Choosing the right real estate market is a critical step in a real estate investors journey. While many investors may feel inclined to stick with their immediate surroundings and invest in their own city or town, expanding your horizons can potentially open doors to more lucrative opportunities.
When selecting a market to invest in, there are many factors to consider such as the speed at which properties are sold, current price points, the price to rent ratio, and what employment centers draw and keep people to the area—such as universities, hospitals, business headquarters, or vacation destinations. A thorough understanding of these elements can enhance your investment strategy and improve your chances of success.
These characteristics of a market can significantly influence your investment strategy. For instance, Birmingham, AL, with its lower price points, higher rental yields, and presence of major businesses, may be more conducive to buy-and-hold investing through strategies like BRRRR and long-term rentals or flipping a property with the goal of selling to a long term rental investor. In contrast, a market like San Diego, CA, where property values are higher but can be more volatile and not produce strong rental income compared to the price, might present better opportunities for flipping properties and achieving faster returns through forced appreciation.
Learning about the local real estate market can feel daunting, especially for newer investors. To make informed decisions, it’s essential to understand various aspects of your chosen market. Here, we present a guide to the four critical steps in getting to know your real estate market.
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Step 1: Understanding Local Market Metrics
Before diving into specific properties or neighborhoods, familiarize yourself with the local market metrics. This includes understanding key performance indicators such as median home prices, days on market, sales volume, and the speed at which properties are sold. These metrics provide a foundational understanding of market trends, helping you gauge the overall health of the market.
Step 2: Learning Price Points by Neighborhood
Next, you need to learn about the price points in different neighborhoods. Each area has its unique pricing dynamics, influenced by factors such as location, amenities, and demand.
- Mapping It Out: Create a large wall map of your market and color-code it based on the median price points of properties in various neighborhoods. This visual representation can aid in quickly identifying potential investment opportunities.
- Identifying Transitional Areas: Keep an eye on transitional areas—locations undergoing changes, such as renovation or new construction. These neighborhoods often present great investment opportunities and can lead to substantial returns.
Step 3: Zoning Laws Within Your Market
Understanding zoning laws is crucial for any investor. Zoning dictates what can be built where, influencing property values and potential uses.
- Obtain a Zoning Map: Start by acquiring a zoning map of your area. This will show you the different zones (residential, commercial, industrial, etc.) and what is permissible within those zones. Many cities are also implementing restrictions on short term rentals such as AirBnb, so knowing what is and isn’t allowed in your market can be vital to developing your strategy.
- Attend Planning Meetings: Attend local planning and zoning meetings to learn about upcoming changes and meet decision-makers. These meetings can provide valuable insights into potential investment opportunities, or insights into what kind of investments to avoid.
Step 4: Studying Your Competition
Finally, studying your competition is key. Instead of viewing competitors as threats, consider them as valuable resources as your investing business grows.
- Identify Competitors: Make a list of other real estate investors in your market. Research their marketing strategies, the neighborhoods they invest in, and the types of properties they focus on.
- Join Local Investor Groups: Search out areas where local investors are. You should plan on attending your local REIA meeting, also search on Facebook for real estate investor groups in your investment market. Many of these groups are a good resource to find contractors, property managers wholesalers, and more team members, plus you might be able to find a deal or two to review. But make sure you do your own full desktop and deal analysis (also check out JD Esajian’s podcast episode on How To Analyze A Deal) of the properties as you would with any potential deal.
- Collaborate and Build Relationships: Don’t hesitate to reach out to your competitors. Building relationships can lead to mutual benefits, such as joint ventures or insights into market trends. Remember, successful investors often operate in the same markets as their competitors, sharing strategies and opportunities.
The Consequences of Not Properly Evaluating the Market
Failing to thoroughly evaluate the real estate market can lead to significant setbacks in your investment strategy and potentially lost income. Here are some potential pitfalls:
- Extended Time on Market: In a slow real estate market, properties may sit unsold for longer periods. This increased holding time can drastically affect projected project costs, as you may need to cover mortgage payments, maintenance costs, and other expenses like property taxes while the property is on the market to be sold or waiting to be rented. Not accounting for these extended periods in your financial projections can lead to serious financial strain.
- Higher Vacancy Rates: If you’re planning on a buy-and-hold strategy or renting to long-term tenants, understanding local demand is crucial. If there isn’t a robust demand for housing—perhaps due to a lack of businesses located in the area—you may experience longer vacancies. This means you could go significant stretches without rental income, impacting your return on investment.
- Misguided Investment Decisions: Without a proper evaluation of the market, you might invest in properties in neighborhoods that are declining or facing economic challenges. This could lead to a decrease in property values, making it harder to sell or refinance in the future.
- Overestimating Cash Flow: If you don’t consider market trends, you may overestimate potential rental income. For example, if similar properties in the area are renting for less than expected, your cash flow projections could be significantly off, leading to financial difficulties.
Action Items
To reinforce your learning, here are some actionable tasks:
- Create your local market metrics report.
- Acquire a large map of your market and begin identifying price points by neighborhood.
- Obtain a zoning map and plan to attend an upcoming city planning meeting.
- List out your local competitors and begin to reach out to foster relationships.
Conclusion
By following these four steps, you will gain a deeper understanding of your real estate market, empowering you to make informed investment decisions, like if you should pursue investing in that area. Having a base of local knowledge is also helpful when connecting and presenting to potential lenders who want to feel more secure in their investment, and knowing the area your investing in and being able to answer questions can help build rapport and trust. Remember, knowledge is power in real estate. Embrace these steps to position yourself for success, and be mindful of the potential pitfalls of neglecting thorough market evaluation.
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