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December 12th, 2016 by Marco Santarelli
Successful real estate investing relies on several factors, but as the old adage goes, “location, location, location” is top of the list. But “location” is a broad term, and evaluating the right place to invest your dollars in real estate means identifying the right market in both the macro and micro senses.
Some cities simply provide better opportunities than others based on factors like the relative cost of housing to average incomes, availability of good jobs, and demographic trends. Within each metro area, however, there are many local real estate markets, and at that level factors like the quality of schools, neighborhood safety, access to amenities like parks, shopping and entertainment and a host of other variables come into play.
Choosing the right markets for your investing needs involves several considerations, some of which go beyond just the property and neighborhood itself.
Here are some guidelines to help you ask the right questions as you determine where to invest.
Start with your Goals
Are you investing for the long term or trying to achieve a shorter-term boost in value? Various markets throughout the country will produce more consistent cash flow per dollar invested, but the properties may not appreciate much. Other regions will exhibit strong trends for appreciation in value, but may not cash flow well due to the high costs of properties relative to rental rates.
Investing for cash flow tends to be somewhat more reliable and predictable, while investing for appreciation tends to be more speculative in nature. Where you are at in your retirement savings path and how your retirement plan fits into your overall wealth portfolio, as well as things like risk tolerance and amount of available capital will all help shape this decision.
Investing Locally vs in Remote Markets
Many investors want to be able to see their investments or rely on their own expertise and local network to manage properties. This is great if your market and your investment goals match up, but that is not always the case. If you live in a high cost city like San Francisco or Washington, DC, the real estate market can produce some positive opportunities, but only if you have significant capital to work with. One option is to participate in a partnership with multiple investors to acquire properties, but that comes with its own set of challenges. In many cases, it may be better to evaluate other markets that fit your goals more cleanly.
If you do choose to look beyond your local market, it can be helpful to consider cities where you have connections or may have lived in the past, but that should not be a deciding factor.
An economic analysis of a market is MUCH more important than feel good reasons like “My cousin John lives there and could keep an eye on things”.
Top Down Analysis
When evaluating a region or city to invest in, start at the big picture level to determine the right geography for your needs, and then drill down to the neighborhood level.
When looking at a metro region, there are a wealth of statistics available to help you determine the overall viability of that market. Here are several categories of data to look into:
Real Estate Factors
Once you find a market or couple of markets that look positive at the economic level, it makes sense to start looking at the general housing market in that area. Some of the questions to ask here include:
Once you have used the above metrics to identify a possible market at the regional or city level, you can then hit the zoom button and start focusing on the local or neighborhood level sub-markets that fit your criteria.
Some markets are more friendly to real estate investors than others. If you take two individual properties with similar dynamics such as cost, condition and rental potential, you can see very different results based on things like taxes and whether landlord/tenancy laws are more or less favorable.
It really pays to understand the following factors:
Local Market Factors
You will want to reevaluate most of the above mentioned real estate factors at the more local level. In addition, you will want to look at things like neighborhood safety, quality of schools, access to transportation, proximity to shopping and recreation, and other factors that drive desirability.
Investing in real estate is not really that different than any other type of investment. You want to identify opportunities that present the maximum potential with the least risk possible.
Understanding a real estate market is a lot like evaluating a particular industry sector when you are investing in equities. You would not just decide to invest in Nike because you live in Portland, or Coca-Cola because you live in Atlanta. You would evaluate how that company’s stock is likely to perform based on many factors related to the industry, competition, regulation and the like.
If you apply the same kind of analytical reasoning to real estate markets, you are more likely to find properties that will produce success for your plan.
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