The temptation to dive head-first into the real estate market is an enticing proposition for any investor. When the market is hot and prices are low, it is an ideal situation for a property investor to take the plunge. Even better is when a new local market is on the verge of popping.
Getting in on a new location that is trending can give you an edge when you are looking to buy real estate. Knowing the signs for investing in the right areas at the right time is key to success as a property investor.
1. Job Growth Compared To Vacancy
We look deeply at the job growth of an area and compare those figures to the local vacancy rates. When you can find an area that is growing without an oversupply of rental homes, it is in most cases a good indication of not only fewer days on market, but also potential rental rate escalators.
2. Standard Local Market Demographics
When we get an investment financing request in a new market, the three local market demographics we focus on are appreciating versus depreciating neighborhoods, school ratings, and crime ratings. While we also look at household median income and access to jobs, those factors can be harder to compare from one market to another. School rankings and crime rates are easier to compare on a national basis.
An area that is growing economically, in population or even just in demand as a destination will offer far better chances for appreciation. The fastest appreciating areas are those that have been recently “discovered,” that many people now desire and often where there is a backlash against further growth. “Nimbyism” has a lot of downsides, but price appreciation is not one of them.
4. Major Retail Trends
A few of the indicators I look at are what retailers are existing and what new ones are coming to the market. If it’s a new development, I validate with the actual retailer to make sure they are coming. Do your homework. Another great resource is the local building department, where you can learn what stage a development is in and if they have actually submitted their plans.
5. State Of Infrastructure
The infrastructure should be strong enough to support the market. For example, how’s the access in and out of the market, what kinds of schools are located nearby, is there additional transit, are there growing companies, are there amenities, etc. If these are all relatively strong, then this is a market that should continue to be attractive because it has good “bones.”
6. Metro Rail Development
Look for metro rail development in a given city to see what infrastructure commitments have been made. Find the stations/stops. Fan out and have fun. Look for properties where the density has been increased and which cleared the major regulatory requisites. Ride the rails — as long as they lead somewhere.
7. Absorption Rate, DOM, Median Sales Price
On specific areas, I recommend my investors look at the absorption rate (the number of months of inventory) versus the days on market (DOM) versus the median sales price. These three factors are what I call “health of the market” indicators. If the number of months of inventory over the past couple of years appears to be changing and minimally impacting the other two, then the market is healthy.
8. Rent Trends
In a new market, the investor should look at rent trends. The best check is a recently purchased property that is being renovated. Find out what the rents were at the time of sale (if the property was marketed, ask the broker for the offering memorandum — it will most likely have a rent roll). Then check to see what rents are being advertised now.
9. Industry Diversification
Our clients work with the local municipality business development office to see what businesses and industries are in or coming to the area. Most investors look for a diverse list of industries that stabilize the local job market and provide a great pool of renters. Savvy investors evaluate the ratings on school systems, real estate taxes and the regulations of the state and local governments.
10. Inventory Of Homes For Sale
There are many indicators for a healthy and unhealthy real estate market. However, you can never know for sure what the future holds for prices. One thing to analyze is the inventory of homes for sale. Low inventory indicates high demand and the possibility that prices could increase or are currently increasing.
11. Household Income and Educational Attainment
At the top of the list is median household income and educational attainment. Comparing this at the local market level provides valuable insight into markets that have a stronger or weaker demographic component, as compared to other similar markets nearby.
– When To Consider Property Investments In A New Market