The most self-directed way to invest and build our financial futures is investing in single-family real estate. This is incredibly exciting but it can also be overwhelming. Not only are we the proverbial captains of our fate when it comes to real estate investment, but we have an enormous amount of choices.
Each choice is distinct and different. An investor’s choice in real estate market absolutely matters as each and every market deals with their own economies, supply and demand. Each market also has its own individual set of rental needs.
For long term success, every real estate investor must thoroughly investigate their market before they begin searching the real estate listings and thinking about purchasing properties.
What makes a rental market desirable?
When it comes to rental markets, there are a few key factors that investors should look for as they scope out potential places to invest. More than the factors that are directly associated with the real estate market, you will need to know which markets are hot and have rising home prices. Every single family real estate investor should turn to the factors that indicate one key thing: Sustainable, long-term growth.
How do you know if a real estate market is healthy? Look for these 4 indicators:
1 – Population Growth
Population growth is one of the key indicators of the health of any market. One of the things that single-family real estate investors want in their given market is steady, healthy population growth. It’s an indicator of the overall health in their city, town, or neighborhood. An influx of people typically indicates economic opportunity and growth, which in turn positively impacts things like home buying and home prices.
Neighborhoods that are mostly comprised of baby boomers will likely be looking to retire and perhaps downsize. A population comprised mainly of younger people will likely have many renters, either through lifestyle choices or necessity. The needs of these markets are drastically different.
2 – Economic Growth
The second indicator to observe is economic growth. Is industry coming to your market? Even if you aren’t a commercial real estate investor, it pays to pay attention to the commercial and retail sectors. see what businesses are moving in or out.
There is a direct link between the economy, the real estate market, and the rental market. If the economy is strong and wages are strong, people are moving in. If people are moving in and making money, they will want to buy houses. Housing demand increases. Prices increase. As a result, rental demand increases and so does rental income.
3 – Steady Price Fluctuations
Even in “hot” real estate markets, we tend to see price fluctuations. While these can offer thrilling investments opportunities, they tend to burn out fast and bright. That’s because rapidly increasing prices can only increase for so long. While investors that are quick on the draw may be able to take advantage of the rapid appreciation in such markets, they may find that a crash is just around the corner.
That’s largely because severe pendulum swings in price and value just aren’t sustainable for the long term. for buy-and-hold investors especially, it’s not about getting swept up in rollercoaster markets. It’s about honing in on the steady markets that provide predictable returns. Typically investors should look for markets that experience a 5% annual increase in home prices.
4 – Month’s Supply and Time on the Market
The classic indicator of real estate market health is to look at inventory supply and time on the market. Everything in real estate investment is about balance. Month’s supply is about the balance between supply and demand. Too much demand without supply increases prices. The opposite, and they decrease. A six-month supply is considered healthy in most markets.
Similarly, time on the market for that supply is an indicator of health. While it’s not as accurate as month’s supply because a property can be delisted and listed again (thus resetting its time on the market), one can take a cursory glance on an MLS and see, in general, how long listings have been on the market, how many new listings pop up each day, and if inventory is moving. If the market seems slow, it could indicate any number of problems: lack of buyers, lack of buyer confidence, issues with the property, too-high prices, or general lack of demand.