Are you considering investing in real estate and finding it challenging to determine the ideal starting point? The key to a successful real estate investment lies in selecting the most suitable real estate market. Robust real estate markets are distinguished by several factors, including high demand, low vacancy rates, and consistent appreciation.
Free Real Estate Comparative Market Analysis
Real Estate Comparative Market Analysis (CMA) is a comprehensive evaluation of a property's value in comparison to similar properties in the same area. It provides crucial insights to buyers, sellers, or investors about the property's market worth.
This analysis considers various factors like location, size, features, and recent sales of comparable properties. Obtaining a free CMA helps in making informed decisions in the real estate market without incurring any cost for this valuable assessment.
Utilizing free resources for CMA is essential, and several platforms offer these services without any cost:
- Realtor.com: This platform provides CMA data to real estate professionals, aiding in accurate property valuation.
- New Way Mortgage: Offers valuable information on the value of your home, aiding in understanding its market position.
- Real Estate CMA Software: Utilize software like iSite Lite, Remine, FlashCMA, iCMALive, Immobilien CRM, and iSite Free, which provide free CMA tools, streamlining the analysis process.
Real estate agents and brokers heavily rely on CMAs to guide sellers in setting appropriate listing prices and to assist buyers in making competitive offers. The core of a CMA lies in utilizing “comps,” which are recently sold homes similar to the subject property. Here's how you can perform your own CMA:
- Research Comparable Properties: Investigate comparable properties on real estate listing sites, considering aspects like location, size, and features.
- Analyze the Neighborhood: Assess the neighborhood's desirability, amenities, and overall market trends.
- Evaluate the Subject Property: Understand the subject property's features, condition, and unique selling points.
- Select Similar Properties: Choose properties that closely resemble the subject property in terms of size, style, and features.
- Adjust for Differences: Factor in variations between the subject property and the chosen comparables, considering any upgrades or drawbacks.
- Calculate Sold Price per Square Foot: Determine the sold price per square foot for the selected comparables.
- Determine the Subject Home's Value: Based on the analysis, determine an estimated value for the subject home.
How to Analyze a Real Estate Market Before Investing?
A rental property is only valuable to you if a person is willing and able to use your property and pay you rent. If you buy a house standing by itself in the middle of a desert, your prospects of finding a paying tenant are poor. You want a hassle-free cash-flow property near lots of well-paid people. Those people want to live near their jobs and the amenities they enjoy.
For a property to be suitable, it must be located in a market that passes the following litmus tests:
1) Large and Growing Population
Population centers have upward or downward momentum. If a city is growing, it will likely continue to grow. A city's losing population has a hard time stopping that trend. As a population center starts to grow, the growth fuels itself. More people attract more people and the rate of growth can be dramatic.
The current population is moving away from small towns and towards urban centers. There is a highly educated, entrepreneurial segment of the population that is moving from urban centers to small towns and telecommuting, but in terms of the total number of people, the safer bet is that big cities will keep getting bigger.
HINT: If a specific geographical area doesn’t have enough population to be studied by www.ofheo.gov, you might call that a clue and stay away.
2) Diverse Employment and Job Growth
People are attracted to an area primarily because of jobs. Many people would prefer to live in the beautiful mountains than the suburbs, but there are very few jobs in the mountains. If you look for job growth, you will find population growth and increased capacity to pay. Where there is population growth you will have increased demand for housing. Increased demand along with increased capacity to pay means higher rents and sales prices. If you are an investor these are good things.
3) Low Cost of Living Compared to National Standards
In tough economic times, companies that do business on a national level will save money by relocating to low-cost, business-friendly areas of the United States (and abroad). For example, many Americans are relocating to Texas because the cost of living is low, the quality of life is high, and that is where the jobs are headed. Workers and employers are leaving California, New England, and other high-cost areas in the US and relocating to where it is more affordable.
Housing in many parts of Los Angeles costs about twelve times the annual wage of its occupants while in Dallas housing is only about three times its occupant's annual wage. Americans are tired of being house poor and they long for a return of the day when a single income was enough to be middle class. Today’s families are making housing choices primarily on proximity to their jobs and secondly on the overall affordability of the area.
