As an investor, in a perfect world you would only invest in markets on the way up. Being a little too early on a market, is much better than a little too late. Finding emerging markets takes diligence and the ability to pour through data. It also takes discipline to know when to walk away, when the risk isn’t worth the reward.
Strong markets rarely pop off the page. They may have a few areas where they can hang their hat, but it takes several to be considered a sure thing. Growth, economy, job creation and sales history all play a key role in breaking down a potential investing area. The market a property is in is often just as valuable as, or more than, the actual property. If you can keep your portfolio to only strong markets, you can be confident in the upside. Here are five areas to focus on when evaluating a new market.
- Population Growth:. The first indicator of a market’s strength is in the population growth. As simple as it sounds, more people coming into a market means that more people find it attractive. With increased population, there is more money spread around throughout the market. This has a direct impact on the property taxes and the reserves of a town budget. The schools should be stronger, the streets improved, and the quality of the area increased. It has an indirect impact of drawing attention of business owners and home buyers. With more business owners coming into town, property demand will increase, and home values will rise. On the flip side, when people flee a market property values plummet and business look elsewhere. Look at a five-year population history at town hall or online to get an indicator on the strength of a market.
- Economy: Population growth is a good indicator of a market but doesn’t tell the whole story. The best data you will find of a market is the strength of the economy. It is no secret that people will often go to where the jobs are. If the local economy is on the upswing and money is flowing people will look to stay, or buy, in the market. An indicator of the economy is the growth of local business. If there are restaurants, factories and shops opening up, it is a sign that the market is solid. Large retail companies are savvy enough to avoid areas in the decline. They often have years of research and data behind them prior to breaking ground. As we stated, if business in the market is expanding it has a trickle-down effect to everyone else. More jobs mean that more people need a place to live. Most people want to live as close as possible to their employment if all other things are equal. Rental or ownership demand will push home prices, and values, higher for the foreseeable future.
- Real Estate Transactions: All home sales are not created equally. It is too much of a blanket statement to say that the volume of transactions indicates strength in a market. There are still pockets in certain markets that haven’t fully recovered from the mortgage collapse. They had excessive foreclosures and property values haven’t reached pre-2009 numbers. What you want to look at is the number of transactions, in addition to the average days on the market plus the average sales price. A high number of transactions show that buyers are looking to get into the market. A reduced average days on the market indicate that home sales are not dragging, and as soon as homes become available buyers are pouncing. An average sales price increase shows that demand is outpacing the supply and values should continue to rise. Looking at just one piece of real state data is selective and could get you in trouble. Look at as much info as the items mentioned as you can find.
- Rent Increases: Rental numbers have continued to climb steadily over the last decade. Long gone is the stigma that renting is a bridge to buying. There are many people who, for a variety of reasons, do not want to own a home and prefer renting. If you are interested in a market you should look at the rental history. Go to the Trulia, Zillow and any other rental website you can find and look at the current rental property inventory. Reach out to the owners and ask where the market has trended over the last five years. Assume the worst case and compare your property to other rentals that are listed. If you are comfortable in the number, you have a fall back exit strategy that makes investing in the market even more valuable.
- Appreciation Potential: You should never invest on appreciation potential. We all saw what happened last decade when property value increase came to a screeching halt. You were left with a declining asset you had trouble getting off your books. That being said, while not investing solely on potential it should be a consideration. Look at comparable sales and current listings in relation to your property. Assigning future value on improvements you make is tricky, but the comps should give you a guide. If there is upside and potential value there, it should be considered a great place to invest.
Simply put, a strong market often makes a strong investment and a weak investment vice versa. Prior to committing to any deal always take the time to evaluate the market before making a decision.
