How to Pick a Geographical Real Estate Investment Market
As an investor, you already know that putting your money into real estate is a smart idea. However, while real estate investing is a profitable option overall, that doesn’t mean that each option is going to provide the same kind of return.
For example, buying a property in Miami is probably going to help you earn more than if you purchased land in Wyoming. While both situations can be profitable, they pose different challenges, and your bottom line may differ accordingly.
Thus, it’s imperative that you take the time to find the right geographical market for your next venture. Because you’re going to be putting a lot of money into your investment, you want to make sure that you know what to expect.
Today we’re going to go over the various ways to find the right real estate market for your money. Due diligence is essential for any investment strategy, but it should be an even bigger priority when looking for valuable real estate.
Step One: Determine Your Investment Goals
Before you can even start paying attention to different markets, you have to know what you’re hoping to get out of your investment. When you think about buying property and making money from it, what is your ideal scenario?
Do you want to flip houses for a profit?
Do you want to own a multi-unit building?
Do you want to rent to businesses or individuals?
Will you be managing the property yourself, or outsourcing it to a different team?
Overall, you want to ask yourself what your investment strategy will look like and how it will impact your life. How involved are you going to be with the property? Are you hoping just to put your money somewhere where it will grow without having to pay attention to it? Or are you looking to put most of your time and effort into the property (i.e., flipping it or managing it yourself)?
Once you know what you’re trying to achieve, it will be much easier to find the right market. Some areas are beneficial for investors looking to put money into massive development projects. Other markets are ideal for investors who want to buy single-family homes. Until you know what kind of investment you want, you can’t determine the best market for it.
Step Two: Think Like an Investor
This may seem obvious, but what we mean by this strategy is that you should take a more expansive view of any particular geographical location. Think of it as a stock pick – you want to get as much information about the area as possible.
Macro-analysis of a real estate market should include the following details.
Is the Population Growing?
Some markets, like Seattle or Phoenix, are some of the fastest growing in the country. That means that demand will only continue to rise, which can help you make even more money in the long-term. While there’s never a guarantee that these trends will continue indefinitely, areas that are booming offer more potential than those that are in decline.
One thing to consider is whether the market looks like it could be growing in the near future as well. For example, if companies are starting to move to a particular area because of lower taxes or cheaper rental prices, then it could mean that more people will begin flocking there because of jobs and opportunities.
Overall, you want to invest in a high-demand market because it will enable you to make more out of your investment. That doesn’t mean you have to put your money into a major urban center like Seattle, but it can’t hurt to do so either.
What is the Employment Rate?
One of the best indicators about the strength and vitality of a particular market is the employment rate. Simply put, the more unemployed and homeless people an area has, the more likely that it will start to decline. While these numbers are always going to fluctuate, you want to see if they are trending upward at a faster rate than average.
On the flip side, looking at the median income for people living in that area will help you find the right spot for your investments. If you’re hoping to make money from a single-unit rental home, for example, then you want to find an area with a relatively high median wage. Otherwise, you’ll be limiting yourself on your earnings potential.
Gross Domestic Product
No matter where you go, the GDP of a particular area is an excellent indicator of the market’s health and vitality. If the GDP is growing steadily, then it means that the city is booming. If the GDP is stagnant or shrinking, then it probably indicates that you should avoid it.
Crime and Other Stats
While taking a birds-eye view of different geographical locations, you want to pay attention to other statistics beyond employment and economic growth. Is there a lot of crime in the area? What is the city doing to combat it? What about natural disasters? If you invest in a place like California, you have to worry about wildfires and earthquakes. States like Florida have to watch out for hurricanes and flooding.
Each location has its challenges, so you want to be as aware of them as possible. Look at any potential situation that could impact the region as a whole. You’ll want to consider larger, global elements like climate change as well. For example, some coastal areas will be more at-risk for erosion and flooding in the coming years, so buying property there may be more of a gamble.
Taxes and Other Expenses
Finally, when thinking like an investor, you want to pay attention to anything that will impact your bottom line. Areas that have high property taxes may cut into your profitability, so be aware of that. Also, consider things like maintenance and upkeep costs for the type of property you’re trying to buy. Massive apartment buildings will have much higher utility bills than a single-story home, so research to find out what your monthly expenses will be on average.
Think Like a Renter
On the flip side, you want to get into the mindset of a potential tenant. While the bulk of your research should be on the overall cost/benefit analysis of a particular area, it helps to understand what people in the area are looking for the most.
By getting into the mind of a renter, you can be in a better position to make sure that your property is in higher demand. Maybe your particular area isn’t necessarily the best from a macro point of view, but having certain amenities in your property can still keep it in high demand.
Here are some elements to consider from the renter’s perspective.
Schools and Other Amenities
If you’re trying to invest in a rental home for families, then you’ll want to pay attention to family-friendly things in the area. Are there schools nearby? If so, what kind are they? High school, kindergarten, universities? What are the schools’ reputations like?
You’ll also want to pay attention to things like shopping centers, parks, attractions, and restaurants when trying to appeal to renters. Also, mass transit options can make a particular location more desirable, such as if it’s close to a train or bus stop.
Appearance and Ambiance
Although you can’t control the way that a particular neighborhood or city looks, you’ll still want to pay attention to the overall feel of the area and how that could impact demand. Quirky neighborhoods may attract more single people or business professionals. Older neighborhoods may be better for long-term renters who are trying to raise a family.
When looking at the ambiance of a particular spot, you’ll also want to pay attention to demographics and diversity. The type of people who live in an area can have a massive impact on its appeal. For example, if you buy a unit close to a university, you can expect a lot of young college kids to be hanging out nearby. If you buy a property in an urban area, you may have to worry more about homeless people or crime.
Each spot will have its ups and downs, so it’s imperative that you have a sufficient understanding of what it has to offer for people who live there.
Another thing to look at from both a renter’s and investor’s perspective is whether the market experiences any seasonal activity. In some parts of the country, snow and ice are a consistent threat when winter rolls around. If you’re investing in a location that relies on tourism, does it get impacted by the weather, or does it stay consistent year round?
By looking at seasonal changes, you can be better prepared for how it will impact your bottom line. During the peak season, you can charge more for rent because demand is higher. When things settle down in the off-season, you may have to charge less.
Also, consider how environmental changes will impact your maintenance costs. Nothing can wear a property down faster than the environment, so be sure that you understand the effects of things like excessive rain, freezing temperatures, and sweltering heat waves.
Bottom Line – Do Your Homework
When finding the right geographical real estate market for your investment, there are many different factors to consider. Thus, you want to make sure that you’re taking the time to analyze each one so that there are no surprises later on.