5 Characteristics Of A Great Investing Market
By Paul Esajian on October 21, 2016
Where you invest is almost as important as the deal itself. In fact the argument can be made that the market the property is located defines just how strong a deal may be. A weak property in a strong market is always more appealing than a great property in a suspect area. Defining just what makes a great investing area isn’t always easy. There are a number of factors that contribute to the appeal. It is not enough to be strong in one area a truly great market is one that is solid across the board. As you search for investing opportunities you should start with the market and work your way from there. Here are five characteristics of a great investing market.
- Demographics. The evaluation of an investing market should start with the demographics. Successful investors are willing to put the due diligence necessary to understand exactly what they may be buying. The demographics of a market can be widespread and cover many different items. For the sake of real estate you need to focus on a few key areas. Recent foreclosure rates, unemployment numbers and crime figures are a good starting point. You should also keep an eye on local income levels and where the population number is trending. Take a look at where these items have been over the past three years and where they are today. A market with increased foreclosures or unemployment is a major red flag. These problems could take years to get out from under and property values suffer accordingly. These initial demographics are not the only factor you should look for but they are a great starting point to gauge just where the market is.
- Sales Data. If the demographics look like an area you are comfortable with you can dive into the specific sales data. Where many investors get in trouble is by looking at outdated or even irrelevant information. What happened in the market twelve months ago has little to no impact on what is going on today. Data from even six months ago may not paint an accurate picture. You need to break down the current sales information from the last sixty days. Take a look at where sales prices are headed. If there was any big shift in either direction you need to get to the bottom of why. Additionally you want to look at the sales volume and the average days on the market. This will tell you if demand is high and if buyers are interested in the market. When evaluating data it is critical that you compare apples to apples. Not all sales within a zip code apply to your subject property. A sale even a few miles away may not be a true reflection of your market. You really need to break down the sales information and look at exactly where, when and even why the transaction happened.
- Schools. One of the hidden factors in almost every market is the strength of the local schools. Any parent or prospective parent wants their children going to the best possible school. Everything else may be appealing about the area but if the schools are poor they tend to look elsewhere. When evaluating schools you should start by looking at the number of schools for each grade in the town. The greater number of schools the more likely a family will find the best fit for their child. Next, look at the number of total students in relation to that of the two closest towns. If enrolment is down in the market it can be a sign that the school is in trouble. A school closing can lead homeowners out of the area and cause property values to plummet.
- New Housing Permits. Property value is largely based on supply and demand. As a general rule of thumb the greater demand in a specific market the higher the sales price. One of the ways to gage demand is by looking at the number of new housing permits. Builders often have a keen sense of which areas are hot before anyone else. They are not going to outlay hundreds of thousands of dollars unless they know that demand is strong. You can obtain new housing permit information simply by going to town hall. Look at the last twelve months and see how many permits have been filed. If the number has increased it is a sign that buyer demand is strong for your area.
- Business Growth, Economy And Taxes. There are a handful of seemingly minor indicators that have a tremendous impact. Start by listening to what your eyes are telling you. If the area is full of busy restaurants, shopping and other attractions you have a good idea that people want to live there. Booming night life is often the byproduct of a strong local economy. On your visit to town hall you can look at past property tax data over the last few years. Markets with lower taxes may be the tiebreaker for potential buyers. If taxes haven’t moved much over the years it can be viewed as a sign that the town has a balanced budget and taxes will remain low for the foreseeable future.
When looking at a market for investing purposes you want to think about the resale value. If the market is strong in these five areas it is a safe bet that things are looking up. As time consuming and tedious as it may be you need to always look at these five market areas before making an offer.