Often when talking to investors I’ll meet someone who only invests in their local market. They tell me they grew up there, they know the area, and they wouldn’t know where to begin to invest out of state.
And I get it, it makes sense! But I’ve always found that to be a bit limiting, because for many of us, there’re better deals to be found out of state!
However, before you fly off to Boise looking for deals, you need to do some research. So here are my top 5 criteria I use when evaluating a market:
Population Growth
So there’re actually two factors to consider with respect to population: population growth and total population. Let’s start with the latter. Sometimes, bigger IS better, and I think that to a certain extent that’s true when looking at potential markets.
You want to be sure the market is large enough to command a strong pool of quality tenants. Employers are more likely to expand into larger markets, driving job growth and boosting demand for real estate. It’s also easier to find quality staff and tradesmen in a larger market, which is key to successful operations.
Knowing this, most investors won’t invest in a market with less then 200,000 people, and I think that’s a good rule of thumb. It also helps on the sell side, as you’ll have a larger pool of interested buyers to fight over your property!
So you’ve found a market with over 200k, but how’s the population growth?
Ensuring your market has strong and consistent population growth is vital. A growing city is a strong city, and will be less susceptible to a downturn.
Ideally, you want to see 20% population growth since the year 2000. Luckily for us, city-data.com has done the heavy lifting and provided us this info at the top of every cities page!
Job Growth
Like population, job growth is at the heart of market analysis. At the end of the day, jobs attract people and those people will need a place to rent.
When you look at job growth, it’ll vary widely from market to market. What you want to see is a positive trend as well as a positive forecast for the year(s) ahead. You can also compare it to the national job growth rate to see how it stacks up.
For example, this year’s growth rate is ~1.5%, so it makes sense that Dallas and Orlando, with ~3% growth, are highly sought after markets for investors.
Also, when looking at job numbers look at unemployment as well to get a more complete picture of the employment market.
Job Diversity
Speaking of jobs, it’s important to make sure the local economy has a good diversity of employers. You wouldn’t want to invest in a market where a majority of the jobs come from a single employer or industry, especially if those jobs are in a manufacturing or an industrial sector such as oil or steel.
Manufacturing/industrial type jobs are generally more vulnerable to economic weakness and outsourcing. Instead, consider markets with a strong services sector such as healthcare or finance.
At a recent meetup, I met an investor who said he didn’t like investing in syndications. When I asked why, he shared his experience investing in a multifamily property located in a North Dakota market that experienced tremendous housing shortages due to the rise of oil fracking.
Everything was great for a year or so, as demand was high, but soon they halted nearby fracking operations. The loss of fracking jobs wiped out the demand for housing and turned his profit to a loss.
In a way, he was invested in oil as much as he was in real estate, exposing him to the harsh volatility of the oil industry. So when you do your market analysis, don’t forget to look for cities with good job diversity. A good rule of thumb is no more then 15-20% employment in a single sector.
Median Household Income
Housing is the #1 expense for most people, so the median household income (MHH) will be the primary factor in determining the ability of the immediate demographic to pay your projected rent rate.
There’s no set amount to look for per se. In some markets you might be comfortable with $40,000 while in other markets you’d want a minimum of $45,000. The idea is to see how the neighborhood compares with other neighborhoods in the area.
The key is to focus on the immediate area surrounding the property, typically within a mile or so (even less in high density areas where the neighborhood might change significantly just a few blocks away).
You also want to make sure the rent you expect to charge isn’t a substantial percentage of the MHH. If the MHH is $40,000, and you’re looking to charge $2,000/mo, your potential tenant pool will have a hard time paying over 50% of their income to rent.
It’s also important to look at the trend. Ideally you’d like to see positive growth of ~30% since 2000. That’ll ensure wages are keeping up with inflation. City-data is an excellent source of this data as well.
Crime
Crime is a key component to choosing a market. Obviously markets with high crime rates are less desirable then markets with low crime rates, but there's a bit more to it than that.
What's really important is the overall trend in crime. Has crime been rising or falling over the past few years? In some cases, you may decide to invest in a city with a higher overall crime rate then a comparable market based on the trend.
Suppose City A has an overall crime rating of 650 on city-data.com, and City B has an overall Rating of 450. You might assume that City B is the better city to invest in (below 500 is a good rule of thumb). But what if City A has fallen 50-75 points a year for the past 4 years, while City B has been rising 40-50 points a year?
As investors, we can't just look at where we are today, but where we're going to be in 3, 5, 10 years from now.
So in the example above, you may decide City A is the place to be. Perhaps City A invested heavily in schools and community programs while City B was cutting funding. That could account for the differing trends in crime which should be taken into consideration by a savvy investor like you.
So that's The Five Best Criteria for Evaluating a Real Estate Market.
Of course, there's plenty more you should be looking at, such as rent growth, landlord vs tenant friendly laws, appreciation potential, and more. That should give you a solid going-in-argument though.
Once you find your market, you can set your investment criteria, build a team, and start analyzing deals! Happy Investing:)