year High: These 5 U.S. Markets Are Seeing the Highest ROIs

  • Growth Market: Just like the name suggests, these markets are on the rise. With the population moving upwards and trending well, these markets are booming.
  • Stable Markets: These markets are stable, steady, and aren’t really going to go anywhere. They won’t really fluctuate upwards or downwards, and they won’t be growing at a very rapid pace. Oftentimes, there will be just enough growth to keep up with inflation.
  • Declining Markets: Hold on tight because these markets are on a downward slope. With the population and jobs market decreasing, it is wise to be careful.

So what exactly is the reason behind the differences seen across these three different sorts of real estate markets? Well, for starters, there is the industry, the job opportunities, and overall, the general desirability. Obviously, the real estate market can change due to any of these three reasons, but drastic change generally doesn’t occur over a rapid timeframe.

multifamily-markets

The Effect of the Market

Now that you know about the different types of real estate markets out there, I will be discussing with you how the direction of the market can really affect the ownership of investment properties.

Profit

What do you want to achieve with your real estate investment property? Are you envisioning yourself trying to sell it in the future? Perhaps you are looking to achieve profit via appreciation. Or maybe you want to hold onto property for cash flow.

Related: The Lesser Known Home Price Index That’ll Give You Unique Market Insight

Well, regardless of what you want to accomplish, there is no doubt that the direction of the market will have a major impact on all of the things mentioned above. For example, a property in a declining market will most likely lead to a decrease in value. This in turn is the starting point to a large number of events, such as not receiving appreciation, losses if you wish to resell, and the possibility of a decrease in rental rates.

Rentability

Basically, if your property is in a growth market, you will be blessed with a continuous stream of higher quality tenants (obviously, it depends on the neighborhood too, of course!), and in general, everything will be moving forward in a positive direction. On the other hand, if you find yourself looking at an investment property in a declining market, you should be starting to feel a little concerned about the chances of finding quality tenants among a decreasing selection of possibilities.

How to Tell if a Real Estate Market is Wise to Invest In

General Population Trend

Is it increasing or decreasing? If it is increasing, then the number of properties available to people occupying the space will be less, hence the demand will increase.

Jobs and Industry

It is important that the number of jobs is constantly increasing and that the industry in the neighborhood/city is going strong. Oh, it is also important to note that things such as universities and even sports teams can fall into this category to some degree! In addition, if there are large corporations headquartered near your property/area, such as Eli Lilly, NCAA, Microsoft, etc., this is a good sign that this market might be a good one to invest in.

hottest-flip-markets

General Desirability

Is there anyone who actually wants to live in the market? This might sound like a no brainer and such a generic thing to say, but this is honestly one of the most important factors out there. After all, how could anyone possibly assume that a real estate market is wise to invest in when nobody in the population actually wants to live there and there are no signs that the number of people living there is going to increase by much?

Conclusion

When choosing a market, it is always best to select one that is best aligned with your investing goals. For example, an investor who only wishes to go in it for the cash flow instead of banking on appreciation should probably opt for a more stable market. It’s difficult to tell whether a given market is wise to invest in, and there is certainly no guarantee. However, so long as you follow these steps and keep thinking straight, you are sure to make good, well-informed investing decisions.

How do you go about studying and choosing markets for investment purposes?

Leave your tips below!

About Author

Sterling White

Sterling White started in the real estate industry at a early age back in 2009. The company he co-founded Holdfolio is a real estate crowdfunding platform based in the Indianapolis market. Before founding Holdfolio Sterling and partner Jacob Blackett were involved in the purchasing and selling of 100+ single family homes nationwide. In his free-time he trains for a World Record

6 Comments

  1. Curt Smith

    Hi Sterling, Great topic, here’s some additions.

    #1 criteria for choosing where to buy rentals or flips: top high schools. The highest quality renters as well as buyers seek the best for their kids. Map your area’s great schools high school that are 6 or better. 8 or better are tops.

    #2 criteria: jobs. Use city-data.com to find the new jobs, where education degrees are moving TO. Good jobs makes for higher priced flips, and stable renters.

    #3 close to freeways, mass transit stations. My rule is 15 min max to a major freeway, 30 min max to good jobs center.

    #4 use craigslist.org rental area, put in a range of city/area names. Count the number of pages of ads. How many have all caps subjects. How many have 1 month free rent. Choose areas that have partial pages of ads, no caps, no free rent. You DO NOT want to be competing with all caps and free rent ads. I only buy where there are 2-5 other rentals in my price, quality. There are areas in Atlanta where the Hedge funds used to buy (where they quickly got totally killed).

    For example choose which area you’d rather buy a new rental:

    Quiz choice #1:
    http://atlanta.craigslist.org/search/apa?query=decatur&bedrooms=3&bathrooms=2&housing_type=6

    Or Quiz choice #2:
    http://atlanta.craigslist.org/search/apa?query=duluth&bedrooms=3&bathrooms=2&housing_type=6

    I’d rather buy a rental in Duluth, in a top high school, find the cheapest houses in that school district, you’ll have few competitors and be able to cull for good renters.

    If you buy in rural areas where we’ve moved to, due to low/no competition on the buy side, use city-data.com to find good jobs, choose houses near freeways and 30 min to good jobs.

  2. Andrew Syrios

    I have found the websites CLRSearch.com and City-Data.com very helpful. Particularly City-Data’s map feature which can break down things like per capita income all the way to the subdivision. CLRSearch is great for zip code data on things like crime rates, per capita income and occupancy rates. And both are free.

  3. Craig Sebert

    This is really great information. I’ve also been using NACO.org to review areas by county.
    Since being on BP I have started a list of sites and information sources that just keep growing, which is exciting because it only means my analysis will improve, therefore limiting risk.

  4. jose harvin

    Good post. I am following up a tip that say find where corporate franchises are putting new locations aka Starbucks, Panera bread, even Subways because these businesses are people dependent, and these people have some discretionary income…a new location means demand is there and they project will be for at least the next 5 plus years to recoup their initial investments.
    6 years ago in Miami, super high end retailers were moving slowly into a neighborhood named Winwood next to some real poor areas…this was a signal.

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