How to Identify a Growing Market or Neighborhood for Your Real Estate Investment
Real estate investing has always been about being in the right position to make the most of the shifts in supply and demand. Every investor has a different set of factors to identify an ideal investment, but location always plays a significant role.
To find a location that offers the profit potential you seek, you need to view investment properties through two lenses:
- Metro area or city
Your best case is to identify and invest in a growing market and neighborhood – one where acquisition prices are still within reach, and demand for rental housing is steady.
How to identify a growing market for your investment
This process applies whether you plan to invest in rental property in your community or find opportunities across state lines. Take a look at the entire forest to decide where you see the best trees.
4 factors that signal a growing market
- Job growth
- Industry diversification
- Population growth
- Price-to-rent ratio
Statistics about jobs tell a lot about local economic health; you’ll want to look at job growth rates, industry diversity, and median salary.
- Job growth—If job statistics reflect business growth in the area, it’s a good indication that housing demand will grow as more people will be drawn to the area, and some of them will be potential tenants.
- Industry diversification—You want to be wary about investing in a single-industry town. If external factors affect that industry and cause businesses to reduce operations, close up shop, or move out of state, that loss of employment affects your tenant pool. Look for an area with a healthy mix of professional businesses, manufacturing, healthcare, and education. These industries will employ a wide variety of people at different wage levels. This diversification means you can own rental property at different rental rates and be protected from the changing fortunes of a single dominant industry.
- Population growth— A growing local population tells the story of a healthy economy in which people earn a sustainable living: areas with a variety of good-paying jobs attract new residents and support demand for affordable housing.
- Price-to-rent ratio— Investors use this quick tool to help them decide if they want to dig further into local neighborhoods to find a deal. An area’s price-to-rent ratio takes the median price and divides it by the median annual rental rate – the lower the ratio, the better a deal looks.
According to Mashvisor, recommendations for price-to-rent ratios break out as follows:
- Low (15 and below): these are good locations for investors to purchase a rental property.
- Moderate (16-20): deals may be hard to find, and investors should try to find off-market or wholesale deals.
- High (21 and above): these areas are not favorable for investors.
For example, if an area’s median housing price is $200,000 and the median annual rent is $15,000, the price/rent ratio is 13.33 ($200,000 ÷ 15,000). This area could have potential. Real estate investors will now want to dig further into that location to identify specific neighborhoods to purchase properties.
Follow these 8 steps to identify a neighborhood with strong investment potential.
1) Look at local laws, finances, property taxes & state of local infrastructure—The local government (state, county, and city or town) can affect the viability of your investment property. You’ll want to evaluate the property taxes, municipal services, rental laws, rent controls, and eviction laws. If the local cost is higher, it might mean better local services and community safety.
2) Learn about safety & crime rates— Your potential tenants want a safe place to live with a low risk of crime. As an investor, crime can cost you money due to vandalism or theft. You’re better off avoiding the areas with the worst crime rates, no matter how attractive the financials look on paper.
3) Look for walkability— walkscore.com rates locations around the country for their friendliness to walkers. You can enter the neighborhood you’re considering and see how it ranks; many tenants will prioritize walkability in their search for housing.
4) Assess convenience— You want to own rental property where tenants want to live, and convenience is a significant factor for many. Look for properties with reasonable commutes to jobs, shopping, and other community centers – typically 10 miles or less. As an investor, this proximity improves your chances of acquiring a property that will be profitable for you.
5) Is there access to public transportation?—Proximity to buses, trolleys, trains, and subways is essential for housing in urban areas. If your likely tenants use public transit, focus your search on locations served by the local transit routes. Google transit is an excellent tool to use.
6) Find out about the school districts—Families with children look for housing where the school district earns high ratings. Talk to local real estate agents who represent buyers or renters. They will be able to tell you which school districts are the most popular among residents. Greatschools.com is a website that rates schools of all different levels.
7) Look into neighborhood covenants & the HOA—When you buy a property with a neighborhood covenant or HOA, you’ll have extra costs. This adds to your overhead but offers assurance about general upkeep requirements that make a neighborhood more attractive. Get feedback about the HOA, so you know it has reasonable, well-enforced rules and a well-managed board.
8) Get reading about the area’s emotional ambiance—Emotion can drive people to choose specific areas in which to live. This is, of course, entirely subjective and hard to measure, which is why it should be considered last in your analysis.
Proximity to parks, green spaces, sidewalks, mature landscape, and beautiful views can draw tenants to a specific area. A walk around the neighborhood or zoomed-in Google maps can help you determine if this could be a draw for your tenants.
Evaluating the rental property
After determining that the city and neighborhood could fit your investment goals, your decision to invest comes down to the property numbers. Before you buy the first vacant property, you see, run through the numbers carefully.
Average rental rates
Rentometer’s online tool for determining the average rent for a city, neighborhood – and a specific property – will help you understand the likely range of rents you’ll be able to charge for the property.
Start with an average rent amount and subtract estimated operating costs. Be sure to consider any additional costs of long-term repairs and vacancies, and you’ll be in a position to make a smart investment.
You’ll be well on your way to becoming a successful real estate investor when you take the time to understand the economic fundamentals of a metro area and its various neighborhoods. With a solid foundation, you’ll be well on your way to being able to identify growing markets and neighborhoods for your real estate investment.
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