Dallas Affordability Ratio
$243,100 median home value / $67,900 median household income = 3.5 times
Los Angeles Affordability Ratio
$635,000 median home value / $54,514 median household income = 11.6 times
4) Natural Resources / Cash Injected into the Baseline Economy
Every town needs something that draws outside cash into the community. Economist Richard Maybury calls the injection of cash into a community a “cone:” “Conventional wisdom says that when the government expands the money supply, the money descends on the economy in a uniform blanket. This doesn't seem right, the money is injected into specific locations causing hot spots or cones.” Excerpt from The Clipper Ship Strategy by economist Richard Maybury: www.RichardMaybury.com. Examples of cones: are recipients of federal stimulus packages, natural resources (oil wells), destination tourist attractions (Disneyland), and agricultural exports (Napa Valley). Cones draw money into the community.
Every city needs firefighters, nurses, librarians, waiters, and waitresses, but these support and service occupations exist to serve the local population; they do not import fresh cash into the local economy. They service the cones but do not create them. Without a natural resource or commodity to import cash into a local economy, the service and support jobs will quickly dry up. Service and support jobs recycle money between themselves, but a large percentage of what these workers spend leaves the local economy in the form of food and clothing imports, taxes, traveling abroad, etc.
Without a regular injection of cash from the outside world, all the cash and jobs will eventually leave a local economy, leaving behind one of those desolate gas station towns clinging to the side of an interstate. Get your investment dollars as close to the cone as possible. An oil field worker is closer to the cone than an oil field worker’s barber. The injection of money (cone) created by oil consumption will keep the oil worker employed, but when the general economy gets tight, the oil field worker’s spending may not be enough to keep the barber in business.
I like investing in lower-middle-class, blue-collar areas close to manufacturing and distribution centers. Manufacturing and distribution centers are somewhat reliable cones. The jobs and tenants they attract are fairly stable, semi-skilled, and well-paid. The government has unlimited ability to inject money into specific locations, creating some of the largest cones. However, government spending comes and goes at the whims of politicians. If you are investing near a large government cone, make sure there are at least four additional cones (baseline industries importing money into a local economy) so when the government cone moves on you won’t be stuck in a decimated housing market.
I’m sure you can name quite a few single-cone towns where the sole employer is a military base, college, or steel mill and every other job exists to serve the population of that baseline employer. The housing values of those ‘one horse’ towns are tied entirely to the success of a single industry which is never a good environment for your real estate investments.
5) Healthy Ratio Between Rents and purchase Prices
Common sense dictates that there should be a small premium attached to home ownership compared to rent. However, there are many high-priced real estate areas where it is drastically more expensive to own than to rent the same house. Why buy when there is such a vast pricing disparity between renting and ownership?
When the homeownership premium is too high it encourages foreclosures; if your home is declining in value and it is much cheaper to rent than own, you will be more willing to walk away from your home.
The inverse of this statement is also true. If it is cheaper to own than rent and home values are stable, you will do everything possible to keep paying your mortgage. In most of Dallas, for example, it is the same cost or cheaper to own than to rent. This substantially reduces the temptation and need for an owner to walk away thus further perpetuating a cycle of stable home values and rents. Stable appreciation and positive cash flow over the long haul result in hassle-free investment performance compared to the roller coaster of price speculation that many ‘investors’ get caught up in.
In the most recent real estate boom and bust in California, Florida, Arizona, and Nevada many speculators ignored the fundamentals of cash flow and overpaid for properties relative to the cash flow those properties could produce. There was a buying frenzy that drove prices up. When the prices peaked, speculators ran to the exits and prices crashed. Yes, you can make a lot of money in a short time, but you can also get creamed. Slow and steady wins the race.
6) Access to Quality of Life Amenities (arts, entertainment, low crime, warmer climate)
People will move to a new area for a job, but they and their families will stay longer if there is a high quality of life: an arts scene, amenities, restaurants, good schools, a low crime rate, and nice weather.
The United States is experiencing a population migration away from the colder parts of the Northeast and Midwest into the warmer climates. Not only are warmer climates more desirable to live in, but they often result in less expensive real estate maintenance. Freezing temperatures are harder on real estate than hot summers.
7) Comparatively Low Cost of Government
When you pay more taxes you have less money to spend on other things. Businesses are attracted to areas with a low cost of government. In places where taxes are low, businesses are generally more prosperous. Profitable businesses are good for real estate owners.
There are seven states with no state personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. How can Texas, a state with no income tax, finish the year 2008 with a $11.7 billion SURPLUS when the national economy is in shambles and forty-four states finished the year with major deficits? Texas has a history of conservative spending, balanced budgets, a reluctance to borrow money, and a very stable economy.
If a government is continually borrowing to fund its operations, the cost of that borrowing is passed on to the taxpayers in the form of higher taxes and/or lower services. When you own real estate, your silent business partners will always be the taxing authorities of the federal, state, and local governments. I prefer that business partners be as silent as possible.